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Taxes and Recreational Cannabis in Canada

Recreational cannabis will become legal in Canada as of Oct. 17.

Growing illegal marijuana has a long tradition in Canada, whether as a massive grow op in an abandoned Molson brewery plant outside of Barrie, Ont., or representing British Columbia’s second largest agriculture export to the United States, even before Washington state and Colorado went legal with recreational cannabis.

Many cornfields in Canada hid marijuana in various stages of growth, sometimes unknown to the farmer who owned the fields.

This year’s federal budget revealed that the government intends to treat the taxation of cannabis as an excise duty, much the same as duties on tobacco and alcohol. Draft legislation was put in place in April.

The federal government will operate a licensing system that requires a permit to grow recreational marijuana and the manufacture of marijuana products.

Regulatory responsibility for distribution and retail sales of the products will fall to the provinces and territories to manage in whatever way they see fit. For example, Ontario has decided to go with the Liquor Control Board of Ontario model of overseeing the distribution and sales of recreational marijuana.

Fresh and dried cannabis, oils, seeds or seedlings for home cultivation will all have the excise tax applied.

Prescription pharmaceutical products with a Health Canada drug identification number will be exempt, as will low-dose THC (less than 0.3%), which is the active agent in cannabis packaged products.

Growers of Health Canada-approved medical marijuana will still have to apply for a federal permit to grow the product, whether or not they are subject to the excise tax.

The federal government will receive 25% of the tax revenues, leaving 75% to the provinces and territories.

The government estimates the taxes will not represent more than 10% of the producers’ costs, but the various products will also be exposed to the GST on sales. Provinces also have the right to impose additional flat rate taxes over the federal rate.

This estimate of tax impact may be a tad low because Canadian consumers just have to look at the additive effect of excise taxes on cost differentials of Canadian tobacco and beverage alcohol products compared with those south of the border.

The program will be administered by the Canada Revenue Agency, which is offering to harmonize the tax collection (like HST) with interested provinces.

The program comes with specific excise stamping and packaging rules, which will surely add to the cost of the product.

If this new system was intended to eliminate the black market in recreational cannabis, the complexity of the measures may be just a little counter-productive if the cost of delivery from the black market is substantially lower.

The federal government says the taxes will not be paid directly by the consumer but by the licensed growers and manufacturers of cannabis products. We’re not certain if the government actually thinks Canadian consumers are naive enough to believe they will not be liable for those taxes on the cost of their purchases.

This article originally appeared in The Western Producer, which publishes news of interest to Canadian farmers.