On June 30, 2016, the Minister of Justice and Attorney General of Canada, the Minister of Public Safety and Emergency Preparedness, and the Minister of Health announced the creation of a nine-member Task Force on Cannabis Legalization and Regulation (the "Task Force"). The Task Force was given a mandate to consult and provide advice to the government on the design of a new legislative and regulatory framework for legal access to cannabis, consistent with the government's commitment to "legalize, regulate, and restrict access", as announced in its December 2015 Speech from the Throne.
On November 30, 2016, the Task Force released its final report, “A Framework for the Legalization and Regulation of Cannabis in Canada” (the "Report"). To fulfill its mandate, the Task Force engaged with provincial, territorial and municipal governments, patients, advocates, Indigenous governments and representative organizations, employers and a wide spectrum of other industry stakeholders. The Task Force received nearly 30,000 public submissions from individuals and organizations in Canada and looked beyond Canada’s boarders to learn from jurisdictions that have legalized cannabis for non-medical purposes such as Colorado, Washington State and Uruguay.
The Report sets out a series of guiding principles and values as important building blocks for making its recommendations. The following principles and values have been validated throughout its consultations:
- protection of public health and safety as the primary goal of the new regulatory framework, which includes minimizing harms and maximizing benefits;
- compassion for vulnerable members of society and patients who rely on access to cannabis for medical purposes;
- fairness in avoiding disproportionate or unjustified burdens to particular groups or members of society and in avoiding barriers to participation in the new framework;
- collaboration in the design, implementation, and evaluation of the new framework, including communication and collaboration among all levels of government and with members of the international community;
- commitment to evidence-informed policy and to research, innovation and knowledge exchange; and
- flexibility in implementing the new framework, acknowledging that there is much we do not know and much that we will learn over time.
Over the course of the coming weeks, we will be publishing a series of short articles where we will summarize the various recommendations made by the Task Force. In this article, we will consider the recommendations for the taxation and pricing of cannabis in a regulated regime.
Prime Minister Justin Trudeau has stated that tax revenue is not one of the principal reasons for the move towards legalization and regulation of cannabis. However, the taxation of cannabis sales has resulted in a boon for some state economies. For example, in their fiscal year ended May 2016, Colorado brought in a total of $157 million in state taxes, helping fund school programs, local government initiatives and additional spending. Therefore, the taxation and pricing of cannabis can have substantial implications for the government and society as a whole. The following are four key takeaways from the Task Force’s recommendations relating to the taxation and pricing of cannabis.
1. Taxation and Pricing Objectives
The Report acknowledges that taxation and pricing policy decisions involve a trade-off between two of the government’s primary policy objectives: (i) discouraging consumption; and (ii) reducing black market profits. Higher cannabis prices discourage consumption, but, if the price of legal cannabis exceeds black market prices, it increases the risk that the black market will continue to thrive. Accordingly, the Task Force recommends that cannabis be taxed and priced in such a way as to limit the growth of consumption, particularly with young individuals that are typically more price sensitive, while also keeping the price of cannabis low enough to discourage purchases from the black market. Additionally, the Report identifies putting public health concerns ahead of the generation of tax revenues as a crucial factor to the success of a regulated cannabis market. To specifically address public health and safety concerns, the Report recommends a tax and price scheme tied to THC potency. This means that products with higher levels of THC could be more expensive than those with a lower THC content.
The mechanism by which cannabis will be taxed and priced was not specified in the Report, but instead left to the federal and provincial governments to determine. However, examples were provided on how pricing objectives could be achieved, including:
- fixing of prices—a set price for each cannabis product;
- setting minimum/maximum prices—a range of prices that can be charged for each cannabis product;
- per unit taxes—a tax on each specific quantity or product sold;
- sales taxes—a percentage tax on the dollar value of every sale; and
- limits on production amounts—a limit on the amount of product produced and sold to control price through market supply.
2. Use of Tax Revenue
While tax revenue may not be the primary goal of legalizing and regulating cannabis, the government has indicated that tax revenue should be used to fund various cannabis related programs and services such as addiction treatment, mental health support and education programs. The Report notes that stakeholders, such as substance-use experts, law enforcement and municipalities called on the government to use tax revenues to support prevention and treatment programs for individuals with cannabis dependence. Others suggested allocation of tax revenues to education programs, including targeted programs for youth, for Indigenous communities, and enforcement, as well as ongoing cannabis research. Accordingly, the Task Force recommends committing to using revenue from cannabis as a source of funding for administration, education, research and enforcement. Therefore, as the scope of programs and services which will qualify for government grants or other assistance subsidies becomes better defined, we expect to see new opportunities develop for existing cannabis related information and education platforms as well as the potential development of new cannabis industry verticals relating to the implementation and delivery such programs and/or services.
3. Medical vs. Non-Medical Taxation
Currently, medical cannabis purchased through a licensed producer under the Access to Cannabis for Medical Purposes Regulations is subject to a 5 percent Goods and Services Tax at the federal level as well as any other applicable provincial sales tax. Medical cannabis does not benefit from any excise tax exemption under the Excise Tax Act as other prescription drugs do (for a more detailed discussion on this issue please see our previous thought piece on the Hedges case).
While the Task Force acknowledged the concerns of medical cannabis patients, including access and affordability issues, the Task Force did not take this opportunity to recommend distinct medical pricing including, for example, tax exemptions for medical cannabis. In fact, the Report recommends that the same tax system be applied to medical and non-medical cannabis products. The Report cites several considerations underlying the Task Force’s recommendation including, continuing to provide medical cannabis patients with reasonable access to ensure they can acquire sufficient cannabis to meet their needs without facing undue constraints on cost and/or variety—the implication being that faced with an opportunity to sell lower priced medical cannabis or higher priced non-medical cannabis, cannabis producers and/or distributors will naturally favour selling to the non-medical market. Therefore, based on the Task Force recommendation, medical cannabis patients can expect to pay the same and be taxed the same as non-medical consumers.
4. Potential Patient Implications
Depending on how the government implements its taxation and pricing policy on cannabis, there exists a risk that some medical cannabis patients may experience an increase in the cost of their medicine. By failing to recommend that medical cannabis be exempt from taxation and recommending a potential tax and pricing scheme tied to THC potency, patients who rely on high THC cannabis products for their ailments may be subject to higher costs.
In addition, having one taxation and pricing policy for medical and non-medical cannabis may create additional hurdles for medical cannabis patients. Under a system where medical and non-medical cannabis costs the same, a positive aspect is that there may be a reduced incentive for recreational users to access the medical stream under false pretenses in an effort to obtain cost savings. However, this may also make it easier for physicians, who may already be reluctant to prescribe medical cannabis, to refuse to prescribe medical cannabis and simply refer patients to the non-medical stream instead. This could make it harder for medical patients to access certain ancillary benefits tied to medical cannabis such as tax deductibility, potential insurance coverage and employer accommodation relating to appropriate medical use in the workplace.