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To: The Hon. Ginette Petitpas Taylor, federal Minister of Health

From: Rosalie Wyonch

Re: Don’t Overtax Our Pot Producers

Date: July 20, 2018    

Your department recently released a proposal to charge legal cannabis producers regulatory fees to recover the costs of governing the cannabis market. Some of the proposed fees seem sensible, one does not.

First, let’s acknowledge your financial rationale. The 2017 Fall Economic Statement detailed $546 million in costs associated with “The New Legal Framework to Strictly Regulate and Restrict Access to Cannabis” over five years. Only $20 million of this is currently budgeted. Health Canada’s proposed fees are intended to recover the remaining costs. Ottawa will also collect excise, income taxes and GST on cannabis.

The proposal includes four fees: an application screening fee, an import/export permit fee, a security screening fee and an annual regulatory fee. The first three are relatively straightforward and sensible.

Health Canada incurs costs to process applications for licences and permits, and can effectively measure those costs. Cost recovery is based on the principle that the public should not bear the costs where private parties derive the primary benefit.  Health Canada forecasts these fees will recover about $38 million over five years.

An annual fee of 2.3 percent of gross revenues (1 percent for producers with less than $1 million in annual revenue, natural health products and exclusive medicinal producers are exempt) is intended to recover the remainder of regulatory costs – about $383 million over five years. This fee, however, appears to be more of a tax and is not clearly linked to the goal of cost recovery because prices are likely to fluctuate and revenues in the legal market are very uncertain.

Across the health portfolio (Health Canada, Canadian Food Inspection Agency, Patented Medicine Pricing Review Board and Public Health Canada) about $150 million in cost recovery fees are collected annually. The proposed fees would increase that fee revenue by more than 50 percent, which implies new administrative costs.

The black market will not be paying excise taxes or cost-recovery fees. Which means that excessively applying them to the legal market will only serve to steer consumers toward the black market. Given the uncertainty around legal recreational demand and pricing, governments need to be cautious about increasing costs for legal producers.

I recommend you maintain the current excise tax rate but impose no annual fee until recreational market prices and supply begin to stabilize. Any increase in recreational marijuana price risks undermining the competitiveness of the legal market. After it begins to stabilize, many such ongoing costs could be recovered by increasing the excise tax. (Colorado, for example, increased its retail sales tax on marijuana from 10 percent to 15 percent last year, after three years of legal recreational sales.) The drawback of this approach from the federal government’s perspective is that it would have to renegotiate its revenue sharing with provincial and territorial governments (currently 75 percent of excise revenues go to provincial governments and federal revenues are capped at $100 million a year.) The federal portion of increased excise tax revenue could then be allocated via the normal budgeting processes to the government bodies that regulate the cannabis industry. This way, you will not significantly increase administrative costs for producers or the government.

Rosalie Wyonch is a Policy Analyst at the C.D. Howe Institute. 

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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matter