Government review of Cannabis Act drags despite ‘sense of urgency’ from pot industry

TORONTO — When Canada legalized recreational cannabis in 2018, there were still many unknown implications for health care, industry and the country at large. So the government made a promise: after three years, it would review the law to ensure its policies worked.

But by the time the three-year mark arrived, the COVID-19 pandemic had diverted attention to more pressing public health concerns and a wave of cannabis companies desperate for changes to the legislation had already cut staff, consolidated or folded.

The government review was finally launched in September 2022, and an initial report was released last week that summarizes what the panel heard from industry, health care and community groups. It did not offer any recommendations and the deadline for the final report is not until March.

Passing legislation based on its suggestions could take even longer, say cannabis stakeholders. They are preparing to mark the fifth anniversary of recreational pot legalization Tuesday and worry the longer they wait for regulatory change, the more the industry will struggle.

“We obviously have a significant sense of urgency which is fuelled by the fact that after five years … about 80 per cent of our surveyed members cannot get to cash flow positivity,” said George Smitherman, president and chief executive of the Cannabis Council of Canada.

“That’s not a good look.”

The industry placed the blame on a cluster of problems: the market share held by illicit sellers, a burdensome excise tax, a race to the bottom on cannabis prices and advertising restrictions that make it difficult to match customers with the right products.

All of these factors are reasons why Smitherman, once Ontario’s deputy premier and a former high-profile mayoral candidate in Toronto, tells people the cannabis industry is “not for the faint of heart.”

“It’s kind of like a low margin prison, where all the meritorious action in the world sometimes doesn’t produce a justified output,” he said. “Because at the end of the day, the middleman just chokes the arteries.”

Members of Smitherman’s council were among the 500 people from 200 organizations, who spoke to the five Cannabis Act review panellists about the law’s successes and failures.

The panel is chaired by lawyer and former deputy minister of foreign affairs Morris Rosenberg. It heard a wide range of feedback from backyard pot growers to Indigenous participation in the industry and hospitalizations with links to cannabis.

Most important for businesses was an acknowledgment that they’ve had a hard time.

“Despite the growth of the legal cannabis market, companies across the supply chain are struggling to realize profits and maintain financial viability,” the report said.

“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.”

Beena Goldenberg, the chief executive of Moncton-based licensed producer Organigram Holdings Inc., wants federal and provincial governments to rethink the excise taxes charged to pot producers.

The taxes amount to the higher of $1 per gram or a 10 per cent per gram fee for dried and fresh cannabis, plants and seeds. The duty is set at one cent per milligram of the active ingredient tetrahydrocannabinol, or THC, for edibles, extracts and topicals.

“Originally, the government thought you’re going to be able to sell a gram of cannabis for $10, so a 10 per cent tax rate would be a dollar a gram,” she said.

But in the rush to compete with the illicit market, prices have dropped dramatically.

“Now we’re selling product at $4 or at $3, not $10, and as a result, the tax rate is in the 30 to 40 per cent range,” Goldenberg said.

Federal excise taxes and customs duties brought in $160 million in the 2021 to 2022 fiscal year alone, while provincial and territorial excise taxes totalled $592 million, and sales taxes generated $458 million, the report said.

Still, many cannabis companies are struggling to pay the duties. The Canada Revenue Agency said $200 million is outstanding.

Although the cannabis sector grew from October 2018 through the end of last year, Statistics Canada reported Monday, it has been declining in 2023. The sector’s GDP is now about $10.8 billion, accounting for 0.5 per cent of the country’s economy.

As the industry’s value ticked down, however, the agency’s new data shows at least one bright spot. By the first half of 2023, more than 70 per cent of the total value of cannabis consumed in Canada was from a legal source, an increase from 22 per cent in the fourth quarter of 2018, when legalization occurred.

Yet the industry is keen to see more progress and changes.

Goldenberg would like to see the government remove some of the packaging and advertising restrictions it enacted to ensure young people aren’t lured in because she finds the policies also keep companies from educating consumers.

“We are so restricted in what we can or can’t say,” she said.

Under the government’s regulations, Goldenberg said she and her company can’t communicate to people what terpenes are — compounds that give cannabis its aroma — or tell them why they should consider buying tetrahydrocannabivarin (THCV), a cannabinoid some call “diet weed” because it’s believed to suppress appetites.

Other retailers told the government panel they want to be able to label products that come from a family-run company, are made with organic ingredients or are sun-grown. Some say they should be able to promote pot as freely as tobacco or alcohol companies market their products

“What the industry wants is the ability to advertise their products more generally to the public and I can tell you from a century of experience with tobacco that there is no way of doing that without also promoting it to you, which is a no-go under the Cannabis Act,” said David Hammond, a professor in the School of Public Health Sciences at the University of Waterloo.

Plus, most people don’t want more pot ads. A study Hammond conducted found one in four of people surveyed last year reported that they would like to see less cannabis advertising.

Any information they do want, Hammond said, can likely be found at a cannabis shop or on provincial pot distributor websites.

And the medical community is insistent changes shouldn’t come at a cost to public health. Many remain supportive of the cautionary approach to cannabis the country took. Some want even stricter limits on who can possess, distribute and buy pot, the government’s report said.

They’re being cautious in part because the Canadian Institute for Health Information has said cannabis-related emergency department visits and hospitalizations both increased 14 per cent between 2019 and 2021.

Cannabis was also responsible for about one per cent of cases reported to Canadian poison centres. The number of calls related to pot doubled between 2019 and 2021.

Smitherman maintains it was logical such numbers increased because legalization made people more comfortable seeking medical attention for “cannabis misadventures” because they don’t fear the stigma or legal repercussions as much as before.

But there’s more to the increase, Hammond said.

Cannabis-related hospitalizations have been increasing for about 10 years, suggesting more people were turning to the substance even before legalization. Over the pandemic, alcohol- and opioid-related hospitalizations increased too, he said.

Asked about the industry’s calls for change and the delays in the review, a press secretary for the Minister of Health responded that “the Cannabis Act exists to protect the health and safety of Canadians and help displace the illegal market.”

“Last year, our government announced the launch of the legislative review of the Cannabis Act,” Christopher Aoun said in an email.

“The review is being done by an independent expert panel, and that important work is ongoing.”

Goldenberg suspects convincing the government to make changes won’t be a speedy process and she worries some companies won’t survive the wait because many are already on the brink of bankruptcy.

Fourteen of 35 applications for creditor protection under the Companies’ Creditor Arrangement Act in 2022 were from the cannabis sector and as of April, 166 cannabis licence holders had left the market since January, representing 15 per cent of licences issued to date, the government report said.

“I don’t think the changes are going to happen fast enough because when you look at some of the cannabis companies and you look at their cash balances and their debt, they just don’t have the runway and regulation changes take time,” Goldenberg said.

“So I do think we’re going to see more shake up in the industry, but at some point, the government has to react.”

This report by The Canadian Press was first published Oct. 16, 2023.

Tara Deschamps, The Canadian Press