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Where is provincial cannabis tax revenue going?

May 7, 2024 | David Brown

When the Federal, provincial, and territorial governments discussed the federal excise tax rate in the lead-up to legalization in 2017, provinces successfully lobbied to receive 75% of the excise tax collected by the federal government.

The argument made by provinces was that the supposed cost of legalization would be borne by themselves (including the territories) and municipalities. This cost was not only related to the implementation and management of their own licensing and regulations but also the added cost to law enforcement and impacts on public health and public health resources.

Provinces, and to a degree municipalities, said legalizing would mean greater expenses and, therefore, the bulk of the excise tax collected by the federal government should go back to them.

Carole James, then BC’s Finance Minister, upon the signing of the agreement in 2017, said:

“We negotiated an agreement for BC that means the majority of cannabis revenue will flow to the provinces so we can invest in programs to keep people safe and remove the criminal element from cannabis.”

But where those dollars have gone isn’t always very clear. While some provinces like Ontario, Quebec, and, to a degree, Alberta have been open about how that money has been spent or allocated, other provinces and territories appear less open.

BC’s municipalities, for example, have been asking for years now where those tax dollars have gone. The same issue is playing out in New Brunswick and Saskatchewan.

Of course, how much has legalization actually cost municipalities and provinces? While there were concerns of increased policing costs or additional public health and safety concerns, more than five years in now, we see these concerns were largely unfounded.

Increased policing is highly questionable since there are fewer illegal/unlicensed stores now than before legalization, with many voluntarily closing rather than facing enforcement action. So, there is less of a need for police to deal with possession or consumption. There have been increased incidents of police detecting cannabis when testing drivers. However, it’s difficult to say if this is due to an increase in use or simply because it’s now easier for law enforcement to detect use.

Increased costs to municipalities are difficult, as well. Most cities have spent at least some time and effort developing new bylaws for cannabis stores, and some have taken extra time vetting any potential applicants, all of which add to their costs. However, these cities also generally charge hefty application fees that cover at least a portion of these costs.

In terms of costs for the provinces, public health and safety issues were seen as one of the significant added costs of legalization. However, it’s difficult to say there have been many, if any, real safety concerns for the public with legalization. Public health concerns in relation to long-term impacts of cannabis use, or more acute issues like emergency room visits, are a legitimate and difficult-to-quantify cost. Canada has seen an increase in people, especially young people, requiring medical assistance due to cannabis use, a cost that impacts provinces and the federal government’s healthcare spending. Although it can be difficult to determine if these costs are due to use from the legal or illegal markets, they do reflect real impacts on spending.

In terms of public safety, though, the added societal costs have arguably been non-existent, with the recent expert panel on the federal Cannabis Act noting in their report the significant decrease in policing efforts and arrests/charges since legalization. In 2023, the previous Manitoba government repealed the six-percent Social Responsibility Fee (SRF) they charged retailers, going so far as admitting that they had not spent the money as intended and that the “social cost” of legalization had been exaggerated.

Despite being a relatively low fee, this alone amounted to millions of dollars the government had collected or expected to collect from the program. Although the provincial government had argued that legalization would cost the government money, they admitted that these fears were unfounded and that, in fact, they had been using these funds for entirely different purposes.

How many other provinces are doing the same? How much of the federal tax revenue that is making its way to the provinces is just being used to fill government coffers, especially as we enter a period of increased government spending and a challenging overall economic environment?

More importantly, how can the industry better take into account where these dollars are going in their efforts to address the issue of over-taxation? While lobbying Ottawa has its place, changing how much of that revenue is coming in will force Ottawa to first get all the provinces to agree or risk alienating them by cutting them out of tens or even hundreds of millions in annual revenue.