Canada must help legal cannabis sector compete with the illicit market, experts say

The federal government's ongoing review of the Cannabis Act emphasizes protecting public health — but experts and industry insiders say it also has to find a way to boost the legal marijuana industry and help it compete with the illicit market.

The act, which legalized recreational marijuana in Canada in 2018, came with a requirement that the federal government review it three years after it became law.

After a delay, the government started the review in September 2022. It's being led by a panel of five experts with a mix of backgrounds in health, law and public policy. The panel is expected to report its final conclusions and advice to the federal government by spring 2024.

"The work of the expert panel will address the ongoing and emerging needs of Canadians while protecting their health and safety. Through this useful, inclusive and evidence-driven review, we will strengthen the Act so that it meets the needs of all Canadians while continuing to displace the illicit market," federal Health Minister Jean-Yves Duclos said in a news release.

But the Cannabis Council of Canada (C3), which represents cannabis businesses nationally, says some marijuana rules and regulations meant to protect public health are hurting the legal market's ability to push out the illegal market.

In its submission to the federal government as part of the review, C3 called for broad changes to the Cannabis Act. They include lowering the excise tax on cannabis products, reducing the number of restrictions on package labelling and advertising, and ending taxation of medical cannabis.

"We have a regulatory system that doesn't make a lot of sense, that frankly prohibits the ability of legal cannabis producers to compete with illicit market products," Pierre Killeen, C3's vice-president of legislative and regulatory affairs, told CBC News.

In the federal government's most recent survey on cannabis, 48 per cent of respondents said they always get their cannabis from a legal, licensed source.

"If we want to achieve the objectives of legalization, we need a financially sustainable cannabis industry," Killeen said. "We are government's partners in this endeavour, although we have never really been treated by any level of government as a partner in this endeavour."

Cannabis stores recorded sales of just under $3.8 billion across Canada between January and October of 2022, according to Statistics Canada's latest data. Stores sold approximately the same amount in all of 2021.

Killeen said many cannabis businesses will be forced to close if the federal government doesn't make changes to marijuana laws — and he's not optimistic it will.

"Your best indicator of the future is the past. So if you look at the Government of Canada and the provincial governments' approach to the economic challenges facing the cannabis industry, there's no track record of success," he said.

"So I think ... at this stage in the journey, we are pessimistic about the prospects of the Cannabis Act review resulting in any measures that address the pressing and immediate financial crisis facing cannabis licence holders."

Michael Armstrong, a professor of operations research at Brock University who studies the cannabis industry, agrees that the federal government is unlikely to make some of the bigger changes C3 wants.

"On some of those asks, I think [C3 is] going to get a hard no, because they're going to contradict the public health, public safety objectives of the federal government," he said.

"Keep in mind, the federal government's balancing act is they want the legal market to be attractive enough to bring all the existing users over from the illicit market, but they don't want it to be so attractive that it brings in lots of new users."

Health Canada recently announced an increase to the amount of cannabis-infused beverages one can legally possess.

Armstrong said that's the type of smaller adjustment the Cannabis Act review is likely to produce.

He added that C3's request for less restrictive packaging and labelling rules is fair.

"I think it'd be perfectly reasonable to let the industry put a little blurb, like a paragraph, saying, 'Hey, this is what this product is intended for,'" he said.

The standard excise tax on dry cannabis flower is $1 per gram except in Manitoba, where a $0.75 per gram additional cannabis duty is not applied. Cannabis consumers also pay sales taxes on the product and, depending on the province, may have to pay a mark-up from monopoly retailers such as the Ontario Cannabis Store. The Ontario government recently reported it made $520 million from marijuana sales last year.

Brad Poulos, a lecturer at Toronto Metropolitan University's Ted Rogers School of Management, said the government has set the excise tax too high to allow the legal cannabis industry to compete with tax-free illegal product — and it should consider lowering it.

"When it's time to get rid of that illicit market, when you get rid of prohibition, you know what you don't do? You don't tax [cannabis] like crazy," Poulos said.

Poulos added he'd also like to see the government eliminate taxes on medical cannabis.

"There's only one medicine in Canada that gets taxed at all, and that's cannabis," he said.

"So what this says to me is that the government does not actually consider cannabis to be medicine."

It's one of many changes Don Davies, the NDP health critic and member of Parliament for Vancouver Kingsway, wants to see come out of the Cannabis Act review.

"A lot of the legitimate legal cannabis sector is hampered by excessive rules and regulations that are, I think, inhibiting it from reaching its full potential and actually helping to facilitate a lot of the black market that's still there," Davies said.

"In my hometown of Vancouver, the storefront windows of cannabis stores have to be shaded in. You can't look in. That's not the case for a liquor store ... More importantly, the labelling on products is not really telling the consumers what they want and need to know."

The Conservative Party did not respond to CBC's request for comment on the Cannabis Act review.

Kun Karunaker, CEO and co-founder of the Toronto-based cannabis production company Strains Limited, agrees that regulation of the industry is excessive. Karunaker's business holds four cannabis-related licenses and recently applied for a fifth.

But Karunaker gives Health Canada credit for reaching out to him and his company for feedback on cannabis laws — something he said the provincial government in Ontario hasn't done as often.

"I'm not going to bash Health Canada where right now they're actually listening more to people like us, and they're having these conversations of where they can get better and where they can improve," he said.

Karunaker said he'd like federal government officials to visit his facility so they can see what operating a cannabis business is like.

"They need to be on-site with somebody like us who can actually show them, and go through these things with them," he said.

Karunaker said some recent tweaks to cannabis regulations make him optimistic about the future of the industry — an optimism that Davies shares.

"I'm hopeful that we can make progress and we certainly need to do so because this industry is very important to Canada's future," Davies said.

"I'm very bullish on the cannabis sector. It's sustainable, it's clean, it's high-tech. Canada can be a world leader."

Cannabis tourism a missed opportunity: expert

Susan Dupej, a researcher at the Lang School of Business and Economics at the University of Guelph, said Canada missed an opportunity to become a world leader in cannabis tourism following legalization.

She said rolling back restrictions on promotion and advertising could lead to more travellers heading to Canada looking for a legal toke.

"The Cannabis Act outlines where consumption cannot take place, right? It's restrictive," Dupej said.

"But there are no rules, no guidelines around the potential for developing the spaces where consumption could take place."

Though cannabis is illegal at the federal level in the United States, Dupej pointed to a Forbes Magazine report that valued the American cannabis tourism industry at $17 billion.

Dupej said it's difficult to know how much the cannabis tourism industry in Canada is worth, but she estimates it's significantly lower than $17 billion.

Poulos said it's not the only area where the United States has an edge when it comes to cannabis.

"The Americans are the ones that are building up the worldwide known brands, and so that's an opportunity lost," he said.