October 17 marks the fourth anniversary of the legalization of recreational cannabis in Canada. When the Cannabis Act was passed in 2018, Canada became the second country in the world to legalize the sale, possession and non-medical use of cannabis by adults.
Now, four years later, the federal government is reviewing the law to see if it meets the needs of Canadians. Morris Rosenberg, the former Deputy Minister of Justice, will chair a panel of experts for this purpose.
Similarly, the Ontario Cannabis Store recently announced a “holistic review” of its prices. Other provincial and territorial governments should follow these examples and also start looking for improvements to their cannabis rules.
The rapid growth of the industry
In Canada’s first month with legal recreational cannabis, there were only about 100 licensed stores and sales were only $42 million.
But the industry has grown rapidly — even the pandemic hasn’t slowed it down — and Canada now has more than 3,300 licensed stores. Legal cannabis products are more accessible than ever.
Legal products have also become more competitive with illegal ones thanks to dry cannabis prices dropping 25% since 2018. In some provinces, they now start at $3.57 per gram including taxes. The improvement in the quality of cannabis products has also made these products more competitive with illegal products.
As a result, monthly recreational cannabis sales reached $395 million in July, just over half of beer sales in Canada.
However, all is not well with the industry. Producer profits have suffered from overproduction. Meanwhile, stores in some places, like Toronto and Manitoba, face too many competitors.
After years of little information about the health effects of cannabis, evidence is beginning to emerge. A recent study found an increase in cannabis-related hospitalizations among young children – all the more reason to review the rules on cannabis.
The federal government’s review only looks at things that fall under its jurisdiction, such as producers, products, and rehabs. Since provinces regulate retail and consumption, it is crucial that they also review their rules.
Cannabis taxes vary
In addition to health issues, provinces should review their rules on cannabis taxation. Ontario’s cannabis excise taxes in 2021-22 totaled $215 million, double the previous year. Profits at its wholesaler Ontario Cannabis Store also doubled to $184 million. I estimate that Ontario also collected about $121 million in sales tax, bringing its combined cannabis harvest to about $520 million.
That means the provincial government received about 30 cents of every dollar its residents spent on legal recreational cannabis last year. The Ontario Cannabis Store spent six cents more on operating expenses.
In comparison, I estimate that the federal government collected a relatively modest eight cents in taxes. That left about 20 cents for retailers and 36 cents for growers. These companies spent some of it on government licenses, property taxes, and income taxes.
Or consider Alberta, which often brags about charging no sales tax but rarely mentions its additional 16.8% excise tax on cannabis. This surtax likely contributed about $74 million of the $164 million Alberta collected in cannabis taxes last year.
Governments clearly need revenue from somewhere. But is it appropriate to extract so much from consumers in a way that ignores the industry’s poor profitability?
Provincial agency operations
Provinces should also review the operations of their cannabis agencies, including whether those agencies should retain their wholesale monopolies. The Ontario Cannabis Store, for example, earns wholesale margins of around 31% – even on sales it doesn’t touch, when growers sell direct to stores – when just 10% would cover its operating costs. .
And as monopolies, agencies become bottlenecks if they fail. When computer problems in Ontario and a strike in British Columbia temporarily halted shipments from cannabis agencies last summer, retailers lost money because they ran out of product. Why not let products go directly from producers to retailers instead, as Saskatchewan does?
A second issue is whether provincial cannabis agencies have enough stores. The profit margin for Quebec’s efficient cannabis agency was just 38%, compared to 74% for the Ontario Cannabis Store. But with fewer stores per capita than other provinces, its legal sales per capita were the lowest. This left a larger share of the market for illegal traffickers.
Finally, provinces should consider simplifying the rules to help retailers, without hurting public policy. For example, Alberta recently removed the requirement for stores to cover their windows. Clear glass can make stores safer for staff inside and friendlier for pedestrians outside.
Store locations are essential
Retail density is another key consideration. At one extreme, some Ontario neighborhoods have too many stores. This consolidation happened in part because the province blocked licensing for a year. The government should make it easier for cannabis businesses to move to underserved areas, reducing retail hyper-concentration.
Conversely, some rural areas have too few customers to support stand-alone stores. Newfoundland handles this by letting general stores sell cannabis. Other provinces may consider doing the same.
There are also some cities, like Mississauga, Ontario and Richmond, British Columbia, that don’t have legal stores because provincial governments let local councils opt out. While it was a smart political decision for the provinces to allow municipalities to opt out, it may not have been a wise political decision.
Learn from experience
As one of the few countries to legalize recreational cannabis, Canada has set an example for others. A growing number of places, including Thailand, Malta, South Africa, Mexico and Germany, are working to implement legalization nationwide.
Even the United States federal government recently took a small step toward reforming its patchwork of divisive cannabis laws. In the United States, some states have passed laws allowing the sale of cannabis, but they remain illegal at the federal level.
These countries have much to learn from Canada’s four years of experience. But Canada’s provincial and territorial governments should also learn from this experience by revising their rules.