October 17 marks the fourth anniversary of the legalization of recreational cannabis in Canada. When the Cannabis Act was passed in 2018, Canada became the second country in the world to legalize the sale, possession and non-medical use of cannabis by adults.

Now, four years later, the federal government is reviewing the law to see if it meets the needs of Canadians. Former Justice Secretary Morris Rosenberg will chair the panel of experts.

Likewise, the Ontario Cannabis Store recently announced a “comprehensive review” of its pricing. Other provincial and territorial governments should follow these examples and start looking for improvements in their cannabis laws.

Rapid growth of the industry
In the first month with legal recreational cannabis in Canada, there were only about 100 licensed shops and sales of just $42 million.

But the industry has grown rapidly — and not even the pandemic has slowed it down — with more than 3,300 licensed shops in Canada now. Legal cannabis products are more accessible than ever.

As the price of dry cannabis has fallen by 25% since 2018, legal products have become more competitive than legal products. In some provinces, they now start at $3.57 per gram, including tax. Improving the quality of cannabis products has made these products more competitive than illegal products.

As a result, monthly sales of recreational cannabis reached $395 million in July, more than half of Canada’s beer sales.
However, all is not well in the industry. Producers’ profits were affected by overproduction. Meanwhile, stores in some places like Toronto and Manitoba face many competitors.

After years of little information on the health effects of cannabis, the evidence is starting to emerge. A recent study It found an increase in cannabis hospitalizations among young children, and is reason to reconsider cannabis laws.

The central government’s review covers only matters that fall under its jurisdiction, such as manufacturers, goods and warehouses. As provinces regulate retail sales and consumption, they need to review their rules.

Taxes on cannabis vary
Health issues aside, states should review their cannabis tax laws. Ontario’s cannabis excise tax for 2021-22 was $215 million, more than double the previous year. Ontario cannabis store wholesaler’s profit more than doubles to $184 million I estimate that Ontario also raised about $121 million in sales tax, bringing its combined cannabis revenue to about $520 million.

This means the provincial government received about 30 cents for every dollar its residents spent on legal recreational cannabis last year. An Ontario cannabis store spent another six cents on functional items.

Comparatively, I estimate that the federal government raised eight cents on relatively moderate taxes. This left 20 cents for retailers and 36 cents for manufacturers. Those companies have to spend some on government licensing, property tax and income tax.
Or consider Alberta, which prides itself on collecting sales tax but rarely mentions the additional 16.8% cannabis excise tax. That supplement provided about $74 million of the $164 million raised in Alberta cannabis taxes last year.

Clearly, governments need revenue somewhere. But is it appropriate to extract so much from consumers in ways that ignore the low profitability of industry?

Functions of Provincial Corporations
Provinces should review the operations of their cannabis agencies, including whether those agencies should maintain their wholesale monopoly. For example, an Ontario cannabis store collects about 31% of gross markups — even on sales, when producers sell directly to stores — only 10% to cover its operating costs.

As monopolies, agencies become bottlenecks if they fail. When Internet problems in Ontario and a strike in British Columbia temporarily halted shipments of cannabis agencies last summer, retailers lost money as they ran out of products. Why not allow products directly from manufacturers to retailers like Saskatchewan?
A second problem is whether provincial cannabis agencies have enough stores. The markup between retail and wholesale at an efficient Quebec cannabis agency is only 38%, compared to 74% for an Ontario cannabis store. But with fewer individual shops than other provinces, its legal individual sales were very low. This created a large market for illegal retailers.

Finally, provinces should consider simplifying rules to help retailers without offending public policy. For example, Alberta recently eliminated the requirement for stores to close windows. Clear glass makes stores safer for employees inside and street-friendly for pedestrians outside.

Location of stores is important
Retail density is another important consideration. At worst, some Ontario neighborhoods have too many people and stores. The grouping occurred in part because the province suspended its licenses for a year. The government should make it easier for cannabis companies to move into underserved areas, thereby reducing retail over-concentration.

Conversely, some rural areas have fewer customers who patronize independent shops. Terranova takes care of that by allowing general stores to sell marijuana. Other provinces may consider doing the same.

Some cities, such as Mississauga, Ontario and Richmond, BC, do not have legal shops because provincial governments allow local councils to opt out. While allowing municipalities to opt out may be a smart political move for provinces, it may not be a smart policy move.

Learn from experience
As one of the few countries to legalize recreational cannabis, Canada is setting an example for others. A growing number of destinations, including Thailand, Malta, South Africa, Mexico and Germany, are working towards legalization across the country.

The US federal government also recently took a small step to reform controversial cannabis laws. In the United States, some states have passed laws allowing the sale of marijuana, but it is illegal at the federal level.

These countries can learn a lot from Canada’s four-year experience. But Canada’s provincial and territorial governments should learn from that experience by reviewing their rules.

(Michael J. Armstrong – Associate Professor, Operations Research, Brock University – 10/16/2022 Conversation)