Clumsy rules create chaos for a cannabis industry ready to conquer Canada
Feature | Gregory Beatty | July 28, 2022
When the federal Liberal government passed the Cannabis Act in 2018, it committed to a parliamentary review after three years. That deadline passed last October, and so far: nothing.
In fairness, the government (and world!) has a lot on its plate these days. And probably for most Canadians, the cannabis scene seems pretty chill.
Contrary to the fear-mongering pre-legalization, Canada hasn’t been overrun by flaked-out stoners. Sure, there were a few early hiccups tied to tight supply, shortage of stores, and too-high prices. But most of those problems are in the rearview mirror, and recent stats are impressive: to date, the legal cannabis industry has contributed $45 billion to Canada’s GDP, creating 50,000 jobs and $15 billion in provincial/federal tax revenue.
But those figures mask a harsh reality — one reflected in a report card the Cannabis Council of Canada released last October. The council graded 11 “subjects” related to key government goals for legalizing cannabis, and the current state of the industry.
The subjects included Keeping Cannabis Out of Youth Hands, Taxation, Combating Illicit Market, Financial Viability and Protecting Public Health.
The CCC doled out two Bs, two Cs, three Ds and four Fs.
“We didn’t give those marks lightly,” says CCC CEO George Smitherman. “But the fact is that the financial vulnerability and sense of urgency is very intense. And our job is to be super real about it, because some people like to pretend that a license in this area is a license to print money, and it’s been anything but.”
Cynics might be tempted to dismiss the Cannabis Council report card as self-serving but several grades critique government policy failures. Take the illicit market: while legalization has hurt it, it’s still estimated to represent half of sales. That’s $45 billion, which translates into $15 billion in lost tax revenue, plus heightened concerns over youth access and public safety — especially given today’s fentanyl-ravaged illicit drug market.
California recently began cracking down on illicit online suppliers using tax enforcement tools. CCC would like to see Ottawa step up enforcement, too. But most of the report card criticisms focus on helping the legal industry compete against illicit suppliers.
Up In Smoke
Price is to retail what location is to real estate. While the legal market is not un-price competitive, it’s still struggling with what it calls exorbitant tax rates, says Smitherman.
“The premise was one dollar of tax on a retail price of $10 a gram. But the reality now is $1 on a price of $3.50 a gram. That’s because it’s a fixed tax, so governments are doing quite well, especially the provincial governments because they get 75 per cent of the revenue.”
The high tax rate, coupled with the need to be price competitive with the illicit market, means the cannabis industry is operating on razor-thin profit margins that aren’t sustainable.
“We need to revamp how the pie is cut up,” says Smitherman. “But our bigger point to governments is, ‘If we work together with the right policy adjustments we can capture a much larger share of the overall cannabis market, because a really significant share — we would say about half — is outside the current legal market.”
Under the Canadian constitution, trade and commerce is a provincial responsibility. That means that in addition to federal regulations around the production and sale of cannabis, the industry is also subject to provincial regulation at the retail level. And Jim Southam says legal retailers trying to compete with the illicit market (and each other) are handcuffed by restrictions that stop them from marketing and promoting their products.
Southam is a cannabis retailer in Saskatoon, and president of the Saskatchewan Weed Pool co-op which is working to grow the industry in Saskatchewan.
“The stores today are definitely not the head shops of days past,” says Southam. “In store, it’s pretty much business as normal. We can display promotional material and products in cases, as long as it’s not accessible to customers. We can engage them in conversation. We can’t open the products, that’s the same as liquor stores. But we can show pictures and give product descriptions about the cannabis strains and their different effects.”
Outside the store, though, it’s a whole other ballgame, says Southam.
“Basically, we can’t talk about cannabis,” he says. “And we can’t offer any incentives to encourage customers to come in. No print or radio advertising is allowed, and if we sponsor charity events they can’t advertise our sponsorship so it’s basically a donation and we get zero recognition. It really ties our hands to operate as a normal business.”
In Saskatchewan, cannabis stores are regulated by SLGA. “We communicate quite often with SLGA, and inspectors come by our stores regularly,” says Southam. “I’m not shy to let them know how ridiculous it is to be forced to ask a senior for their ID. That is definitely something at the top of our list to get changed so it’s similar to alcohol, where you must ID if they look under 25.”
While Saskatchewan cannabis stores may not be head shops of days past, the requirement they block off their windows and doors so passersby can’t see inside invites comparisons to porn shops of days past.
It’s not inviting for consumers, and some retailers fear it makes them more vulnerable to crime because there’s no way to see inside, says Southam.
“It’s just another example of a silly, no commonsense or evidence-based cannabis regulation,” he says. “It’s all based on prohibition-style propaganda. It’s frustrating.”
Edibles is another area where the legal market operates at a disadvantage, says Smitherman. Current regulations cap potency at 10 mg of THC per package. THC is the psychoactive element in cannabis, and an experienced consumer looking to get baked can probably handle a 10 mg dose easy — maybe even 15 mg or higher.
Most edibles come in packs of five (2 mg each) or 10 (1 mg each). That’s fine for the novice but do the math for an experienced consumer and that’s a lot of gummies and/or chocolates to buy and scarf down.
“The 10 mg per pack limit for edibles is a good example of how we’ve conceded an enormously profitable category to the illicit market,” says Smitherman. “Under the current model, the typical consumer is not going to have their requirements met. In that category, we just don’t got game and we need relief.”
CCC would also like to see changes to packaging regulations. Right now, dried flower is sold in child-proof plastic containers.
“I have teenagers at home so I’m sensitive to that,” says Smitherman. “But when you have child-resistant packaging on cannabis, but don’t have it on a bottle of Tylenol or alcohol, that seems like overkill. It also contributes to an overall packaging burden, which for me as a legacy consumer who got my weed in a sandwich bag with a relatively low environmental impact, can be shocking.”
Grass On The Hill
While the Cannabis Council of Canada is eager for the federal government to get its review underway, the industry recognizes it will be a protracted process with reports, committee meetings and maybe even public hearings. For now, CCC is working directly with government departments (primarily Finance and Health) to address specific concerns.
One early battle was the regulations Health Canada developed for cannabis drinks where they wildly over-calculated the THC content so that a 12 oz drink was equal to six grams of dried flower.
“They just got it wrong,” says Smitherman. “And it took us all kinds of effort to get them to reconsider.”
A more recent win came in the 2022 federal budget when the government agreed to establish a strategy table to facilitate communication with the industry.
“With the table we want to create some external influences around government that are not afraid to talk about growth in the industry and getting behind exports,” says Smitherman [see sidebar]. “Right now, it seems that our regulator is afraid to see us do well.”
At the provincial level, CCC would like to see provinces work to harmonize their cannabis regulations.
In most provinces, the legal age to purchase is 19. But in Quebec, it’s 21. Quebec also bans some edibles that other provinces allow. And in Ontario, Mississauga, Oakville, Markham and Richmond Hill (total population: two million) all said no to bricks-and-mortar stores. That means all that business is online, where illicit options — with delivery to your door — are abundant.
Different provinces have different vetting requirements to be in the industry, too. Freshness dates and packaging/recycling standards also vary, and when processors ship product to different provinces they have to follow a complicated excise tax regime for each province — all of which adds extra cost, making it harder to compete against the illicit market.
When CCC held a Grass on the Hill promotion on Parliament Hill in late May, the caucus co-chairs for cannabis from the Liberals, NDP and Conservatives all showed up, says Smitherman. Progress!
Still, it’s probably fair to say that after being demonized for over 100 years, cannabis, in certain circles anyway, still has a stigma which makes it a bit of a political hot potato. Smitherman, though, thinks that’s overblown.
“I think the stigma is alive for people in government, but more as a figment of the imagination,” he says. “Our job is to give them the evidence that will give them the confidence to make the shift. Public opinion polling we do shows Canadians continue to have high regard for legalization, so that should be a point of confidence for politicians.”
EDITOR’S NOTE: Greg’s article should not be read as an endorsement for reckless deregulation or mindless tax cuts. Regulations and taxation are good. Half-baked rules do not, however, serve any interest other than chaos. Responsible criticisms of flawed public policy, like Greg’s feature here, should never be confused with the all-too-common, anti-democratic whining to slash regulations or taxes. We regret we live in a time when this needs to be explained, but there are a lot of shadily funded, dishonest actors out there who have undermined discourse about functional, public interest regulations (see: climate change) and we’re not going to make it easy for those turds to use this (or any) feature in our paper in their agenda.
World Leaders Vs. Foot Draggers
While other industrialized countries haven’t exactly stampeded to follow Canada in legalizing recreational cannabis, the clock is ticking. New Zealand disappointed in a 2020 referendum when voters said No to recreational cannabis by a 51.2 to 48.8 per cent margin, but there are over 60 countries now where cannabis is legal for medical use.
South of the border, recreational cannabis is legal in 19 states, and Washington, D.C.. It might soon be legal at the federal level too, says Sask. Weed Pool president Jim Southam.
“The U.S. is quite close to legalization. There’s a bill before Congress, so I think it’s going to happen, whether it’s soon, or a year or two from now.”
Not only will that open up potential markets for Canadian producers, it should also help with longstanding problems the industry has had accessing banking services.
“The Big Five have supported a couple of the larger publicly traded licensed producers, but for the most part they’re still not touching the cannabis industry,” says Southam.
“What I’ve gleaned from my experience is that the banks are afraid to put their foreign investments in jeopardy due to the legalization we have in Canada,” he says. “If it was legalized in the U.S., then the banks could actually start serving their Canadian customers.”
Once the U.S. legalizes, other countries will inevitably follow. And Cannabis Council of Canada CEO George Smitherman says Canada needs to be ready.
“Canada has this theoretical first-mover advantage as the first large industrial nation that legalized, but we haven’t exactly crafted strategies in government for how we can best take economic advantage of that,” he says.