Legal Updates

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Update

Tuesday, July 17, 2018

Read online or download the full update here.

Since the federal government announced the proposed legalization of recreational cannabis in Canada, it has been well known that the plant will be taxed–at approximately $1-a-gram, or a 10% excise duty rate. The government has said that the revenue from this tax will mainly go to the provinces. In its 2017 Fall Economic Statement, the federal government stated that it would implement a cost recovery regime to recover the costs of regulating cannabis–so the public will not bear the costs of government services when they are provided for the main benefit of private parties (i.e., licensed cultivators, processors, nurseries and sellers of cannabis for medical and non-medical purposes). Health Canada has such cost recovery programs for other areas like pharmaceuticals and medical devices. The new cost recovery fees were authorized by a clause in the federal government’s Cannabis Act, which was passed in June, 2018 and will allow legal recreational cannabis use starting October 17, 2018.

On Thursday, July 12, 2018, Health Canada announced four proposed cost recovery fees on licensed cannabis producers. The proposed fees aim to recover the regulatory costs of screening licence applications, reviewing applications for import/export permits, and conducting security screening of key individuals and other general regulatory costs to be charged through an “annual regulatory fee.” This is still a proposal and Health Canada is giving companies and interested parties 30 days to comment on the plan until August 13, 2018. The proposed fees will cover costs borne primarily by Health Canada, which expects to spend about $50 million a year regulating the recreational and medical cannabis industries.  

What is the Significance of These Fees? 

Although Health Canada has proposed four cost recovery fees, it is the fourth fee, the annual regulatory fee, which is the most far reaching and designed to recover general regulatory program costs. It is not tied to a specific regulatory process or activity (unlike the other fees) and Health Canada has stated that this fee would be an annual fee of 2.3% of cannabis revenue. A lower fee is proposed for micro-cultivators, micro-processors and nursery license holders with less than $1 million in gross revenue. There is also an exemption from the fee for companies that are industrial hemp producers, analytical laboratories, researchers and medical users licensed to grow their own supply, along with those who hold licenses to produce health products containing cannabis.  

In addition to the 10% excise tax on cannabis, the cost recovery fees amount to another layer of tax on certain producers of cannabis. For larger producers, these fees come as a bit of a surprise and may not be factored into their business models. Multi-year agreements have been signed with provincial crown wholesalers, which did not include these significant costs.  

The key concern is that the cost recovery fees will hurt the producers’ ability to eliminate the cannabis black market. An additional fee (really a fancy name for an additional tax) of 2.3%, on top of the 10% excise tax, would likely hinder the ability of licensed cannabis producers to compete with the cannabis black market.

Cannabis businesses will not be allowed to begin or continue operations until the cost recovery fees have been paid in full. While some in the cannabis industry are generally not opposed to the idea of regulatory cost recovery, some industry players are pushing for a deferral of the cost recovery fees until the actual costs of the regulation are known.

If you have any questions with respect to the matters discussed above, please contact Katy Pitch by email at kpitch@wildlaw.ca.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.