Canada’s major producers of cannabis are urging the federal government to suspend the introduction of an $82-million levy on their revenues in the wake of Ontario’s decision to delay the opening of physical stores by nearly six months.

Health Canada proposed the creation in July of an “annual recovery fee” of 2.3 per cent on the revenues of licensed producers to recoup the costs of regulating the cannabis industry. However, just as the consultation period on the federal fee ended on Aug. 13, Ontario announced that it was postponing the opening of physical stores in the province from Oct. 17 of this year to April 1, 2019.

Health Canada is predicting it will eventually need to recoup more than $100-million a year from licensed producers to cover regulatory costs, but it remains unclear exactly how much revenue the licensed producers will earn and the exact level of the fee that should be levied on an annual basis.

In an interview, the executive director of the Cannabis Council of Canada said producers are unlikely to make as much money as the government anticipates in the early goings of legalization, which starts on Oct. 17. Between that date and April 1, Ontarians will have to rely on online sales to legally obtain cannabis for recreational use, which stands to negatively affect sales numbers.

“That puts additional pressure on the revenues of cannabis companies, because there won’t be the same volume from online sales that you would have with a combination of online and bricks and mortar,” said Allan Rewak of the Cannabis Council.

Mr. Rewak said the industry will need firm sales data before determining the adequate percentage of their revenues that should go back to Health Canada. Known as C3, the council represents companies such as Canopy Growth Corp., Aurora Cannabis Inc. and Tilray Inc.

“Let’s look at the numbers in Q3 and Q4 of year one and then we can come up with a number [for the recovery fee] that makes sense,” he said.

The federal government is still analyzing the responses that it received as part of its consultation on the fee proposal, but it has vowed to pass on the cost of regulation to the industry.

“Our government has always been very clear that those who benefit from the legal market will pay the costs of regulating cannabis,” said Thierry Belair, a spokesman for federal Health Minister Ginette Petitpas Taylor.

The topic of cannabis legalization has been top of mind at this week’s meeting of the Association of Municipalities of Ontario, whose members are still adapting to the Progressive Conservative government’s new strategy to sell cannabis in the province. The previous Liberal government planned to distribute cannabis through publicly owned and operated stores, but the Ontario government announced last week that it will sell recreational cannabis through an online retail channel and private retail stores.

Ontario’s Minister of Municipal Affairs, Steve Clark, sought to reassure municipal officials that the government will listen to their concerns before finalizing plans for retail sales.

“We’ve proposed to give every municipality a window to opt out of allowing physical, private cannabis retail within their boundaries,” he said at the AMO convention in Ottawa.

Health Canada’s proposed annual regulatory fee would be in addition to the $1-a-gram excise tax on cannabis that has already been put in place and will go mainly to the provinces. The regulatory fee would cover the overall costs of evaluating and approving new production licences, inspecting facilities and other regulatory enforcement activities. The money would be used to cover expenditures that will be borne by Health Canada, the Canada Border Services Agency and Public Safety Canada. It would not cover law-enforcement costs.

The 2.3-per-cent annual regulatory fee would apply to large producers, while microcultivators and microprocessors with gross revenue under $1-million per year would pay a fee of 1 per cent.

Health Canada is planning to approve about 200 new production licences every year on average. There are currently 115 licensed producers in Canada, including 62 in Ontario.

The Globe and Mail, August 21, 2018