Ottawa’s attempts to outflank the illicit market has been undermined by the clumsy and unresponsive nature of the tax regime
Isaac Newton said he lost money on the South Sea Bubble financial collapse because, although he could track the movement of stars, he could not calculate the madness of men.
In Canada, the legalization of cannabis in October 2018, unleashed a mania that has seen nearly 1,000 companies receive federal production licences and retailers open nearly 3,500 stores selling cannabis products across the country. It is a short street indeed that doesn’t have a pot shop on it.
The Cannabis Act was a cornerstone piece of legislation for the Trudeau government — a welcome end to 94 years of failed prohibition and an attempt to make Canada safer by closing down the black market in unregulated pot.
It hasn’t quite worked out that way and now there are dire warnings that the onerous federal regulatory and tax regime is in danger of killing the nascent licensed production market.
Bill Blair, then parliamentary secretary to the justice minister with special responsibility to usher in legalization, said the legislation was an effort to outflank organized crime. “We’ve created competition in the marketplace,” he said.
In part, this is because of federal excise taxation.
The federal government said it would cap its tax receipts at $100 million annually, with any excess going to the provinces.
Neither of those promises has been kept. Tax was set at 10 per cent of the value of dried and fresh cannabis plants or seeds, or $1 per gram, whichever was greater. The government originally thought that producers would sell for around $10 a gram, making the $1 per gram levy a reasonable excise duty.
However, the flood of new entrants saw the price producers could offer drop to $3 or $4 a gram, resulting in a 30 to 40-per-cent effective tax rate that does not scale up or down with the selling price.
Producers condemn the excise model as inflexible, unsustainable and illogical.
But from the government’s point of view, it makes perfect sense.
Paul McCarthy, the new president of Cannabis Council of Canada, said 40 per cent of all filings from companies seeking protection from creditors to restructure last year came from the cannabis sector. “The regulatory and taxation regime is suffocating this business,” he said. “None of this works if the private sector can’t be profitable.”
Without some relief on the excise-tax front, few in the industry will make it to the other side.
That suggestion was ignored by the finance minister, Chrystia Freeland. The prevailing mood in government seems to be to watch even more producers fail, as a way to correct the demand/supply imbalance. But that’s not much of a strategy and could end up creating even more volatility if the whole sector fails.
Freeland’s office appeared to leave the door open to future changes in a statement to National Post. “The government recognizes the need to ensure the existing excise duty framework is fair and as current as possible, including in its application to the cannabis industry,” said Navpreet Chhatwal, Freeland’s communications adviser.
Blair’s pledge on privatization was that public health was the government’s main consideration, not maximizing tax revenue. But the idea that Ottawa could outflank the illicit market has been undermined by the clumsy and unresponsive nature of the tax regime. A simple legislative change would transform the cannabis landscape.
National Post