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Canada’s Competition Bureau says federal government policies are making it more difficult for the country’s fledgling legal cannabis industry to compete with the illegal market.
In a report made public last week, the competition watchdog waded into the legislative review of Canada’s Cannabis Act, recommending changes in five areas to encourage competition.
The bureau recommends amendments to ease regulations and rules around licensing, loosen rules governing the promotion and packaging of cannabis products, and an increase in the THC limits on cannabis edibles in order to respond better to consumer demand and compete with the illicit market.
The bureau also called for the current level of excise duties to be reviewed and for more harmonisation of the rules between provinces to make it less complicated to operate in multiple jurisdictions across Canada.
“Steps taken to promote more competition will enable cannabis producers to compete more effectively, including with their illicit market counterparts,” the bureau wrote in a 45-page submission to Health Canada. “This in turn will stimulate business innovation, allow consumers to access a wider range of quality-controlled, safe cannabis products, and ultimately help to divert consumers to the legal industry.”
Health Canada spokesperson Tammy Jarbeau said the department had received more than 2,300 submissions in response to the legislative review launched in September 2022. Another 90 submissions were sent directly to an expert panel set up to review the legislation.
An international trailblazer
The expert panel has also held consultations with a variety of groups, from governments, industry and cannabis users to experts in areas such as public health, substance use and criminal justice.
The expert panel is still accepting submissions and plans to issue a report by late summer or early autumn on what it has heard. The panel is expected to provide its final report to the health minister in winter 2024 and the minister has until March 2024 to table a report in Parliament on whether changes should be made to the law.
The Competition Bureau said in its brief that it began its review last autumn and interviewed more than 20 industry stakeholders.
It said Canada had been an international trailblazer in legalising cannabis. Since 2018, many consumers have moved away from buying cannabis in the illicit market and household spending on cannabis across the country has risen by 40% to nearly CAD8bn a year. It has helped create more than 150,000 jobs and brought governments CAD15.1bn in taxes between 2018 and 2021.
However, the bureau also found significant barriers to competition in a cannabis industry made up of a small number of large producers and a large number of smaller producers.
“While the industry is emerging and evolving, some degree of consolidation has already occurred and stakeholders interviewed by the Bureau expect further consolidation to occur. It is therefore difficult to forecast how the industry will continue to evolve in the future,” it said.
Black market ‘bigger than estimated’
Meanwhile, the illicit market continues to play a “significant role”. “While most stakeholders interviewed by the Bureau agree that progress has been made, some believe the true share of the illicit market is higher than what has been estimated.”
If Canada’s cannabis industry can’t compete against “an entrenched illicit market” it won’t succeed, said the bureau, pointing out that the illegal market doesn’t face the same regulatory and tax burden as the legal industry.
For example, legal cannabis producers must have their facilities nearly completed, often at the cost of millions of dollars, before they can get a licence to operate. To get that licence, key personnel have to go through security checks that can take “anywhere from a few months to over a year to complete”.
The federal tax authority, the Canada Revenue Agency, requires a minimum CAD5,000 financial security for cannabis cultivators and up to CAD5m in financial security for cannabis processors. At the same time, Canadian cannabis businesses have been having difficulty opening bank accounts or getting financing through mortgages or lines of credit.
Added to that are the challenges of navigating the legal framework and costly regulatory fees, the bureau wrote.
While licensing plays an important role in regulating and overseeing cannabis production in Canada, “certain aspects of the licensing process…combined with regulatory compliance costs, may be impeding cannabis producers from competing successfully in the industry. Operating costs may become too high to be sustainable, and businesses may exit the industry completely.”
Illicit market’s competitive advantage
The current limit on THC levels in edibles also gives “a competitive advantage” to the illicit market, which can offer a wider range of products, including products with higher potency, the bureau found.
It said simply increasing the THC limit per package from 10 mg to 100 mg could increase appeal and bring Canada more in line with US states that have adopted similar limits.
THC limits on edibles have generated a range of opinions during the consultation. The Cannabis Council of Canada supported an increase in THC levels to meet market demand; however, the Centre for Addiction and Mental Health urged the government to maintain the cap of 10 mg of THC per package and ban products and packaging that appeal to youth.
In its brief, the Competition Bureau said the restrictions on the promotion and packaging of cannabis products are also hampering the ability of producers to compete and to promote innovative products or processes they may have developed.
“More flexibility to communicate with consumers can also help legal cannabis producers compete more effectively with their illicit market counterparts who do not face similar restrictions on promotion, packaging and labelling and have found ways to promote illicit products despite potential legal repercussions,” the bureau said.
In recent months, the Canadian cannabis industry has stepped up its lobbying efforts to reduce the level of excise duties charged on its products. In its report, the bureau said 66% of licensees had an outstanding debt with the tax authority. It said the level of unpaid cannabis duties “has continuously been rising since legalization” and is expected to reach CAD97.5m this year.
– Elizabeth Thompson CannIntelligence contributing writer
