The adult-use cannabis industry in Canada has officially graduated. After four years of legal cannabis sales in The Great North, the industry has evolved and adapted and grown, but, like any recent graduate, still has a lot of maturing to do.
That’s why the Canadian government in September launched a review of the Cannabis Act to evaluate its impact on youth, indigenous communities, the economy, the illicit market and more.
The Cannabis Act took effect in October 2018 and included a mandate for Canada’s health minister to assess the legislation, its administration and operation three years later, according to a Reuters report, although delays led to the review happening this year instead.
All Canadians are invited to share their perspective on legalization through an online questionnaire or through written feedback, and all comments are due by Nov. 21, 2022. Although no timeline has been announced for the release of a formal report, a “What We Heard” report will ultimately be made public on https://www.canada.ca/en.html.
“I’m excited about the early changes that have been affected by legalization, for the most part,” says Dan Sutton, founder and CEO of Tantalus Labs, a British Columbia-based, small-batch cannabis cultivator. “In terms of safe supply and quality assurance standards, I think Canada’s built their recreational cannabis program on the back of their medical program. There’s no other federal standard of that quality anywhere else in the world that would be a good example for other countries that legalize.”
Phil Niles, executive vice president of GreenSeal Cannabis, a licensed producer in Stratford, Ontario, says it’s encouraging that the government is reviewing the Cannabis Act and hopes a closer look at the law will lead to tweaks to ensure the industry’s long-term viability.
“It’s a challenging industry right now,” Niles says, adding, “I don't think there are enormous changes that are needed, per se. I think it's more just rounding the edges and rounding the corners.”
On the positive side, Sutton says reducing youth access was one of the driving forces behind Canada’s decision to legalize cannabis, and policy reform has indeed led to a decrease in youth consumption in recent years.
A June 2022 policy brief from the Canadian Centre on Substance Use and Addiction reported that “the rate of youth ages 16-19 years reporting past-year cannabis use significantly decreased from 44% in 2020 to 37% in 2021.”
“To see that [in less than] four years of legalization is something that those in Canadian policy should be really proud of,” Sutton says.
Of course, that’s not to say that Canada’s cannabis regulations are achieving all the goals of legalization.
Room for Improvement
Rick Savone, senior vice president of global government relations for Aurora Cannabis, who also serves as chair of the Cannabis Council of Canada (CCC), is actively working to identify areas of improvement within the law.
In his role with CCC, Savone works with a number of producers across Canada to collaborate and determine what priorities they want to communicate to the Canadian government about how to improve the cannabis industry for both operators and consumers.
While Savone applauds Canada’s medical cannabis market, he says the adult-use market has a lot of room for improvement, describing it succinctly as a “work in progress.”
He identified three specific issues he sees with Canada’s adult-use market:
- the lack of understanding and education surrounding cannabis; and
- competition from the illicit market.
“One, the regulatory model has to be made more simple; that is, a regulatory model that matches the scope of the challenges of what we’re trying to manufacture,” Savone says. “We’re manufacturing medicines, so it should be one that permits and allows us to explore medicines for patients in Canada.”
In terms of educating consumers on cannabis’ medical potential, Savone says marketing restrictions need to be loosened to better spell out products’ characteristics.
“In the adult-use market, we should be able to market in a way that more reflects the differences between each of our products and each company’s products in Canada,” he says. “We’re not able to market to consumers. We use plain packaging, and the only thing we can say about our product is its name and its potency. That doesn’t really help consumers to understand about the potential of the product, how it could be used, or what distinguishes our product from another competitor’s products. We need to lower the regulatory bar so people can access the products they want and need.”
Taxation is another aspect of Canada’s regulatory model that Savone says needs adjusting.
“Depending on the product being sold, anywhere from 45% to 50% of the product prices goes into government coffers in one form or another,” Savone says. “That does not allow us to compete with illicit producers whose prices are way, way lower and whose potency is often higher. From a dollar value perspective, we’re just not able to compete with the illicit market.”
Niles echoes the same sentiment regarding taxation.
“You'll hear every producer talk about [the] excise tax,” he says. “I think it's easy to point to an excise tax as being an obvious standout … because it's a fixed price program. When prices were [up], that number may have made sense, but as prices have dropped dramatically, that remains the same dollar amount coming out of the pockets.
“I think everyone appreciates and understands that there will always be some level of taxation, and potentially substantial taxation, but it needs to be sensible taxation that allows the industries to thrive,” Niles adds. “Because if you don't allow the businesses in this industry to thrive, there will be no excise taxes to pay because there will be no one producing product at those unsustainable prices.”
Sutton agrees with this assessment of Canada’s taxation structure, saying the government “missed the mark in engineering a tax policy that can create sustainable businesses of all sizes.”
Sutton estimates that the illicit market likely still owns 50% of the market share in Canada–a statistic he doesn’t see changing any time soon since high taxation makes it difficult for regulated businesses to compete with the illicit market on price.
“That is a place where there’s been a little bit of allusion to more scrutiny, more economic plans and thinking about, how do we make sure that there’s a piece of the market in here not just for the government, but for everybody in the private sector?” Sutton says.
Sutton is a member of Stand For Craft, a national organization made up of 40 small producers that have been advocating for a more progressive tax policy in the Canadian cannabis market. He says the organization was born from a collective awareness that the current tax structure disproportionately harms small businesses.
“If craft producers don’t make enough money to bring in positive income, … they just don’t have the resources to wait out a change in policy,” Sutton says “It’s no exaggeration to say [most] craft-scale businesses don’t make any break-even income. They make revenue, they pay their taxes, … and then there’s no money left over or there’s negative money getting drawn down on at the end of the day.”
Stand For Craft aims to analyze the economic aspects of Canada’s market and provide data that Sutton hopes will facilitate policy reform. The organization submits commentary, data and analysis to Canadian regulators on a weekly basis, Sutton says.
“We are just trying to provide resources that validate our position, to demonstrate that there’s still work to be done,” Sutton says. “And we’ll continue to do that until we see the impacts of material excise reform.”
While Sutton says tax policy reform should be the government’s priority in any reworking of Canada’s cannabis law that stems from the legalization review (“I think the industry is unified in that we got the numbers wrong and we need to reexamine them,” he says), he also acknowledges that good policy takes years to develop. In the interim, while regulators work on broader reform, he would like to see tax relief that will allow the Canada Revenue Agency (CRA) to forgive tax debt for smaller craft businesses.
“This will allow everyone to get their ducks in a row, understand what fundamentals are healthy, and it also is a way to throw a material lifeline to craft businesses without substantially or materially subsidizing the larger companies that have more resources and more in the budget segment of the cannabis marketplace,” Sutton says.
Another figure within Canada’s cannabis laws that cultivators say is unreasonable is the possession limit. Niles points to this as another area of the Cannabis Act that may need some additional consideration, noting the current law allows adults to possess a maximum of 30 grams of cannabis at a time.
“OK, so someone who goes and buys an ounce, that's 28 grams,” Niles says. “You're pretty much at your upper limit, and an ounce isn't a crazy amount of product. No one's trafficking that or anything along those lines. … So, is 30 grams the right number? Probably not, but … you had to pick a number [to start]. Let's review that number now in good faith and figure out something better.”
Another point of contention in the law, Niles says, is the 60-day notice period for cannabis operators to create a new product. Even after businesses spend months—potentially more than a year—developing a new product internally, they then have to submit it for government review and approval 60 days before it hits the market.
“One of the biggest things people don't recognize is the time this industry takes from a product development perspective,” he says.
For example, when GreenSeal introduced a new cultivar in Ontario called Citrus Skunk this past spring, it took a year-and-a-half to develop from start to finish, according to Niles, from genetic selection, finding a unique phenotype, growing the plants and testing them.
“And then, even after you've come up with a great product, now you have to go pitch it to the provinces, and those provincial timelines for product calls can be extraordinarily long,” Niles says.
Oct. 20 is the pre-submission date for Ontario’s product call for spring 2023, he says, so even after internal development is completed, the earliest GreenSeal can get the product into Ontario is April 2023.
“The timelines of this industry are really underappreciated,” Niles says. “We're not making car parts. We can't just turn the machine on and here they come. It takes a lot longer to create truly new and interesting and differentiated products and then get them to market.”
While Sutton sees tax reform as the first order of businesses for regulators to tackle upon the completion of the review, Niles says increased clarity from the federal government is most important.
“The one major thing I would like to see happen is more transparency and communication,” Niles says. “I came from a financial services background, and I always felt like cannabis could really do something like what the accounting world has, where you have a central board that establishes standardized accounting practices for an entire industry. No matter what industry you work at, there's clear and transparent and known standards that you need to adhere to. We don't really have that.
“I think that's the most important first step because everything else, if you think about it, flows off of better communication and better transparency with one another,” Niles adds. “I think the better that industry and government connect to one another, [then] reviews like this are more frequent, they're smaller, they're more incremental, [and] they don't wait four years and do a whole bunch of changes. They're making constant iterative changes to improve the industry and it can happen faster and smoother and more efficiently.”
‘It Looks Good Out There’
Overall, Savone notes that Canada was one of the first countries to federally legalize cannabis, and he credits the Canadian government for building a blueprint from scratch. However, he still believes, as do Sutton and Niles, that change is needed sooner than later–especially if Canada wants to stay ahead of global competition.
“It’s off to a solid start, but there is a lot of work left to be done to get it operating ideally, especially for patients and especially from an economic perspective,” Savone says. “If we want to be globally competitive, we have to be able to adjust our regulatory model at home.”
“If you think about it, every industry that was new had to come along and be a new industry,” Niles says. “And they all tend to overswing at the start. It’s not the only heavily regulated industry. It’s not the only heavily taxed industry. It’s not the only perishable product industry. It’s not the only consumer packaged goods. All these other industries got sorted out in time, cannabis will get sorted out, as well, in time.”
From Sutton’s perspective, he says Tantalus Labs won’t be making a profit anytime soon, but the company will withstand the pain points in the industry and make it out on the other side.
“I think the growth opportunities in cannabis over the next five years are actually quite compelling,” he says. “It requires some recalibrating of policy, and it requires some vision, but good-quality cannabis is not a fad. You’re getting some good quality cannabis from a lot of great producers right now. I think it looks good out there.”