Can Canadian Cannabis Companies Thrive Economically Under the Cannabis Act?
Canada became the second country after Uruguay to legalize recreational use of Cannabis on the 17th of October 2018. The complexity of Cannabis legalization is that it cut across different public policy areas such as public safety, public health, economic development and taxation among others. This will create challenges for policy implementers as the Cannabis Act is creating a whole new regulatory regime. One of the initial comments by Canadian cannabis companies is that some of the regulatory measures in the Act, especially those related to advertisement and promotion are too rigid. The companies argue that this may drive consumers to the black market, which will contradict some of the policy objectives the Canadian Government sought to achieve when it legalizing cannabis. In legalizing cannabis, the Government of Canada sought to achieve some of the following public policy objectives;
- Protect young Canadians by keeping marijuana out of the hands of children and youth; Keep profits out of the hands of criminals, particularly organized criminals;
- Reduce the burdens on police and the justice system associated with simple possession of marijuana;
- Prevent Canadians from entering the criminal justice system and receiving criminal records for simple marijuana possession offences (Government of Canada).
To achieve these objectives, the Government has enacted a strict legal and regulatory framework to regulate the cannabis industry. The Cannabis Act and it's subsidiary regulations regulate Legal Producers, retail stores and anybody selling cannabis-related accessories. They control and regulate its production, distribution, and marketing. Legal Producers and retail stores are expressing concern about how restrictive the Act is, regarding promotion and advertisement. As it stands, unless authorized under the Cannabis Act, it prohibits marketing cannabis, cannabis accessories or cannabis services in any of the following ways:
- by communicating information about its price or distribution;
- by doing so in a manner that there are reasonable grounds to believe could be appealing to young persons;
- by means of a testimonial or endorsement, however, displayed or communicated;
- by means of the depiction of a person, character or animal, whether real or fictional; or
- by presenting it or any of its brand elements in a manner that associates it or the brand element with, or evokes a positive or negative emotion about or image of, a way of life such as one that includes glamour, recreation, excitement, vitality, risk or daring. (Subsection 17)(1)
The promotion and advertisement of Cannabis are regulated from section 16 to 24 of the Cannabis Act. These sections regulate advertisements and promotional activities for cannabis and cannabis-related accessories and services in Canada. Health Canada is the regulatory body that ensures authorized companies are abiding by these rules. The Government of Canada has chosen to model these sections after the Tobacco Act. All promotional and marketing activities are prohibited unless authorized by Health Canada. The government of Canada believes these regulatory restrictions will protect the public health of Canadians.
Industry insiders share the government’s concern and know they need to promote and brand their products in a responsible manner that protects the public health of Canadians. This is why many Legal Producer (LPs) agree with the government’s decision to use the same regulatory framework it uses to govern the tobacco industry to regulate smokable cannabis.
But, it has questioned the government’s rationale to use the same regulations to regulate none smokable cannabis products such as edibles and other consumers’ health products associated with cannabis. Edibles cannabis are products containing cannabinoids that you eat or drink.
Legal Producers (LPs) argue that they need to be allowed to market their products to differentiate themselves from competitors, be in a position to compete globally, and more importantly differentiate themselves from black market producers. The legalization of cannabis edibles will provide new market opportunities for Canadian companies. Deloitte 2019 Cannabis Report notes that there is going to be a “significant opportunity” with the ensuing legalization of “Cannabis 2.0” which will include edibles, CBDs, extracts, and beverage infuse cannabis.
According to Deloitte, the annual Canadian market for edibles and alternative cannabis products is going to be worth C$2.7 billion. Edible will make up the majority of the market share, which will be worth an estimated C$ 1.6 billion. The report further states “as producers and retailers bring more edibles to market over time, they will capture an ever-larger share of consumer spending-and contribute to a shrinking illicit market”. Which will contribute to the Government policy objective of eliminating black market producers.
Statistics Canada estimates Canadians spend about $4.4 billion annually on cannabis, however, research conducted by the Arcview Group found just $570 million was spent on legal medical marijuana in 2017. But, as more Canadians move from the illicit to legal markets, the research firm predicts that the number will climb to $1.3 billion in 2018, and $5.5 billion by 2022
CBD and it’s Associated Health Impact
LPs and retailers are also calling on the Government to ease restrictions around Cannabinoids (CBDs) because of the health aspect associated with it. CBD (cannabidiol) is a non-intoxicating cannabinoid that has been proven to have some therapeutic benefit. Recent research suggests CBDs are an effective way of treating Children with seizures such as Dravet syndrome and Lennox-Gastaut syndrome (LGS), which typically don’t respond to antiseizure medications.
Several studies, have shown CBD can reduce the number of seizures, and in some cases, it was able to stop them altogether. In 2016, an article entitled; Cannabidiol in patients with treatment-resistant epilepsy: An open-label interventional trial; researches found that cannabidiol might reduce seizure frequency and might have an adequate safety profile in children and young adults with highly treatment-resistant epilepsy. Similarly, an article published in the New England Journal of Medicine called Cannabinoids in the Treatment of Epilepsy found similar outcomes. According to a report from the World Health Organization, “In humans, CBD exhibits no effects indicative of any abuse or dependence potential…. To date, there is no evidence of public health-related problems associated with the use of pure CBD.”
Strict Regulations Are Stunting Economic Growth
Globally the cannabis market is projected to grow exponentially over the next 5 years. A report by Deloitte estimates that the global cannabis market is worth about US$100 billion and will continue to grow exponentially over the next 5 years to an estimated US$194 billion by 2025. If Canada is to maintain its competitive edge in the cannabis industry over the long run, the government of Canada must create a regulatory environment where regulators work with industry experts to create policies that will protect the public health of Canadians, and also allow Canadian companies to grow.
As it stands Canadian LPs and retail stores are losing a significant amount of revenues due to Health Canada’s restrictive regulatory measures. Canopy Growth Corp. (WEED.TO) Canada’s largest Cannabis company reported a net loss of nearly $1.3 billion as higher expenses offset revenue growth in the first quarter. Canopy reported it lost $1.28 billion during the three months ended June 30, its fiscal first quarter of 2020, compared with a loss of $91 million in the first quarter of fiscal 2019.
Lost of Tax Revenues
Prior to legalization a report by C.D. Howe Institute-”Cannabis Countdown: Estimating the Size of Illegal Markets and Lost Tax Revenue Post-Legalization, found “pricing and supply shortages will contribute to maintaining the black market, resulting in lost tax revenues and a continued need to spend significant resources on law enforcement activities related to the market”. According to the report, this will cut potential tax revenues by an estimated $800 million in the first year of legalization, which will exceed the amount the federal and provincial governments are expected to collect, estimated between $300–600 million. The researchers found delays in issuing licenses to legal producers and retailers stores will be the main contributing factor.
The research finding has proven to be quite accurate. Provincial governments who anticipated a significant amount of revenues from excise tax were disappointed to see such a shortfall. B.C Ministry of Finance initially estimated federal excise taxes on legal cannabis sales would be around $200 million over the next 3 years. However, the amount is substantially less. The ministry now estimates the province will only bring in $68 million over the next 3 years, which is significantly lower than expected. Robyn Gibbard, the Conference Board of Canada’s economist says these first-ever government tax figures are lower than expected, due to the “bumpy” rollout of legalization last fall, however if the government is able to ease regulatory restrictions, such as limiting the time it takes to issue licenses for legal producers and retailers, the federal and provincial government can expect a strong growth in revenues going forward.
Canada has a great opportunity to demonstrate to the world how a fully legalized marijuana industry can form part of a modern, industrialized nation in the western world. The Canadian Government has an opportunity to use tax revenues for positive social causes such as funding mental health programs and programs in communities the war on drugs has had adverse effects on. When people are arrested for minor possession of marijuana, it can have dire collateral consequences that affect their eligibility for public housing, employment opportunities, child custody determinations, and immigration status. The taxes collected should be used to revitalize these communities with new schools and pre-k programs, and rehabilitate much-needed infrastructure. However, to achieve this, the Government of Canada needs to eliminate some aspects of the regulatory framework regulating the cannabis industry, which will allow cannabis companies to thrive economically.