On October 17, 2018, recreational cannabis became legal in Canada, with the primary objectives of eliminating a significant illicit market, keeping cannabis out of the hands of youth and protecting public health and public safety.

Recreational cannabis would now be produced, distributed, and sold through an entirely transparent and licensed business model and Canadians would able to access a wide variety of cannabis products, just as they would most other products. By enabling access to regulated cannabis products, the policy objectives of displacing the illicit market and lowering youth usage would be achieved. The legal recreational cannabis market opened up many aspects of the supply chain to the private sector to fill the need for the responsible production and sale of cannabis products in Canada.

Early market projections for the recreational cannabis market ranged between $4.9 and $8.7 billion per year. One-year post legalization, actual sales were approximately $1 billion, although growing at a rate that suggests a size of closer to $2 billion. Many agree that the shortfall against expectations has been caused by a host of factors, including:

  • Jurisdictional issues between the provincial and municipal governments that have restricted consumer’s access to retail cannabis access stores and therefore regulated cannabis;
  • A complex supply chain in many provinces;
  • The cost of legal cannabis relative to the illicit market, in part due to the taxation and regulatory frameworks;
  • Restrictions on packaging and advertising that limit brand awareness; and
  • Limitations on product formats and potency relative to the illicit market.

These factors have threatened the predictability and future profitability of private sector participation. Although not a primary consideration for the government, in order to achieve its stated policy objectives, the private sector must be able to operate in the recreational cannabis market in a sustainable manner.

Background

The legalization of recreational cannabis in Canada presented an opportunity for the private sector to displace a long-hidden, but flourishing, illicit market with ties to organized crime. As of July 2019, the cannabis sector has already contributed $8.26 billion to the Canadian economy that year and employed over 9,000 people.

Initially, recreational sales only consisted of dried flower products (including pre-rolled joints) and cannabis oils (including sprays and gel-caps). Health Canada approved additional product classes including other inhalable extracts, ingestible extracts/edibles/beverages with a THC limit of 10 mg per packaged product, and topical products on October 17, 2019, one year following initial recreational legalization. The approval of additional product classes helps displace the illicit market by allowing more product formats for consumption of cannabis.

The two biggest challenges to the development of the nascent regulated cannabis industry are entrenched illicit market competition and inefficient and costly regulation. The illicit market in British Columbia is active in three interconnected areas: unregulated production, unlicensed retail stores, and illicit e-commerce sales. Cannabis produced by the unregulated market in BC is purchased by unknowing consumers at unlicensed retail shops in BC communities and shipped across the country through illicit e-commerce sites. There is limited enforcement against these illicit operators with much operating lower costs. In the 2020 Budget, the Government of British Columbia committed just $12 million over 3 years  to compliance and enforcement against the illegal sale of cannabis. These funds must be shared between the many agencies involved in licensing regulated cannabis businesses and the Community Safety Unit, the province’s cannabis enforcement agency. This is in contrast to the estimated $50 to $70 million per year in expected transfers from the Federal Government to BC from the province’s share of the excise duty.

When it comes to policy and regulation, a variety of key responsibilities are under provincial jurisdiction. Regulatory decisions around wholesale, consumer retail, and e-commerce sale of recreational cannabis are determined by the provincial governments. Provinces also have the ability to implement policy decisions pertaining to permissible product classes for sale, and age limits for consumption. In British Columbia, several policy decisions have significantly slowed the roll out of retail cannabis outlets, depressing the earnings of cannabis producers in BC and inadvertently protecting the illicit market share. These policy choices include repeated vetting of corporations and their Key Personnel for each new store opening and intensive security screening for all front-line retail employees.

Further complicating this is the role of the municipalities, which also varies by province. In British Columbia, the province delegated certain approvals to the municipalities, resulting in a more complex system with longer approval times. Beyond licensing delays, some large municipalities in British Columbia have essentially opted-out of private cannabis retail, resulting in highly populated “Cannabis Deserts” where consumers have no access to regulated product (other than online sales from the government whole BC Cannabis Stores) and therefore illicit cannabis thrives. In the municipalities that do allow for private cannabis operators, some charge or accept Community Contributions in order to secure positive recommendations and municipal zoning required for their business. In contrast, the government of Ontario established a single province-wide zoning for cannabis retail and municipalities were allowed to “opt-out” of permitting recreational cannabis in their jurisdictions. Regulated cannabis companies need a process that is reliable and predictable in order to make the capital investments in their business.

Wholesale sales of cannabis fall within the jurisdiction of the province and the government of British Columbia chose a public monopoly, operated by the British Columbia Liquor Distribution Branch (BC LDB). However, cannabis wholesaling is considerably different than alcohol, and certain policy and administrative decisions are limiting the growth and profitability of producers and retailers. Given limited supplies of fresh, high quality products, these are often listed for a limited time on the BC LDB website and require orders to be placed immediately before quantities sell out. If a retailer attempts to stock the best products for its customers to incentivize their transition from the illicit market, they must pay the BCLDB delivery overage charges for orders placed outside of a limited weekly schedule. The current policy also restricts product transfers between different locations operated by the same licensee, resulting in higher inventory and lower sell-through. These policy choices limit economic opportunities for BC-based cultivators to sell their products in BC and increase costs and inhibit access to regulated product for consumers.

Taken together, these policies, bylaws and regulations greatly increase the costs of operating a regulated cannabis business in BC. The corporate infrastructure required to support a chain of legal cannabis retail stores will likely exceed the profits that will be generated if only allowed the current limit of 8 stores. The current 8-store limit also constrains a retail business from designing a business structure that works for them based on a supply/demand market. This puts BC-based businesses at a disadvantage to national retailers with revenues from stores in other jurisdictions.

The issues noted above present an important observation – some of these regulatory decisions potentially run counter to the overall objectives of eliminating the illicit market and keeping cannabis out of the hands of youth. It is estimated that as much as 75% of Canadian consumers still purchase unregulated cannabis products from the illicit market. Furthermore, the patchwork of regulation across all provinces and municipalities, along with the increased cost (due to taxation framework, licensing delays, and supply chain considerations) further erode the policy objectives mentioned above because they jeopardize a predictable and sustainable business environment for the private sector. Aligning the interests of the private sector along with the policy objectives and public safety is critical to the long-term success of the initiative to legalize recreational cannabis in Canada. Doing so, will not only meet the policy objectives, but will also unlock billions of dollars in private sector investment that will result in further job creation for Canadians and British Columbians and tax revenue for government.

the chamber recommends

That the Provincial Government

[1] Enable better access to legal cannabis, which in turn will help to extinguish the current illicit market through, but not limited to, the following:

  • Increase the provincial budget for enforcement of illicit cannabis production and sales.
  • Province-wide retail operator licensing, allowing companies to be screened once, with subsequent applications focused on location specific criteria; 
  • Province-wide allowable zoning for cannabis retail;
  • Increase the cap on the number of allowed retail locations per operator to help meet consumer demand for legal cannabis and eliminate regional supply gaps;
  • Support the introduction of “farmgate” sales in B.C., to allow growers/producers, in particular smaller producers, to offer legal products to local consumers and access an alternative sales channel for their products;

[2] Reduce regulations that cause operational inefficiencies for licensed retailers and do not meaningfully contribute to high health and safety standards for consumers and producers through, but not limited to, the following:

  • Repeal the Worker Qualification Regulation and replace with security screening and training requirements parallel to employment in the alcohol sales and service industries. This will increase and broaden the economic opportunities in the BC Cannabis sector, reduce labour market constraints in retail, and focus government resources on vetting of operators, corporate executives, and majority shareholders;
  • Allow for different ordering and delivery days for in-demand product or eliminate additional delivery fees to private retailers;
  • Give operators the flexibility to reallocate product inventory between stores;
  • Creating a more transparent, fair, and efficient system for Fit and Proper assessments of corporate Key Personnel;

[3] Review tax policy related to cannabis focusing on:

  • Exempting medical cannabis from PST;
  • Work with the federal government on a national excise stamp. The current requirement for a provincial/territorial specific stamp increases the cost and complexity of the manufacturing process (adding cost to the final product that is passed on to consumers), and restricts producers to respond to rapidly changing supply and demand conditions in a nascent industry;
  • Removing the 20% tax on cannabis vape products. The manufacturing, distribution, and sale of inhalable cannabis products is already highly regulated to ensure public safety and keep products out of the hands of youth. Our view is that the tax was implemented as a response to nicotine vaping products that have increased in popularity amongst youth, which has an entirely different manufacturing process and supply chain in Canada. The imposed tax on cannabis vape products is counter to the policy objective by encouraging sales from the illicit market by making legal products significantly more expensive in BC; 

That the Federal Government:

[4] Treat medicinal cannabis equitably as a medicinal product by:

  • Exempting GST on medicinal cannabis;
  • [Allow for pharmacies to dispense medicinal cannabis; and

[5] Focus federal enforcement on illicit cannabis e-commerce and shipments via Canada Post to support the established legal framework.

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