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As Canada’s cannabis industry enters a new phase of maturity, business leaders are confronting some hard truths. Profitability is elusive, competition is intensifying, and traditional financing is drying up. Recent industry discussions have highlighted major trends reshaping the sector, from collapsing margins and outdated tax models to restructuring, consolidation, and cross-border uncertainty.

This article offers cannabis entrepreneurs and executives a practical framework for navigating current challenges and identifying strategic opportunities.

Market pressures in a saturated landscape

Cannabis retailers are under intense strain, particularly in urban centres where market saturation has driven prices down to unsustainable levels. Licensed producers face continued oversupply, shrinking margins, and rising operational costs due to inflation. Many operators are also unable to realize economies of scale, which places further stress on their cost structures. Meanwhile, interest rate hikes have made capital harder to access, compounding the financial pressure.

Compliance costs and excise tax burdens

The cost of compliance remains one of the biggest operational challenges for cannabis businesses. Complex and frequently changing licensing requirements demand significant internal resources. For many cannabis businesses, the real barrier to sustainability lies in Canada’s excise tax regime. Designed at a time when market dynamics were very different, the current model disproportionately affects small and mid-sized producers, squeezing margins at every turn.

Recent regulatory changes are beginning to address some of the compliance cost pressures that have long challenged cannabis businesses in Canada. In March 2025, Health Canada implemented a suite of amendments aimed at streamlining cannabis regulations. These changes reduce administrative burdens for licence holders and applicants by simplifying licensing requirements, easing certain physical security obligations, and updating packaging and labelling rules. The regulatory adjustments are intended to lower compliance costs, support diversity, and enhance competition in the legal market, while maintaining public health and safety objectives.

The federal government has also signaled that long-awaited reforms to the cannabis excise tax regime may finally be on the horizon. The current system – which requires producers to manage 13 separate provincial and territorial excise stamps, and imposes a tax of $1 per gram or 10% of the selling price (whichever is higher) – has been widely criticized for adding significant administrative complexity and further squeezing margins, especially for small and mid-sized producers. In late 2024, the government announced plans to explore a transition to a single national excise stamp and to consider capping the excise tax at 10% of the wholesale price.¹ While these changes are not yet finalized – and immediate relief was not included in the 2024 federal budget – the prospect of harmonized stamps and a simplified tax structure has been welcomed by industry stakeholders. If implemented, these reforms could help alleviate some of the financial and administrative burdens that have contributed to payment backlogs and undermined the competitiveness of legal operators.

Although these recent regulatory and tax developments represent incremental but meaningful steps toward a more sustainable operating environment for Canadian cannabis businesses, the sector continues to call for further action to address the high tax burden and ensure that compliance requirements remain proportionate to the risks and realities of a maturing market.

International competition and U.S. market pressures

While international markets once appeared to offer growth opportunities, Canadian producers now face mounting barriers. Export destinations are tightly regulated, and foreign imports from countries such as Israel, Croatia, and England have already begun to depress domestic prices.

Looking south, the prospect of U.S. federal legalization looms large. While it could open the door to cross-border trade, it may also introduce new barriers, such as import quotas, labelling standards, or tariff-based protections designed to favour domestic U.S. producers. Canadian companies must remain agile and closely monitor policy developments in both markets.

Restructuring and financing constraints

The cannabis industry is experiencing a wave of financial distress, with several insolvencies already on record. Many operators remain overleveraged, unable to secure traditional financing, and are increasingly reliant on alternative lenders whose terms can further strain cash flow. In this environment, it is essential to identify financing partners who not only understand the unique regulatory and commercial risks of the sector but are also prepared to work collaboratively through challenges.

Strategic M&A: A path to stability

Despite these pressures, the current environment presents opportunities for strategic consolidation. Larger, well-capitalized companies are actively acquiring distressed assets to expand their market presence and reduce costs through integration. For some operators, this may offer a viable exit strategy; for others, it represents a path to achieving long-sought operational efficiencies.

Key takeaways for cannabis operators in 2025

To stay competitive in a tightening market, cannabis business leaders should prioritize the following:

1. Re-evaluate your cost structure and operational model. Streamline supply chains, renegotiate contracts, and assess facility usage to improve efficiency and margins.
2. Prepare for consolidation—whether as a buyer or seller. Understand your valuation and monitor acquisition opportunities to remain strategically positioned.
3. Reassess your financing strategy. Engage with non-traditional lenders and partners familiar with the cannabis landscape to secure sustainable funding.

Next steps: How we can help

Our Restructuring and Insolvency Group advises entrepreneurs on the full spectrum of corporate, regulatory, and transactional issues, from restructuring and debt strategy to M&A and market entry. If your business is facing financial uncertainty or preparing for strategic growth, we are here to help you evaluate your options and move forward with confidence.

Footnote

1. Health Canada, “Summary of changes following the streamlining of the Cannabis Regulations” (28 March 2025), online: Government of Canada

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Source: https://www.mondaq.com/canada/insolvencybankruptcy/1630686/from-squeeze-to-strategy-reshaping-the-future-of-cannabis-businesses