Canada’s cannabis excise duty on fresh flower, plants, and seeds, in which producers pay the higher of $1 per gram or 10% of a gram’s value, is viewed by most industry players as unsustainable. 

This was brought home in September 2023 in a Cannabis Council of Canada (C3) survey in which 96% of respondents viewed the current model as excessively punitive.

However, as drumbeats for duty reform grow louder—with the federal House of Commons Standing Committee on Finance recently recommending a switch to a 10% ad valorem rate—little attention has been paid to the actual processes required to bring relief. 

The challenges, say experts, fall into two domains: the first is purely practical, involving the legal requirements and logistical challenges; and the second is more political, given that the federal government shares 75% of the revenue with the provinces and territories (with the exception of Manitoba).

Practical considerations

The federal excise duty framework falls under the purview of the Minister of Finance. The requirements are clear.

“Changes to the federal component of the excise duty rates require amendments to the Excise Act, 2001,” Caroline Feggans, a spokesperson with the Department of Finance, told StratCann via email. “Under the coordinated agreements, any changes to the federal component of the excise duty rates would trigger corresponding changes to the additional duty component in respect of a participating province or territory.”

This would ensure that the revenue split between the federal government and the provinces and territories remains constant. Notably, from a purely legal perspective, it appears that the federal government can act unilaterally. It doesn’t require anyone’s permission.

The process for amending legislation would depend on the specifics of the Bill and attendant political considerations, with varying amounts of consultation. Within the government itself, multiple stakeholders would be involved.

“Any change would start with a policy review led by Health Canada, with key input on excise tax from the Department of Finance, and oversight by the Prime Minister’s Office and the Privy Council Office,” says Denis Gertler, a former government regulator. “Changes are then operationalized through the Canada Revenue Agency (CRA). The CRA would also be consulted about policy changes, but mainly from an operationalizing perspective.” 

Recently, Innovation, Science and Economic Development (ISED) announced a consultation with industry representatives, perhaps to give cannabis businesses a stronger voice.

“I think it’s too soon to say what the outcome of this exercise will be,” says Gertler.

The politics of change

The provinces would also have to be engaged—one of the biggest hurdles. The provinces are receiving the lion’s share of the money, which flows directly into general revenue, and that’s hard to give up.

“This is definitely more complicated politically than it is legally,” says Trina Fraser, a partner at Brazeau Seller Law in Ottawa who has questioned the validity of the excise duty.

“The coordinated tax agreements contain typical contract language, including that the contract can only be amended in writing with the mutual consent of the parties,” she says. “But, there is a provision in the agreements which states that if the federal government changes the federal component of excise duty, which it can unilaterally do, then the provincial component shall be automatically amended as well to maintain proportionality.”

However, Fraser says it is unlikely that the feds would use this power to unilaterally overhaul the excise rates due to political reasons. In effect, the unilateral federal power, while legal, may be politically untenable.

“Changing the rate structure on flower to a fixed 10% model, as the federal House of Commons Standing Committee on Finance has recommended, would affect the provinces, and is something they probably wouldn’t do without provincial consent,” she says. “Yes, it would simplify reporting, but it would reduce the duty collected, so would likely, practically speaking, require provincial buy-in.”

That said, there are permutations that could be viable.

“Things like a national stamp, a digital stamp, changing the timing of remittances, or having the provincial distributors remit the duty, are all examples of changes that would assist producers (from an operational expense, administrative burden and/or cash flow perspective) but wouldn’t require any change to the rate structure,” she says.

These are viable observations, but they may fall on deaf ears given that the Legislative Review of the Cannabis Act has emphasized societal issues and health, with the cannabis industry comprising only 20% of the groups making their views known.

“In my opinion, the public health community will have a greater impact on the Panel’s final recommendation,” says Gertler. “The thrust of legalization is not how to build a dynamic cannabis industry, but is more concerned with protecting young persons from the harms of cannabis consumption.”

Nonetheless, the industry has been speaking with one voice for some time about the negative effects of the excise duty. This may be hard to ignore, given that some producers are now paying over 30% in excise duty.

“I do expect there to be a recommendation for a reduction,” says Brad Poulos, a professor of entrepreneurship at Toronto Metropolitan University. “However, I’m loathe to predict how the federal government reacts.”

A reality check

Given that the cannabis industry’s efforts to be treated as an industry with legitimate economic concerns have been consistently drowned out by larger societal considerations, a strategic pivot may be in order.

“The cannabis industry seems to not be fully cognizant of all the political forces at play regarding the excise tax,” says Gertler. “To advocate for more industry-positive changes, it needs to find common cause with some of these groups and come to the feds together. Harm reduction advocates could be approached, as well as the research community. There may be others, too.”

A prime example, says Gertler, would be to make the case that a stronger, responsible legal industry is vital to beating the illegal market, which sells directly to youth with no regulation. Otherwise, the concerns of the cannabis industry, and by association excise duty, are simply not top of mind.

“I’m not sure that the federal government cares if smaller LPs go out of business,” says Gertler, “unless that would result in some seat losses in the next election, which I think is unlikely.”

There is also the simple economic message that it makes more sense for the government to take a smaller part of a bigger, growing pie than to kill an industry by gouging it. This approach also helps to grow the legal market and to address health and policing concerns related to the unregulated market. 

“There are still a lot of people buying from the illicit market,” says Fraser. “Reducing tax could be a key component in the legal market getting more market share.”

In effect, a simplified and coordinated approach to excise tax reform could kill a few birds with one stone: helping grow the legal market, thus driving more tax revenue, while making it less lucrative for those in the unregulated space.

Then, says Boutros from Metropolitan University, the government can get back in the game: “Once the illicit industry has been reduced much more than it is, the government can look at getting greedy with taxes.”

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