Will Canadians Experience Cannabis Sticker Shock This Summer?

byAlanaArmstrong4 minutes

The legalization of recreational marijuana in Canada should commence this summer, though the law is still officially in the lap of the Senate. As long as it passes Bill C-45, the country can expect a Canadian cannabis tax to be cut from the $4 billion (CAN) that experts estimate the market is worth.

Prices and taxation levels will need to be monitored, however, to keep the legal industry competitive enough to achieve the government’s goal of eradicating the black and grey marijuana markets in the country—without pricing products too low and encouraging excess use.


Policymakers Tasked With Monitoring & Adjusting Cannabis Taxes

Prime Minister Justin Trudeau’s marijuana czar, Bill Blair, has given Canada's policymakers a heads up that tax adjustments will be needed in future to prevent prices from falling too low after legalization.

Canadian licensed producers (LPs)—many of which are publicly traded and have surged in value—are expected to achieve such economic heights that production costs will be tamped down. Over time, that means the prices of retail cannabis will come down, too. With that, so will the taxes collected on it.

As in Colorado, a Few Big Cannabis Players Are Calling the Shots

In Colorado, where recreational marijuana has been legal since 2014, the state's cannabis sales generated more than half a billion dollars by mid-2017. Colorado imposes a sales tax of 2.9% on medicinal marijuana. For recreational adult use, it applies a 15% excise tax on wholesale transfers as well as a 15% special sales tax on retail sales.

The system worked well until prices of wholesale marijuana plunged from a peak of $2,000 per pound in January 2015 to just $1,300 per pound in December 2017, leading to lower margins and less overall collected tax.

Experts suspect that big businesses have been weighing down marijuana prices in Colorado over time. The state-issued grow licenses had no limits on the number of plants that one company cultivated. With giant growers snagging as many licenses as they could afford, a minority of growers established a majority stake in Colorado's market in no time.

And this style of cannabis industry takeover isn't just happening in Colorado. Canada, which has had enormous success in the “green rush” leading up to legalization, is already dominated by only a handful of larger businesses. Most of them got a head start producing medical marijuana, then debuted on the stock market, and are now busy setting up mergers and acquisitions to grow their businesses even further.

Canada could, therefore, be following in Colorado's footsteps—including the successes and the missteps—and perhaps this is why Bill Blair is preparing provinces for future adjustments. But so far the government seems to be sticking firmly to its formula.

The Proposed Canadian Cannabis Tax Plan

The finance ministers agreed on a Canadian cannabis tax of 10% of the product price, or $1 per gram—whichever is higher.

These excise taxes aren’t paid directly by the consumer but by the LP. Consumers will be charged sales taxes of 5–15% depending on the province. So far, this includes fresh and dried cannabis, cannabis oils, as well as seeds and seedlings for home cultivation. (Edibles and extracts will come later.)

The finance ministers of each province and territory made a case late in 2017 that it would be the provinces and territories—not the federal government—footing most of the bill for legalizing this industry. This plea is what won them the 75% share of the Canadian cannabis tax for the first two years of legalization, a tax that was initially supposed to be split evenly with the federal government.

But because marijuana is still outlawed on the federal level, lawmakers have yet to implement their tax plan. Thanks to StatsCan, we have a crowdsourced idea of what cannabis currently costs in each area of Canada. And it’s not the only one tracking the price of Canadian marijuana.

Right now, the price for medicinal marijuana seems to be close to the black market price for cannabis. But we’ll have to wait until legalization to see if the proposed taxes will make the price too high, subsequently keeping illicit cannabis sources in business.

What the Tax Plan Means for Medical Marijuana Consumers

Many are angry that this tax plan will apply to recreational and medical cannabis. Cannabis patients, their doctors and medicinal marijuana advocates are the most frustrated with the federal government’s proposed “sin” tax. Taxing medicinal cannabis could end up affecting its affordability and availability for those who need it. A letter signed by 50 physicians states that taxing medicinal marijuana is "the last thing we should do" during an opiate crisis. Some speculate that patients will use recreational marijuana if it's taxed at the same rate as their medicine and more accessible in their area.

Provincial Regulators Need to Keep an Eye on the Marijuana Market

It's true that attention must be given to what's going on—including the prices charged for cannabis—in the illicit markets. But there's a delicate balance to strike between legal cannabis that’s cheap enough to entice buyers to legitimate establishments over black market providers, but not so cheap that legalized marijuana becomes a resource for organized crime or other unintended buyers.

The Canadian consumer, whether in the market for cannabis or any other product, is used to almost limitless quality, choice and accessibility. We’ll probably see provinces using both price and taxes to maintain a rate that’s competitive with the illicit market and pleases the average Canadian buyer.

Photo credit: KMR Photography