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Reflections on the Cannabis Act Legislative Review’s Final Report, Part 1

In March 2024, Health Canada released its Legislative Review of the Cannabis Act’s Final Report. Judging by early industry response many in the cannabis community are less than enamoured with its recommendations, although there have also been statements of hopeful optimism.

Industry observers have criticized the Expert Panel’s headlining recommendations, particularly concerning the Cannabis Excise Tax, which it has recommended be maintained with some adjustments. Recommendation #27 that the government apply progressively greater duties for products with higher THC concentrations and quantities came under fire, as did the Panel’s recommendation to stay the course on THC limits for edibles. Criticism was also leveled at the Panel’s composition, which lacks industry and consumer representation, and the delay of the Review itself.

While these concerns are understandable they reflect a misreading of forces driving the federal cannabis framework, a discounting of broader public concerns and an impractical view of Canadian politics.

For starters, the continued growth of demand for recreational cannabis tends to undercut arguments that the sector is struggling. It’s the growing consumption by youth and young adults especially that is driving the Panel’s concern about public health impacts, as I noted in my piece on the ‘What We Heard’ report.

Matt Lamers profiled these developments in a recent X post which revealed that use by youth aged 16-19 years has risen 7 points since 2018, to 43 per cent in 2023. As he contends, “There won’t be any meaningful easing of regulations governing legal businesses until cannabis consumption rates decline.”

That said, my review of the Panel’s observations and recommendations suggests some possible modest wins and provides insights for more fruitful advocacy.

The importance of public health

As mentioned, the overriding purpose of the Cannabis Act and its Regulations is to protect young persons and the broader population from the harms of cannabis use. While the legislation has other goals, those are subordinate to public well-being. The first four themes in the Final Report’s summary focuses respectively on youth, children and adults, and maintains public health measures such as tight restrictions on advertising and promotion. The next theme, which addresses First Nations, Inuit and Métis communities also has a strong public health imperative and cites the challenges in offering cannabis health services to these groups, particularly for mental health care.

Given this inescapable fact, the cannabis industry should look for allies in the public health and affected health advocacy communities.

Businesses may decide to address these issues by calling for more accurate reporting of THC levels on product labels, and by pressing for national standards to govern lab practices.

Following the tobacco playbook for promotion, advocacy and enforcement

Another point I have noted previously is the strong influence of tobacco control strategies on cannabis regulation. The problem for the industry is, well, that cannabis is mainly seen as a health issue by government, and only secondly as an economic opportunity. This means that growing the industry is not a key federal objective, except, perhaps, to the extent that legal businesses can gain market share from illegal providers, now estimated by Statistics Canada to supply 30 per cent of demand.

The Panel recommends more vigilant enforcement, especially for repeat offenders. Unfortunately, that call is intended for legal operators. The report does include a number of observations directed at other levels of government and hence beyond its mandate.

Chapter 10 on criminal activity and the illegal market is filled with suggestions such as targeting criminal networks, closing unlicensed stores on First Nations territories, and encouraging provincial governments to force internet service providers to block illicit websites.  These proposals have no chance of being realized through this exercise.

LPs and retailers are already reporting increased enforcement. I recently learned that Health Canada seems to be stepping up warning letters to retailers, who must also deal with provincial inspectors. In Ontario for example, the AGCO just issued a $200,000 penalty to Cannabis Xpress for violating its rules on retail inducements.

Not all enforcement is seen as bothersome, as retailers have long been asking authorities to clamp down on data deals involving product purchases. The Final Report does not address the duplication of compliance oversight, however. Since the Act delegates responsibility for retailing recreational cannabis to the provinces, a single enforcement focus by provinces would reduce confusion and perhaps even require the two levels of government to speak with each other.

Road safety is part of the federal framework, and the Report singles out cannabis-impaired driving despite the lack of reliable data to confirm a problem or indicate how this will be enforced.

It’s unlikely that additional resources will be found to train additional officers, especially those under provincial jurisdiction who are already overburdened with statutory duties. Why this should be called for, “particularly for rural and remote police services” is one of the Report’s unexplained mysteries.

Recommendations one through fifteen highlight measures directly borrowed from tobacco control initiatives. Of special note, number 2 asks Health Canada to set and monitor targets to reduce youth and young adult consumption, which poses a problem for an industry that increasingly sells to the latter. More stringent proposed requirements on advertising and promotion include further restriction of promotional characteristics appealing to youth; new requirements for information on THC and CBD quantities and concentrations; more explicit limits on branding elements; and additional warning messages on psychosis and schizophrenia.

One recommendation the industry might consider supporting is the Panel’s call for a youth advisory board to engage young persons on cannabis issues. Such a group should be co-sponsored with government to position the cannabis industry as a partner. However, the panel probably has in mind the tobacco control model where such groups report to government only, in opposition to that industry.

Taxes, Fees, and Revenues

As reported by other observers, businesses hoping for Excise Tax relief were disappointed to learn that the panel offers little support for this measure. The main reason from a public health perspective is that excise taxes are used as a tool to control consumption of a product with broad public policy implications.

Historically, these taxes have been applied to tobacco, beverage alcohol and fuel to modulate or dampen demand, and raise revenue to offset social costs from the use of these commodities. For example, alcohol and tobacco excise taxes are designed to offset health care costs, while fuel taxes help fund policing and roads. At the same time these products generate revenue and provide employment. The balancing act for government is to weigh economic benefits against ill effects such as higher mortality, stress on health care facilities and related costs.

In keeping with this approach, tobacco control advocates have successfully lobbied governments to increase taxes to significantly reduce demand for tobacco products. Only when high tobacco duties created a profitable illicit market were tax hikes moderated. The case for moderation and perhaps a limited pullback for cannabis taxes may rest on the argument that a more profitable cannabis industry is better positioned to erode illegal sales, or failing that, to detail how growth in legally generated revenue is in danger of being reversed.

Unfortunately, the evidence thus far doesn’t show that excise taxes have dampened demand for legal products. Notwithstanding growing defaults and arears in excise tax payments, legal cannabis continues to be widely available at low prices across Canada while demand appears to be growing.

The report’s recommendation that Finance Canada apply progressively higher duties for higher risk (i.e., high THC) products reflects the above logic to discourage their use, a policy that also plays to the concerns of public health advocates.

More positively, this measure could incent more stringent lab testing practices and more accurate THC ratings on labels, promote development of lower THC products, and spur market research to identify overlooked consumer niches who would be interested in such products.

The panel does offer modest olive branches in recommending that Finance Canada redesign its excise tax model to recognize that dried flower was priced significantly higher when the model was developed and will likely remain cheap for the foreseeable future. In lieu of making major concessions on the excise tax, Health Canada is encouraged to accelerate regulatory streamlining to lighten the administrative burden on federal licensees.

With little ‘give’ on the industry’s cost structure, some producers may decide to develop higher value-added products. This might be done by offering products that appeal to older buyers with greater discretionary income, similar to beverage alcohol segments for fine wine and bespoke distillates.

Perhaps more LPs will emulate premium wineries by growing outdoors and introducing seasonality and terroir to their business models.

Check back for Part 2.