Canada is on track to become the first developed nation in the world to legalize cannabis, which has sent Canadian cannabis company stocks soaring. Prime Minister Justin Trudeau introduced legislation this past April that would make cannabis legal for adults 18 years of age and older throughout the country as soon as July 1, 2018. In addition to expanding the legal marketplaces to include recreational cannabis, individuals would also be able to grow up to four plants for their own consumption. It is estimated that Canadians would consume 1.32 million pounds of cannabis per year, according to a study by Deloitte.
It has been reported that Canada’s medical cannabis market has been growing at a rate of 10% per month, and nationwide legalization of recreational cannabis stands to have a potential for $5 to 7 billion Canadian Dollars (“CSD”) in sales per year.
Taxation amounts on the legal recreational cannabis have been announced, and have been set at $1 CSD per gram ($.80 US) for cannabis costing up to $10 CSD/gram, and then a flat 10% rate for any product more expensive than $10 CSD/gram. Canada will split the tax revenue generated in each province with that province equally, as each province will be expected to provide policing and other regulatory oversight over recreational cannabis. The tax rates have been kept relatively low intentionally in order to keep the price of recreational cannabis production down so as to disincentivize black market operations. The provinces would also be responsible for a certain amount of the regulations regarding distribution of cannabis, violations of those regulations, and the policing, to include setting and monitoring drugged driving limits.
The Canadian approach to the taxation of cannabis is novel, and one that US states could learn from – currently local and state excise taxes in Colorado, and other states that allow for the legal sale of recreational cannabis, have extremely high tax rates (upwards of 15% each for both state sales and excise taxes), which unnecessarily drive the price of cannabis and cannabis-infused products higher, hurting the business owners as well as the consumers. The state sales tax on cannabis and cannabis products has increased since legalization in US states, which is a concern for those who advocate for low taxation rates to divert consumer traffic away from black market operations. As seen in the US when alcohol prohibition ended, by creating and establishing regulated, cost-effective markets, black market sales decrease significantly.
Legalization will likely increase revenue for other Canadian industries as well, including those who market home growing equipment and provide consulting on home-growth optimization. The expansion of the robust medical marijuana industry would create additional jobs and provide an influx of tax revenue to local communities. Although detractors are concerned that the increase in the availability of cannabis will lead to an increase in access to, and thereby use of, cannabis by citizens under the age of 18, supporters have pointed out that Canada already has a relatively high rate of use by adolescents, and have also promised to actively enforce the age restrictions. In Colorado, underage use of marijuana by teenagers is lower than the national average, despite legal medical and recreational marijuana. This decrease in use actually began when legalization became effective.
Given the demand, there are already concerns that the supply of cannabis will not, and currently cannot, match the predicted market need, despite the fact that Canada’s growers are working to expand their facilities in anticipation of legalization of recreational marijuana. Currently, Canada does not allow for outdoor cannabis cultivation. This has an enormous impact on the ability of LPs (licensed producer) to enter the market or to scale their operations as the cost barrier to market entry and to expansion are exponentially higher if large scale agricultural operations are prohibited and high-tech indoor greenhouses are a prerequisite for production.
This dynamic is one that heavily favors established LPs like Canopy and Aphria, whose core business model is built on and around greenhouse cultivation. Aphria’s entire US expansion plan is based entirely on the greenhouse play, which is unfortunate because it results in higher prices for businesses and consumers and the only real beneficiaries are Aphria and a few other greenhouse manufacturers. Several Canadian producers export their product to other countries, such as Germany, as Canada can legally export cannabis (the effect of which has been to establish a duopoly that only Canada and the Netherlands enjoy). Canadian producers certainly have a leg up in international markets, but will most likely have to make choices about whether to expand domestic operations or attempt to meet global demand, and may not be able to do both. The result of which, again, is increased costs for the public and for cannabis businesses; a sad state of affairs given Canada’s current track record of reasonable and responsible drug policy.