Author: Ryan Greer, Director of Infrastructure & Transportation Policy, Canadian Chamber of Commerce
As of October 17, Canadian adults will be able to legally purchase and consume cannabis for recreational purposes; a year and a half after the federal government introduced its legislation to do so. It will mark the beginning of a fascinating battle between a new regulated industry and the existing illegal market that Canadians are currently turning to for recreational cannabis use.
So what are the steps to legalizing a multi-billiondollar illegal market? Over the last 18 months, federal
legislators and civil servants have been establishing a national framework for regulating access to
cannabis, which includes rules for cultivation, production, possession and marketing. Meanwhile,
provinces and territories have been busy setting the rules for distribution and retail sales. This has been accompanied by a frenzy of private sector activity to supply the legal market with licensed producers,
retailers, ancillary businesses and others investing billions of dollars in this new sector.
Some of the factors that will influence how effective Canada’s legal cannabis market is at reducing illegal sales include safety, quality, access, supply and branding. Like all markets, one of the biggest factors will be price. As the head of the federal Task Force on Cannabis Legalization and Regulation, Anne McLellan, told Members of Parliament studying the Cannabis Act, "Price point here is going to be key in terms of what you see in the illicit market and how effective the legal market is at moving people over.”
In late 2017, the federal government reached a cannabis tax revenue sharing agreement with the provinces and territories. On top of sales taxes, the agreement included a cannabis excise or ‘sin’ tax of 10% of the retail price or $1 per gram—whichever is higher. The 10% tax is expected to raise $300 million annually for the provinces/territories and $100 million annually for the federal government. The agreement projected that including the excise tax, legal recreational cannabis will be priced around $10 a gram.
Only a few months later, Statistics Canada released a survey that found Canadians are currently paying an average of less than $7 a gram for cannabis.
Health Canada proposed four ‘cost recovery fees’—otherwise known as user fees—on the industry to
recoup the costs the government will incur by regulating the sector. User fees are typically associated with a specific service from the federal government, such is the case with the first three of the proposed fees.
An annual regulatory fee of 2.3% of gross revenue for licensed producers was proposed, with a 1% fee for micro-cultivators and processors. The proposal is expected to put an additional $100 million into federal coffers every year. No clear policy rationale has been shared with industry for how government
determined the 2.3% fee level.
This additional tax (which is what the fee is), was also proposed after licensed producers had already negotiated multi-year supply deals with provincial wholesalers based on the previously announced 10% excise tax.
As others have warned, high government taxes and fees will hurt legal producers’ ability to compete with the illegal market and ultimately hurt Canadians as well, which runs counter to the government’s rationale for legalizing cannabis in the first place. There are other looming policy issues that will influence the
effectiveness of breaking up the illegal market. The government of Ontario’s recent decision to move from a sparsely populated government-run retail distribution network to a private retail model will increase the reach of the legal market in Canada’s largest province. Municipalities across the country will need to deal with the hundreds of unlicensed dispensaries that are operating outside the law to protect retailers who are investing and operating within new provincial rules. The federal government must also move quickly to establish regulations for the recreational production and sale of cannabis edibles, beverages and other
products that will remain in the hands of the illicit market after October 17.
Deloitte has forecasted that Canada’s cannabis market will be worth up to $7.17 billion in sales next year. To maximize the economic benefits to Canadians of this $7-billion market, governments must create an environment that supports businesses that are playing by the rules, so they can in turn create new jobs and investment, along with the significant tax revenue for governments that will follow.