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B.C.'s legal cannabis regime shows mixed results after five years

Challenges include high taxes on producers and consumers and large municipalities banning sales, leading to retail deserts
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Legal-cannabis packaging sits in a recycling bin at Evergreen Cannabis store in Vancouver

Giddiness was widespread five years ago today, when Canada legalized cannabis sales for adult use.

Consumers in Metro Vancouver were accustomed to buying cannabis products either as part of a medical authorization, from illicit dealers or from black-market retail stores. There was a sense that legalization could bring safer products thanks to stringent testing that ensured quality. 

Business executives and investors joined in on the frenzy, as is clear from a look back at a stock chart for the main Canadian exchange traded fund (ETF) that tracks the cannabis sector: Horizon's Marijuana Life Sciences Index ETF (TSX:HMMJ).

Shares in that ETF on Oct. 17, 2018, were priced only slightly below the fund's all-time-high close, which it hit two days earlier. In the next five years, those shares would plunge in value by more than 90 per cent, to close yesterday at $8.89. This followed a one-for-two stock consolidation last year, which helped pump up the price for the ETF's shares.

Canadian licensed producers, many of which had been operating for years in the medical-marijana sector, were scrambling to lease more space to increase their potential growing capacity to accommodate what was seen as substantial consumer demand.

Retail-sector entrepreneurs in this province were, similarly, angling to be ready to navigate B.C. government laws and regulations, which allowed for a maximum of eight stores for each ownership group.

Prime Minister Justin Trudeau had laid out that his main objectives in legalizing cannabis for adult use was to keep the products out of the hands of youths, keep profits out of the pockets of criminals and protect public health and safety by allowing adults to access a quality-controlled supply.

"I don't think anyone ever estimated that the black market would be going away on Day 1, or even by Year 5 of legalization," said Deepak Anand, a cannabis consultant and principal at ASDA Consultancy Services.

"There has been a shift toward people consuming and getting access to cannabis from legal channels so I think momentum is trending in the right direction."

Anand questioned the reliability of Statistics Canada data on how big black-market sales are because those surveys rely on respondents being honest about their use, and where they buy products. 

Nonetheless, Statistics Canada yesterday released a report that included a wide range of data, much of it years old.

The nation's number cruncher's most recent data shows that 68 per cent of cannabis users said in the fourth quarter of 2020 that they had obtained at least some cannabis from a legal source within the preceding three months. That was up 21 percentage points, from 47 per cent who said that they had bought cannabis from a legal source in the first quarter of 2019, just after legalization.

Anand said while this progress is admirable, there remain plenty of regulatory pitfalls that are hurting the sector.

He is set to attend a round-table meeting hosted by the independent-expert panel that recently released a large report on the state of the cannabis sector in Canada – dubbed Legislative Review of the Cannabis Act: What We Heard Report.

Despite the report having that seemingly final-sounding title, Anand told BIV that he expects that the panel will present a final report to Health Canada by March 2024, and that this final report will be tabled in Parliament. 

Taxes remain a burden

There are likely enough gripes about taxation in the cannabis sector to fill a book.

Anand pointed to Ernst and Young (EY) research that calculated that $0.60 out of every retail dollar spent on cannabis products went into some form of taxation or fees when all levels of government's levies were added up. 

One tax burden that Anand specifically highlighted as being wrong is B.C.'s 20-per-cent tax on cannabis vape products, which the government announced in 2019 and which went into effect in 2020. The problem with this tax is that it deters consumers from using legal vape sticks and legal vape concentrate and encourages them to go to the black market, Anand said.

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Image: Deepak Anand consults with companies around the world on cannabis policy. | Rob Kruyt, BIV

As Shawn McDougall, then a production manager at BlissCo, told BIV in 2018, illegal cannabis vape concentrate can contain harmful ingredients such as glycol, which are not meant to be smoked and may cause a condition known as popcorn lung.

Canadians who use black-market vape concentrate are risking their health because there is no government oversight, said McDougall, whose company was sold in 2019 for $48 million to Supreme Cannabis

“In an unregulated market, most vape-pen manufacturers have been using mediums [in concentrates] that are not recommended for smoking,” he told BIV in 2018.

Canadian taxes on licensed producers have been punitive enough that many have not been able to survive. 

Cannabis executives, entrepreneurs and advocates took aim at what they viewed as unfair and high taxes as well as government fees and mark-ups at the Lift cannabis business conference in Vancouver in January.

Some taxes came under fire because they were targeted to the cannabis sector, and not to the alcohol or tobacco industries, while others were criticized for being much higher than the government originally intended, or for working against various governments' stated goals. 

Cannabis Council of Canada CEO George Smitherman showed a slide indicating that Health Canada collected $75,683,891 from its 2.3-per-cent regulatory fee from cannabis companies in the 2020-2021 fiscal year. That same year it collected no money at all in regulatory fees from tobacco or alcohol ventures. 

Dan Sutton, who in January was CEO at Tantalus Labs, told BIV that his Vancouver-based licensed cannabis producer was teetering on the bring of profitability, with some months turning a profit while other ones racked up losses. 

His venture in late June entered bankruptcy and insolvency proceedings, and in August had Newfoundland's Atlantic Cultivation buy its assets for an undisclosed amount.

His biggest beef when he was CEO at the company was Ottawa's excise tax that was put in place to be either $1 per gram, or 10 per cent of the price of the cannabis sold, whichever is more. The federal government created that taxation system based on an expected $10 wholesale price for one gram of cannabis. 

Licensed producers then swamped the market with cannabis, leading to the wholesale price for a gram of marijuana falling to less than $4 per gram. With $1 needing to be paid as an excise tax, that has lifted the excise tax rate to around 25 per cent, Sutton said. 

He worked out a scenario in B.C. where the cost to the wholesaler before the excise tax was $3.78 per gram. One dollar is then added as the excise tax and $0.09 is added to account for the 2.3 per cent Health Canada regulatory fee. The B.C. government would then add $0.73 as part of its 15-per-cent wholesale mark-up. The retailer would then add a likely $2.40 mark-up to make the product $8 per gram before the provincial sales tax is levied at the till. 

Only a small fraction of cannabis companies are turning a profit because of high government taxes, Sutton told BIV yesterday.

"It is imperative that the Canadian government reevaluate the appropriate level of tax and regulatory complexity required to allow the Canadian cannabis industry to thrive," he said. 

"Until they revisit their original taxation and regulation strategy, the sector remains inhospitable to businesses of all sizes, especially small businessses."

Sutton no longer works in the cannabis sector and he said he is looking to find a job doing "anything but" cannabis-related work.

Many cannabis retailers have also struggled. 

Successful hospitality business operator and Donnelly Group CEO Jeff Donnelly's Dutch Love cannabis retail business is one example. It sought creditor protection in court in late 2022 and then sold four stores to Calgary-based pot retailer SNDL in a transaction valued at $7.8 million.

B.C. cannabis regulations have loosened

The B.C. government has loosened its restrictions on ordering and delivering cannabis that were in place five years ago.

Initially, the only legal cannabis e-commerce orders in B.C. were those conducted through the provincial government’s BC Cannabis Stores website.

In August 2020, the B.C. government started to allow licensed private cannabis retailers to sell products online, but it still required their customers to pick up their purchases at bricks-and-mortar stores.

The provincial government then ended its 34-month monopoly on delivering legal cannabis in July 2021.

Earlier this year, British Columbian cannabis shoppers gained another legal platform to help them get their weed, as food-delivery giant Uber Eats added cannabis to its app’s options

Another baby step toward normalizing cannabis sales in B.C. came into effect in time for the September Rifflandia festival. The B.C. government legalized enabling attendees to order cannabis and pick up their orders on-site.

One element of B.C.'s approach to cannabis legalization that seems to run counter to the spirit of legalization is that the province allows municipalities to regulate whether cannabis stores are allowed. 

Anand said that this approach means that some large Metro Vancouver cities, such as Surrey and Richmond, do not have a single cannabis store despite five years passing since the products were legalized.

"There are large cannabis-retail deserts," he said. "There's still these large swaths of population that still don't have access to legal cannabis going into five years. It's just bizarre."

B.C. has 477 retail cannabis stores and one producer-operated cannabis store, according to the most recent government statistics. That includes 39 government-owned stores

gkorstrom@biv.com

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