Canadian Government Releases Report on Legislative Review of Cannabis Act

Editor's note: This story was updated at 11:30 a.m. ET on Thursday, Oct 12, to include comments from Organigram CEO Beena Goldenberg.

The Canadian government has released a report outlining the findings of its legislative review of the Cannabis Act, the country’s 2018 adult-use cannabis legalization law, and the results paint a less-than-ideal portrait of the industry.

The “What We Heard Report,” published Oct. 10 by Health Canada, presents findings suggesting that legal operators are struggling to turn a profit and become financially viable due to the costly burdens of taxes, mark-ups, fees and regulatory compliance.

Health Canada announced in September 2022 that it would launch a review of the Cannabis Act to evaluate its impact on youth, indigenous communities, the economy, the illicit market and more.

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The review was mandated by the Cannabis Act itself, which took effect in October 2018 and directed Canada’s health minister to conduct a review of the legislation three years later.

The resulting study, which launched a year later than planned, was conducted by an Expert Panel chaired by Morris Rosenberg, who has served in several departments including the Department of Justice and the Department of Consumer and Corporate Affairs.

The panel was ultimately responsible for advising Health Minister Jean-Yves Duclos and Carolyn Bennett, Minister of Mental Health and Addictions and Associate Minister of Health, on the progress made toward achieving the Cannabis Act’s objectives—which include protecting the health and safety of Canadians and serving as a flexible legislative framework that adapts to their needs—as well as identify areas of improvement in the law.

All Canadians were invited to share their perspective on adult-use cannabis legalization through an online questionnaire or through written feedback, with all comments due by Nov. 21, 2022.

“From December 2022 to June 2023, we held numerous roundtable discussions, one-on-one meetings, and were graciously hosted by a number of stakeholders at their sites,” the Expert Panel wrote in the report. “The voices and perspectives reflected in this report come from a wide range of stakeholders and experts who are described in Chapter 3 [of the report]. We would like to extend our gratitude to those who shared their views and experiences with us.”

Through its efforts, the Expert Panel found, among other insights, that public health experts support the Cannabis Act’s advertising restrictions for cannabis businesses and THC limits for edibles. Some even suggest considering stricter age limits on who can buy, possess and distribute cannabis, according to the report.

“Public health stakeholders insisted that the focus of the regime should be on reducing harms associated with consumption, high-potency products, higher-risk product formats, polysubstance use (that is, the consumption of at least two substances), cannabis use during pregnancy and breastfeeding, driving after cannabis use, and cannabis poisonings of children,” the panel wrote in the report. “Public health stakeholders were generally supportive of the precautionary approach—including the 10-milligram delta-9-tetrahydrocannabinol (THC) limit for edible cannabis products and restrictions on promotion of these products. There were some suggestions that further restrictions should be considered such as stricter age limits on who can possess, distribute, and buy cannabis, setting minimum pricing retailers can charge, and restrictions on selling flavored products.”

The panel said that while it heard progress has been made on diminishing Canada’s illicit cannabis market, some public safety experts remain concerned about illegal sales.

“While not a direct measure of access, the growth in legal sales—and the decline in illicit sales—indicates that consumers are migrating to legal suppliers,” the panel wrote. “Estimates of legal market share vary, but suggest that more than half, and up to as much as three-quarters, of cannabis is being obtained from legal sources (for example, in 2022, a survey found 63% of cannabis users always or mostly accessed legal sources, another observed cannabis consumers bought 82% of the cannabis they used from legal sources, and 68% of household spending on non-medical cannabis was attributed to legal sources).”

The report also outlines varying perspectives on whether the legal cannabis market is sufficiently meeting consumer demand; some consumers reported that they are seeking products, such as higher-potency edibles, that are not available in the legal market, while others said there is limited access to legal cannabis in some rural and remote areas.

“We heard differing viewpoints on whether consumer demand was being met and the degree to which adults have access to regulated cannabis products,” the panel wrote in the report. “Many stakeholders noted that price is an important factor for consumers when considering whether to buy from the illicit or legal market. Many industry representatives and others argued there is still consumer demand for products that are not available in the legal market (for example, higher-potency edible cannabis products, or lower-priced cannabidiol [CBD] products in a variety of formats). Conversely, public health stakeholders expressed some concerns with the types of products available in the legal market, notably high-potency extracts, and flavored edibles.”

The panel noted that when it comes to legal cannabis retail access, the number of overall retail locations has increased since legalization, but the density of retail outlets varies within and among the provinces and territories, and dispensaries tend to be concentrated in urban areas.

“For example, a recent study found that, as of September 2022, Quebec had about one retail store per 100,000 residents, while Alberta had more than 20,” the panel wrote in the report. “In terms of geographic density, it is noted that in certain parts of the country there are a small number of retail stores in jurisdictions with large land areas (for example, one store in Nunavut, six in the Northwest Territories and six in the Yukon). Nonetheless, the study also noted that four years after legalization, 59% of neighborhoods were within a five-minute drive from a cannabis retail store.”

The Expert Panel noted in the report that one of the resounding messages it received from Canada’s cannabis business operators was that many are struggling to survive due to several challenging economic factors.

The panel wrote that it “heard a great deal about the economic condition of the legal cannabis market,” and that industry representatives “expressed concern in that companies in the legal market are struggling to realize profits and maintain financial viability.”

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“A main message from industry representatives was that, despite the growth of the legal cannabis market, companies across the supply chain are struggling to realize profits and maintain financial viability,” the panel wrote in the report. “Specifically, they noted that the hyper-competitive cannabis market for producers and retailers, combined with the various regulatory fees, distributor mark-ups and fees, and taxes are stifling companies of all sizes. Some noted that other industries, such as alcohol and tobacco, are not subject to federal regulatory fees and that they pay less mark-ups and taxes (for example, beer). Some stakeholders proposed that Health Canada move towards an ‘à la carte’ model for regulatory fees (that is, transactional fees for specific services) and remove the annual regulatory fee. Others felt that the government should adopt a progressive excise tax framework, whereby the tax rate is connected to the size of the firm or the price of the product. Others suggested adjusting the tax rate to 10% for dried cannabis, as opposed to the current model of $1 or 10% per gram, whichever is greater.”

With the five-year anniversary of legal adult-use sales coming up on Oct. 17, Beena Goldenberg, CEO of licensed producer Organigram, said that while she views legalization as successful overall, there are lingering issues that threaten the sustainability of Canada's cannabis businesses.

“As we reflect on the past five years of cannabis legalization in Canada, it's clear that this historic move has been a success for Canadians, cannabis consumers and our governments alike," Goldenberg said in a public statement. "We've witnessed a remarkable journey from $0 to nearly $5 billion in legal sales annually, capturing an impressive 60 percent market share. However, this journey has not been without its challenges for the nascent cannabis industry. As we reach this pivotal five-year mark, it is imperative that our government takes swift action to address the issues that threaten the sustainability of our evolving sector. It must act urgently to slash excise taxes and regulatory fees, elevate the 10-milligram cap on edibles to combat the illicit market, and loosen restrictions on consumer communication to destigmatize the industry. To safeguard the future of legal cannabis and maintain the integrity of our public health and safety objectives, the government must prioritize the financial well-being of this industry. Without adequate support, the illegal cannabis sector will inevitably step in to meet the demand for cannabis products. Therefore, it is incumbent upon us to act now to secure the continued success of legalization, ensuring that our shared vision for a responsible and thriving cannabis industry becomes a reality."

Regulators seem to be listening—the panel noted that the What We Heard Report marks the completion of the first phase of their efforts, with ongoing work planned to further reform Canada's cannabis policy.

“For the second phase of our work, we will re-engage stakeholders in multi-sectoral roundtables and host other discussions to gain a deeper understanding and fill any knowledge gaps from our first phase,” the panel said. “We will then prepare a final report for the Ministers, which is expected to be tabled in Parliament by March 2024 with our advice and recommendations. Our final report will be based on the data that we have gathered and what we have heard.”