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THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE

EVIDENCE


OTTAWA, Tuesday, June 4, 2019

The Standing Senate Committee on National Finance met this day at 1:30 p.m. to study the subject matter of all of Bill C-97, An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2019 and other measures.

Senator Percy Mockler (Chair) in the chair.

[English]

The Chair: Honourable senators, welcome to the Standing Senate Committee on National Finance. My name is Percy Mockler, senator from New Brunswick and chair of the committee.

I wish to welcome all those who are with us in the room and viewers across the country who may be watching on television or online. As a reminder to those watching, the committee hearings are open to the public and also available online at sencanada.ca.

At this time, I would like to ask all the senators to introduce themselves, starting on my left, please.

Senator Klyne: Marty Klyne, Saskatchewan.

[Translation]

Senator Pratte: André Pratte from Quebec.

[English]

Senator Duncan: Pat Duncan, Yukon.

Senator Andreychuk: Raynell Andreychuk, Saskatchewan.

Senator Dean: Tony Dean, Ontario.

Senator Forest-Niesing: Josée Forest-Niesing, northern Ontario.

Senator Ravalia: Mohamed Ravalia, Newfoundland and Labrador.

Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.

[Translation]

The Chair: I would now like to introduce the clerk of the committee, Gaëtane Lemay, and our two analysts, Alex Smith and Shaowei Pu, who team up to support the work of the Standing Senate Committee on National Finance.

[English]

Honourable senators, we have an addition to the team. She is a clerk in training, Ms. Ariane Larouche.

Thank you, Ms. Larouche, for being present.

Honourable senators and members of the viewing public, today we continue our consideration of the subject matter of Bill C-97, An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2019 and other measures.

This afternoon, we will focus on the provisions that change the taxation of cannabis products. I am talking about Part 1(h) and Part 3 as listed in the summary of the bill.

To discuss the subject matter, we welcome, from the Canadian Centre on Substance Use and Addiction, Ms. Rebecca Jesseman, Director, Policy. By video conference from Brock University in St. Catherine’s, Ontario, Professor Michael Armstrong, Associate Professor, Goodman School of Business; and from Consumer Choice Center, David Clement, North American Affairs Manager.

To the witnesses, thank you very much for accepting our invitation so that you can share with us your opinions and answer our questions on Bill C-97. I have been informed by the clerks that Ms. Jesseman will be the first to make comments, to be followed by Professor Armstrong and then Mr. Clement. Following your presentations, senators will be asking questions.

Ms. Jesseman, the floor is yours.

Rebecca Jesseman, Director, Policy, Canadian Centre on Substance Use and Addiction: Thank you and good afternoon. CCSA is Canada’s only agency with a legislated national mandate to reduce the harms of alcohol and other drugs in Canadian society. We welcome the opportunity to speak to you today about Bill C-97. I will keep my comments brief and have provided the committee clerk with links to additional resources if you’re interested.

CCSA looks at cannabis regulation from a public health perspective, which seeks to minimize harms, maximize benefits, apply evidence and promote equity. These goals can be achieved by increasing product safety and quality, decreasing rates of use overall and rates of high-risk use in particular, and by monitoring and evaluating regulatory impact.

Taxation according to the level of tetrahydrocannabinol, or THC, that a product contains rather than its overall weight supports a public health approach and aligns with CCSA’s previous recommendations to Parliament on Bill C-45.

THC is the component of cannabis responsible for intoxication. Products with higher levels of THC are strongly associated with health and safety risks. The risks include over-intoxication, experience of psychosis and development of tolerance and dependence.

Evidence from extensive international studies of alcohol indicates that pricing controls such as taxation are some of the most effective approaches for reducing related health and social harms. Importantly, those most at risk of experiencing the harms associated with both alcohol and cannabis consumption are also most likely to be price sensitive. This demographic includes younger people and those who consume cannabis more frequently and in higher quantities. Taxation by THC level is, therefore, an opportunity to incentivize the use of products with lower concentrations of THC and reduce the related risks for these groups in particular.

CCSA recognizes that disrupting the illegal market is one of the objectives of the Canadian Cannabis Act. Achieving this objective should not come at the cost of compromising public health and safety. Canadians have indicated that they are willing to pay higher prices for legal, quality cannabis products of known composition. In fact, the National Cannabis Survey indicated that quality and safety are the main factors considered by 75.8 per cent of Canadians when deciding to purchase cannabis versus 37.7 per cent reporting price as a deciding factor.

Providing that quality assurance should be the focus of both government and industry. Engaging in a price war with the illegal market risks incentivizing consumption and increasing rates of use. This effect is particularly concerning with new product formats where research on health impacts is the least developed.

Taxation by THC level is only one component of a comprehensive public health approach to cannabis regulation that also includes the following considerations: prevention and education, for example, through promoting the Lower-Risk Cannabis Use Guidelines; research on the health and social impacts of cannabis use, both positive and negative; refinement and enforcement of quality control standards; evaluation of the impacts of regulations at all levels of government; and timely and appropriate policy and regulatory adjustments that are informed by evidence.

In conclusion, along with these other considerations of a public health approach, CCSA supports the use of taxation by THC level as a means of incentivizing the use of lower-risk cannabis products.

Thank you for providing the opportunity to speak with you today. I will be pleased to respond to your questions.

Michael Armstrong, Associate Professor, Goodman School of Business, Brock University, as an individual: Good afternoon, and thank you for inviting me to speak with you today.

Regarding the proposed change in excise tax calculations for cannabis-derived products like oils, I think the change makes sense as far as it goes for two main reasons.

First, it is fairer, in a sense, to both producers and consumers in that it taxes the products based on their final form rather than the combination of ingredients that happen to be used. Under the existing or previous rules, two identical end products could end up being taxed differently if the producers had used raw materials of different strengths or potency.

The second advantage of the change is it could simplify accounting and inventory management for the producers in that they won’t need to track which specific raw materials went into each batch of products when doing their tax calculation. Under the current or previous rules, producers calculate excise tax at the end of the delivery process, but when they do that, they need to know how much of the ingredient — how many grams of cannabis — went into the product back at the beginning of the production phase.

If the committee is looking more broadly at the issue of cannabis taxation, it might wish to consider three other possible changes. The first would be concerning registered medical cannabis users. The current system taxes all medically used products much like recreational use products, whereas there’s been a call by medical clients that asks that all medical use products be tax-exempt, like medicines. A possible compromise would be to exempt taxation for oil products only and leave the tax on dry cannabis. The reason I’m making that suggestion is that the two groups had different preferences for products. The recreational users prefer the dry, the medical users prefer oil, so the selective exemption could take advantage of that.

The second potential change could be to simplify the excise tax system overall, first, by at least getting it down to a single excise tax sticker for the entire country, rather than having 13 different ones for 13 different jurisdictions.

Ideally, that could be taken a step further and have a single excise tax formula that would apply to all jurisdictions. These changes would simplify the processing and inventory management for the producers and, incidentally, perhaps facilitate some interprovincial trade.

The third suggestion you may wish to consider for fresh and dry cannabis, the smokable products, is remove the minimal excise tax amounts and rely solely on the percentage version of the formula. For example, currently, the federal portion of the tax on cannabis flower, is calculated at the greater of 2.5 per cent wholesale value, or $0.25 per gram. The suggestion would eliminate the $0.25 per gram minimum and just use the 2.5 per cent of wholesale value. Again, this would simplify the accounting for the producers and make it easier for the legal industry to offer a value-priced product to compete with the black-market products for the most price-sensitive consumers.

Thank you for listening to me, and I look forward to any questions you may have.

David Clement, North American Affairs Manager, Consumer Choice Center: Good morning, members of the committee. First off, thank you very much for the invitation to appear before the Standing Senate Committee on National Finance.

My name is David Clement. I am the North American Affairs Manager for the Consumer Choice Center.

As a global consumer advocacy group, we represent patients and consumers who embrace increased choice, innovation, and smart regulatory policy, which is what brings me here today.

For my statement, I would specifically like to address two cannabis-related items within Bill C-97, the first being Part 1(h), the amendment to the Income Tax Act to reflect current regulations for accessing cannabis for medicinal purposes.

Part 1(h) changes the Income Tax Act so that newly legal forms of medical cannabis, edibles, topicals and extracts will be eligible for the medical expense tax credit. First off, as a group that represents consumers and patients, it is positive that the government is providing some relief and moving to allow new forms of medical cannabis to exist within the tax credit system. Although that does give patients some relief, it does nothing to address the long-standing issue of taxation on medical cannabis.

We, who are among many, have significant problems with the government’s decision to continue to tax medical cannabis whether that be excise or sales. These taxes unfairly punish patients for the crime of simply using the prescription medicine that was prescribed for them.

Although the expansion of what qualifies as a medical expense is appreciated, it would be much preferred if the government were to simply tax-exempt medical cannabis, as other prescribed medicines are.

The second item I would like to address is Part 3, which is the new excise tax rate framework for edibles, extracts and topicals. Specifically, that is the new tax framework based on THC potency at a rate of $0.0025 per milligram of THC. When you combine that with the provincial rates, it’s $0.01 per milligram of THC.

The first issue with this tax framework is that when it’s applied to medical cannabis, it directly targets medicine based on efficacy. We have data from a recent study from the Journal of Palliative Medicine which shows, when examining medical cannabis usage patterns for cancer patients, they prefer their medicine to be high THC, opting for potency over quantity.

For medical patients, these new changes will ultimately mean that their more desired medical products of higher THC will be taxed at a higher rate than lower THC products, thus encouraging them to do the exact opposite of what they would otherwise prefer to do.

The second issue is with the changes in terms of tax rates and this framework. The limit for edibles is 10 milligrams per package. That leaves the excise tax on those products to be relatively small, so 10 milligrams would be $0.10.

However, when we look at the products of topicals and extracts, the setup of the framework could lead to steep additional costs for consumers. If we take a topical or extract, the maximum THC in the immediate container is 1,000 milligrams of THC. At the higher threshold, that would mean the $40, 1,000 milligrams THC topical product would carry a $10 excise tax attached to it, along with a sales tax. If we take that example of a $40 product, that means that once you combine those taxes, taxes would inflate the shelf price by close to 40 per cent. The cost-prohibitive nature of it matters because we as Canadians want the legal market to thrive for the purpose of stamping out the black market. Our concern is that when you have excessive taxation on these new topicals and extracts, it will make it highly unlikely these products will be purchased legally and could serve to be counterproductive by giving rise to more attractive unregulated black market products, thus keeping consumers in the black market.

In closing, I think the question we need to ask on these excise tax rates specifically for medical cannabis is: Does our federal government want to make regulated medicinal cannabis more or less affordable for the patients who need it? If the goal is ultimately to make medicine more affordable, then taxing medicine cannot be the answer. Thank you.

Senator Marshall: Thank you very much for your presentations. We’re talking about cannabis edibles, cannabis extract, cannabis oil and cannabis topicals. Are cannabis edibles available now? I thought that was deferred to sometime in the future.

Mr. Clement: They are not available now.

Senator Marshall: They are not available now.

Mr. Clement: Well, they are available illegally, but not legally.

Senator Marshall: Legally is what I was referring to. What about the cannabis extracts, oils and topicals, are they available now?

Mr. Clement: Oils, yes; topicals, no, although that can be a grey area depending on how you define a cannabis product. There are CBD topical products that exist. The legality of those is grey right now. Those do and don’t exist and oils do exist.

Senator Marshall: My question is relating to the availability of some of those products now and then I guess the edibles into the future. I’ll start with you, Mr. Clement, because I know in your opening remarks you spoke about the availability of products and the black market.

There’s a shortage of cannabis products. We all know that because we’re listening to the news. How do we go about ensuring that supply meets demand?

Mr. Clement: I think the best way to go about ensuring that supply meets demand is changing the production regulations so that they are more representative of how government bodies treat alcohol production and less like how we treat pharmaceutical production. Right now, the cannabis market or cannabis producers are regulated as if they are a pharmaceutical product, for the most part very strictly. I think that those rules could be loosened to allow for more scalability.

Another suggestion that was pointed out by my colleague here was the streamlining of the excise tax system. I think that could do a lot in terms of allowing for product mobility. Right now excise tax implementation and stickers ensure that legal product is landlocked in particular provinces, so you can’t shift product from one store to another across provincial boundaries to meet demand. I think that would certainly help as well.

Senator Marshall: So there will be no taxes collected unless there is an availability of supply.

Ms. Jesseman, do you have any comments on that?

Ms. Jesseman: The only thing I would add, I would agree that the undertaking that we have had in Canada regulating a product that was previously illegal for almost 100 years, we’ve certainly learned a lot with the early implementation of the regulations. I think there are definitely some efficiencies to be achieved. The only thing I would highlight is the importance of ensuring that quality control remains a priority.

Senator Marshall: When you relate excise tax to the amount of THC in the product, who determines what the THC is? Who determines what the excise tax is going to be? Is that easily verifiable?

Ms. Jesseman: In terms of the level of THC in the product?

Senator Marshall: Yes.

Ms. Jesseman: That is a required part of the testing. All THC, all cannabis products sold have to have the level of THC and CBD clearly marked and that has to be tested and verified.

Senator Marshall: Thank you.

Mr. Armstrong, do you have any comments with regard to supply of these products?

Mr. Armstrong: Yes. First, concerning the oil products — I’m getting lots of reverb at my end. Are you getting that?

Senator Marshall: No. I hear you clearly.

Mr. Armstrong: Yes. First of all, regarding the oil products, the ones that are existing currently available are the ingestible oils, the ones you can swallow or spray on your tongue. The vapable oils you could put in an electronic pen are not yet legally available.

In terms of shortages, currently the legal market, the oil situation seems to be reasonably good. The supply coming from industry more than covers sales demand. The inventories are pretty good. There’s a big shortage of dry cannabis, smokeable cannabis. Industry is producing less than a fifth of potential demand across Canada. Currently, that is the main limit on the legal industry taking market share from the black market.

Senator Pratte: The question is for whoever wants to take on this topic. Frankly, I am confused on the way dried cannabis and cannabis products will be taxed. Presently, for cannabis products that are available on the legal market, it’s either a flat-rate duty or an ad valorem duty. I’m not sure why the government decided to have these avenues available. I’m not sure what’s the logic there, but there’s a choice there. Now with the new cannabis products there will be another system based on the THC level.

Wouldn’t it be simpler — or maybe there’s something I’m missing — to have all products taxed based on the THC level, or is it not possible for some reason?

Mr. Armstrong: You could set the tax system that way. With dry products it’s a little more difficult to quantify the level. So, for example, if you look at the product packages, they typically have a range — like, they’ll say 10 to 15 per cent THC — because it varies from plant to plant or flower to flower to some extent. I suppose you could tax somehow based on the average.

Senator Pratte: I’m just looking for a way to simplify this.

Mr. Armstrong: I absolutely encourage simplification. My suggestion is to drop the base rate and just go with the percentage rate for the dry cannabis and per gram of THC for the oils and other derivative products.

Mr. Clement: There could be one potential negative externality if we were to apply THC content to a dried product, and that would be the repercussions that would have on the black market because that would make high-THC black market products more attractive than they already are because they would be competing against products that are taxed on an increasing level. If stamping out the black market is the goal, which I certainly think it is, we have to be mindful of policies, although I certainly appreciate simplification and, trust me, the process of going through these tax rates and trying to figure out what is taxed at which rate and how that is applied is quite confusing. That would be one potentially negative consequence that would send a pretty clear signal to those who are in the black market and would highly concentrate the product available on the black market at that higher THC threshold.

Senator Pratte: Mr. Clement, what is your response to the government’s argument on why they do not want to exempt medical cannabis? Their argument is simply that if they do that, consumers who don’t have a medical reason for getting medical cannabis will try to get a prescription or whatever because medical cannabis will be a lot cheaper.

Mr. Clement: That response has been brought up to me in the past. Basically the argument was that if they exempt medical cannabis, you’ll have people lining up to get their —

Senator Pratte: Registration.

Mr. Clement: Yes, their registration. I think that’s largely a question for the integrity of the medical community. I don’t think that taxing all medical patients because of a few potential bad actors is appropriate policy. That would be my response to those who have raised that objection.

I certainly think it’s possible. You could have some folks try to game the system to get a prescription for medical cannabis to avoid taxation. But then again, that also depends on how the legal market unfolds over the next year or two in terms of storefront availability catching up with supply. I’m of the opinion that the incentive for recreational consumers to go through the hassle of going to see a doctor, getting a prescription refilled, waiting for the mail, when they could go into a storefront, will become increasingly less as the market matures. That is my interpretation or belief here.

Senator Pratte: Ms. Jesseman, did you have any comments on that point?

Ms. Jesseman: My background is in criminology and not economics, so I completely echo your desire in simplifying the taxation approach because it certainly takes a bit to wrap your head around. But that does lead me to some expertise in terms of stamping out the illegal market. I think we have to be careful in setting reasonable expectations around the ease with which we can eliminate the illegal market and the compromises that we might have to make from a public health perspective in order to compete with the illegal market.

[Translation]

Senator Forest: Ms. Jesseman, from the beginning of the legalization of cannabis to today, are we in a position to see which parts of the market have increased in terms of age category? We were much more concerned by consumption among young people under 25. Do you have statistics showing that cannabis consumption has increased among those clients?

[English]

Ms. Jesseman: We actually do. We have some early results courtesy of Statistics Canada for the first quarter of the current fiscal year, 2019. Those statistics do indicate a slight increase in use, but most of that increase is, in fact, focused in older age groups rather than the younger age groups, which is extremely interesting.

The data is certainly very preliminary. We have to keep in mind that the market has certainly not stabilized and that accessibility remains a considerable challenge in most of Canada. But those are some very interesting early trends to watch that we will continue to monitor.

[Translation]

Senator Forest: So we are seeing that it is an older clientele, people 25 and older, that has increased its consumption since legalization, correct?

[English]

Ms. Jesseman: That’s the age group within which the increase has been focused, yes. I should clarify that youth remain the highest consumers, but in terms of the absolute increase from pre-legalization to post-legalization rates of use, it has been among older age groups. I would be pleased to provide the group with the documents on that is as well.

[Translation]

Senator Forest: There are two issues: recreational consumption and consumption for therapeutic or medical purposes. Do I understand correctly that there is talk of matching the excise tax to the level of THC — more than three-tenths of 1 per cent? We are not talking about the concentration of CBD, which is more a factor in therapeutic use.

Is there a link between the excise tax and the rate of CBD, or is the excise tax linked simply to the level of THC?

[English]

Mr. Armstrong: The current excise tax is based on the grams of cannabis regardless of the THC or regardless of the CBD level. That is, how much plant went into the package of dry cannabis or was used to create the ingestible oil. That’s the existing system. It doesn’t actually take into account potency of either chemical. The proposed change for the oil, or edible-type products would look at only the THC.

[Translation]

Senator Forest: Only THC is considered?

[English]

Mr. Armstrong: Yes; that’s the government’s proposal.

[Translation]

Senator Forest: Has an automatic increase in the excise tax been built in, much as was done with microbreweries and microdistilleries in relation to the consumer price index?

[English]

Mr. Armstrong: As far as I know there is no planned, programmed increase in the tax rates. Of course, it is always subject to the government’s future change.

Senator Forest: Automatically.

Senator Forest-Niesing: Before I get to the question I had planned to ask you, I am sensing from your earlier response, Mr. Armstrong, that you are in disagreement with the government’s proposal to tax based on the THC level. Am I correct in my read?

Mr. Armstrong: No, I agree that the proposal to tax on THC level is an improvement over the current rule which would just be how many grams of the cannabis plant went into the product. It is a step forward.

Senator Forest-Niesing: That begs the question: What other steps would you estimate to be worth considering?

Mr. Armstrong: Well, for the dry cannabis, the smokeable cannabis, my suggestion is to get rid of the flat base tax amount currently 25 cents per gram federal and, depending on the province and the detail, 75 cents per gram provincial share. Currently it is a dollar minimum excise tax on a dry cannabis product.

That’s not necessarily a huge increase if we are talking about a high-priced product, maybe $20 per gram. However, it is a noticeable increase on a product that’s $10 a gram. I think it is a serious challenge if you want to try to offer a product at $5 a gram, like a value product, to try to compete with black market pricing. It would be very difficult for producers or retailers to compete with that if you have either $1 or $5 going to excise tax and another chunk going to a sales tax. If we could switch that, get rid of the minimum $1 per gram, and have a percentage so that more expensive products are taxed higher and cheaper products are taxed lower, that could make a value-priced product more practical.

Senator Forest-Niesing: Thank you. Are there any additional measures that should be taken to discourage consumers from purchasing cannabis illegally?

Ms. Jesseman: In terms of survey responses, we’ve seen that people are looking for product quality, product safety and knowing what is in the product. Those are three things that the legal market can’t guarantee. That is, is it free from mould? Is it free from pesticides? Does it have the level of THC and CBD that the consumer is looking for and that is marked on the package? Also, there is simply the consumer experience; that is, being able to go to a store, see a variety of products and have a discussion with an informed salesperson. Those are all benefits that the legal market can offer over the illegal market. I think it is that retail experience and quality of the products that we need to focus our efforts on in order to promote people to move to the legal market.

Mr. Clement: From my perspective, I think it largely comes down to three issues. One is price, and taxation is a huge factor in that. Other regulations impacting production costs, obviously, play a rule in inflating price. Accessibility is another issue that, for the most part, is not the purview of the federal government. That’s mostly provincial and then local governments. There are a handful of policies that are misguided at that point, at those levels of government, but that might not be as relevant to what we are doing here today.

The third is product variability, which is really something we’ve not seen yet. It’s something that we are hopeful for in terms of offering consumers more choice, a variety of products. Unfortunately, the framework for legalization rolled out dried cannabis and oil, while giving a year to roll out other arguably less harmful means of consumption.

Our hope is that, as these new harm-reduction products, if we want to call them that, become available, you will see consumers opt for the legal market because the legal market now has more options and more choice. The more choice we can infuse into the legal market, the better because, ultimately, that’s what’s going to make it more attractive.

Senator Forest-Niesing: That makes sense. Thank you.

Senator Klyne: This might play on some of the other questions asked. Anybody can jump in on this, but I’m trying to unravel the — I suppose the flow chart of how things could go with cannabis for medical purposes. I suppose it could start with the patient. They may go to see a doctor with the intent of getting a prescription. Or they may just be just going to see a doctor to find out what is wrong with them. If it is with the intent to get cannabis prescribed, the doctor may deny it. If it is denied, this could then lead to self-medication and the black market, I suppose. Or maybe they just want to bypass the doctor altogether and self-medicate. Again, that leads to going to the black market.

Does it get complicated for someone to get cannabis for medical purposes when they think about the fact that you need to get a prescription, you need to apply for a tax credit, and it is probably overpriced. That is, if they know the prices compared to the black market. I don’t know how the black market handles that. Do they sell by the THC content? I don’t think so. Do they issue tax credits? I don’t think so. Where does all this lead? Is there going to be an uptake of cannabis for medical purposes and the tax credit? If so, what will the uptake on cannabis be? Or will it gravitate to the black market because it is simpler and they don’t need a prescription? That said, there is a caution for the viewing audience that cannabis for medical purposes has its own issues.

Ms. Jesseman: To clarify, the illegal market is not the only choice for the consumer. There is the regulated market if they choose not to pursue through medical authorization. Granted that’s limited now in terms of product formats, but, by October, we will see a fuller spectrum of products available.

Senator Klyne: In that example, then, there is no tax credit? They would still get a tax credit if it’s regulated?

Ms. Jesseman: On the new products being introduced, if they are purchasing without the medical authorization and it is not a prescription, without the medical authorization they could not claim a tax credit.

Mr. Clement: The best way to describe it would be someone with severe seasonal allergies. You could get to doctor for a prescription grade — insert a brand name of allergy medicine — that falls under a pharmaceutical. Or you could go and grab an over-the-counter drug you take that does not qualify for the tax credit.

That would be the circumstance that medical cannabis patients would fall into. I think the question is, if it becomes too burdensome for them to access medical cannabis through a doctor, they will most likely go to either the legal recreational market or the illegal recreational market. From our perspective, what we’ve seen is that consumers who are consuming what we would consider heavy amounts of cannabis prior to legalization, for the most part, are not making the transition to the legal market because of price and accessibility.

The hope would be that medical patients don’t fall into that trap. Part of the reason why we so strongly advocated against taxing medical cannabis in the first place is because obviously you don’t want the cruelty of punishing patients. Also, you don’t want to encourage them to engage in illegal activity simply to get the medicine at prices they can afford.

Mr. Armstrong: As a business professor, I have the least amount of medical knowledge in the group, but my only comment is to point out that medical users and recreational users tend to have different product preferences. According to Health Canada’s sales volume data so far, since legalization, recreational sales have been about 68 per cent dry cannabis. The recreational users generally prefer to smoke it. Medical sales only had 27 per cent of dry cannabis. Medical users generally prefer to have the oils.

Presumably that’s partly because they avoid the “ick factor” of having to smoke something. And presumably it also allows them to have a more consistent dosage. Oil is more consistent, in terms of its production and its use, as far as I understand.

Senator Ravalia: I will preface my question recognizing that we have little or no control over the black market. I am concerned that the long-term sequelae of high-dose THC products continues to be uncertain. While studies are in evolution, should we not continue to create a disincentive, via taxation, until we have clear evidence of risk versus benefit in the higher THC products? My concerns, as a recently practising physician, were in the areas of tolerance, psychosis and, in particular, adolescent vulnerability. I’ve seen instances of each of these.

The other concern I have is that we made this mistake with opioids. We did not, at the outset of prescribing opiates for nonmalignant pain, set any margins in terms of doses. And today we are dealing with a grave public health crisis across the Western world. So I would be interested. This may be partially a philosophical question but as a physician, I would be very concerned about high-grade THC products being indiscriminately used for the high factor, without the long-term sequelae being taken into account.

Ms. Jesseman: In short, I agree. That’s why we are supportive of a precautionary approach when it comes to higher levels of THC, and certainly continuing to invest in research to find out more about the longer-term health effects of those products, as well as some of the short-term impacts in terms of over intoxication, for example.

Mr. Clement: My only additional comments are, yes, you want to be precautionary and there are associated risks, and we need to know the risks. However, we have to avoid public policy that has grave externalities that push consumers into a marketplace that has no care for their safety whatsoever, or their age, for instance. You have to balance wanting to curb or eliminate youth access entirely, while also realizing that, if we are too heavy-handed in our regulatory approach, it only fuels the black market, which has no care for how old the purchasers are, quality or safety of the product, et cetera.

We have to strike the balance, in terms of making sure price, access, product variability are appropriate so that consumers, when purchasing, are doing it legally, are of age and are resuming themselves from all the negatives of prohibition, which is the reason why our country legalized in the first place.

Mr. Armstrong: I would echo that comment. It is a difficult decision as to what the best tax level is because, on the one hand, you would like to discourage cannabis use in general. On the other hand, you also want to discourage people going to the black market to get their cannabis. If you tax too high, that provides incentive to go to the black market. I don’t have a magic answer to that, unfortunately. It is a tradeoff.

The other point to add to that — and this is something that some of the provincial and local governments sometimes forget — is the alternative to legal cannabis is not no cannabis. The alternative, if they can’t get legal cannabis, is black market cannabis.

Senator Dean: Thank you for being with us today and for promoting the sort of intelligent evidence-based discussion that, unfortunately, I think we weren’t having at this time last year. What a difference a year makes. It is delightful to be part of this discussion.

Ms. Jesseman, you remind us of Stats Canada and I think it is important for us to remember that Stats Canada, Health Canada, the Parliamentary Budget Office a year ago was well into benchmarking that does allow us, today, to answer questions around what happened in the first three months. I would like to go on the record and commend Stats Canada and other agencies for doing a good job with that.

In the legal market, we heard about a split in product between medical and recreational. In the legal market today, what do we know about the consumption split between dried, oil? I guess that’s all we have now. If we could start there, what do we know about consumption demand for oil versus dried product right now? And is there any trend?

Mr. Armstrong: Recreational sales are about two-thirds dry cannabis, about one-third ingestible oils whereas, as I mentioned before, in the medical market, it is almost the reverse, about three-quarters oil, one-quarter dry.

Senator Dean: So two-thirds dry, one-third oil in recreational?

Mr. Armstrong: Yes.

Senator Dean: Thank you. I will go back briefly to the incentives and disincentives around pricing. You did remind us, Mr. Clement, about the report around price, availability and variability. They are key factors and if one takes a look inside an illegal store and if you go next door to the legal store, the legal store is more Apple-like, I suggest. It is more high-tech and clean, but with a sharply reduced range of products. So one can wander into these places and test this.

I’m going to go back to the issue of price and incentives. As we think about taxing for THC potency — and we had this discussion in the Social Affairs Committee and McLellan and Ware made recommendations on this, too, and I agree with it — we have to bear in mind that we already have a considerable price differential, such that the long-term, illegal recreational consumer buying 30 grams of dry cannabis is probably staying at half the price — if they stay with the current market — of the price that would be available walking into a legal cannabis store.

Would it not make sense, as we think about now tacking on potency variables, to reconsider the entire price differential? What we don’t want to do is stack potency differentials, taxes, on top of a price differential that although, as Ms. Jesseman suggests, is tolerated because of quality and safety, that tolerance is not going to be without its limits.

As we think about taxing on potency, do we need to consider the entire pricing framework in order to redistribute that premium and move it toward higher potency products?

Mr. Clement: Yes, I think you raise a good point in terms of reevaluating the tax system in its entirety. That includes the various fees and taxes associated with production at the federal level. I think that should also include some perspective on what provincial governments are doing in terms of the boutique tax rates they have. If you use Manitoba, for example, I think the benchmark is that legal cannabis is taxed at a rate of 29 per cent once you factor in all of the taxes.

It’s naive for us to think that the legal market can compete in that context, so I would certainly welcome this potency question to open up the door to a re-evaluation of over-taxation of cannabis in general, the creation of a smarter, more consistent tax model that allows for better competition, while maybe balancing some of the harm reduction aspects that my colleague has mentioned. That would certainly be welcomed from a consumer’s perspective because the goal here is to get consumers to purchase it legally, and we have to provide the incentives to do so. Price is a huge factor in that.

Senator Pratte: My questions are directed to Professor Armstrong.

You make two proposals. One is to get rid of the flat-rate duty in favour of the ad valorem duty for dried cannabis. Would you please remind us, do you know what the rationale was for establishing two possible tax regimes for dried cannabis? What was the logic behind that?

Mr. Armstrong: I don’t know the logic or the rationale. I recall first hearing about it in a speech by the Prime Minister. I assume it was to make sure that at least a minimum amount of revenue was collected from the product. It is possible they wanted to discourage discount or value-priced product, but I don’t know.

Senator Pratte: If we put ourselves in the government’s shoes, if they followed your advice and got rid of the flat-rate duty, would they lose revenue?

Mr. Armstrong: They would lose revenue on the lower-priced products, some of which really don’t exist and presumably will be coming as the legal industry unfolds.

Right now, the legal industry doesn’t really have to compete on price because there is so little product in terms of dried cannabis available that whatever makes it to the store is quickly purchased, for the most part, because it is a segment of the market where there are enough consumers who are happy to pay a large premium.

As supplies improve, as you start to get more toward the average cannabis consumer who is more price sensitive and doesn’t want to pay 40 per cent more or whatever the price differential is, then being able to offer a lower-priced or value-priced product becomes more important and part of the competition between the black market and the legal industry. Does that answer your question?

Senator Pratte: Yes. Thank you. Your other proposal is to eliminate taxes on medical purchases of only cannabis oil. The logic there is that the consumers for the recreational market and for the medical market are different.

But if you do exempt cannabis oil from taxes, is there a risk that consumers would change their preferences just because the price of cannabis oil is much lower?

Mr. Armstrong: There is always a risk, but I think the consumption habits would be different enough. If somebody wants a cheaper product, they could switch from dried to oil right now. Oil products tend to be cheaper in terms of how many dollars you have to spend to get some THC. People want the flavour and the aroma of smoking. Obviously not to my taste. So it is a different consumption style. I guess it’s something like saying, would people switch from wine to beer. Some would, but most want the flavour profile of a wine if they’re a wine drinker and are not really interested in beer.

Senator Marshall: My question is the same one I asked earlier on, but then after hearing all the testimony — who determines the level of THC? If the excise tax is related to the level of THC, who is determining the level of THC for tax purposes?

Mr. Armstrong: The producer has to test all of their products, so they would use that number in their accounting system, presumably.

Senator Marshall: Sorry, I missed the first part of your explanation.

Mr. Armstrong: The producer is required to test their product. As one of the other witnesses mentioned, the percentage of THC is on the label of all the products, so presumably that producer test would be used to calculate the tax.

Senator Marshall: So you could go back to the producer’s records?

Mr. Armstrong: I assume that’s what the government intends to do. I don’t know.

Senator Marshall: If the government wanted to. Rather than doing test checks, they could just go back? Or just do test checks?

Mr. Armstrong: I imagine like other kinds of taxes, you would have the producer calculate it, but then you would do some kind of audit to make sure it was done correctly. Sometimes that would mean going back to the records and occasionally actually testing the product yourself, but I don’t know the specifics of the government program.

Senator Marshall: Thank you. That answers my question.

Senator Klyne: I’m trying to follow closely here to find out how this is shaking out since this has been legalized. There have been some missteps, delays, lessons learned, probably things that are on supply and demand, pricing. With that comes a lot of frustration on both sides, supplier and customer, if you will.

There is recreational use, medical use, and now this new wave of alternative cannabis products — new to me, anyway. I’ll call it the black market, I guess. I don’t know how that is keeping up competitively with the alternative products, but are things panning out well here for the provinces monetarily?

Also, they had huge policing concerns at the beginning of this, money and resources that were going into getting training and equipment for all of this in terms of impairment. Is it unfolding the way people had somewhat forecasted? Or is this thing in a little bit of disarray and frustration on all fronts?

Mr. Armstrong: In terms of the revenue for the provinces, they haven’t got as much as, say, the forecaster planned from a year ago. That’s almost entirely because sales have not been as high, and that’s because the product supply has not yet caught up to demand. There hasn’t been enough product available, so there hasn’t been as much sold. And since excise tax and sales tax are based on how much is sold, they have not collected nearly as much revenue yet as they thought they would.

Market share-wise, the legal industry probably has 15 or 20 per cent of the market. The rest is black market. As that percentage improves, there will be more revenue coming into the provinces.

Currently, some provinces are doing better than others. Provinces with more retail stores tended to get a bigger market share. Nova Scotia probably has closer to 30 per cent legal market share as they have a pretty good store network. It’s the same thing on Prince Edward Island and in Alberta, whereas Ontario, up until very recently, has had no retail stores so their market share has been very small and much lower than the national average.

Ms. Jesseman: I’ll speak a bit in terms of the policing impact. There certainly has been a budgetary impact on training for recognizing impaired drivers. I know a lot of police agencies have not purchased the testing machines because of the cost so there certainly has been a resource impact.

I also wanted to go back to market stabilization, retail pricing and the revenues being generated. I think it’s important to recognize that prices are as high now as they’re ever going to be and that as the market stabilizes and market competition increases, those prices are going to be reduced. It’s important to keep that in mind when we talk about reevaluating the price system, as well.

Mr. Clement: I don’t think I have much to add, other than to the question of whether the provinces are making money off of this. There is anecdotal evidence from province to province that their distribution models are not turning a profit. Part of that is sales, as Mr. Armstrong mentioned, and part of that is the framework in which they set up distribution in the form of public versus private or mixed. Then again, those are separate conversations outside the purview of the federal government.

There are certainly provinces who are turning heavy losses, at least in the short term, in comparison to their forecast of how much revenue they would generate.

Senator Klyne: I wasn’t around last year through all the great debate and discussion. I understand it was quite vibrant and rigorous.

Was the driving factor around the objective of getting control of that market and taking it out of the hands of the illegal sellers balanced with revenues? If it’s only at 15 to 20 per cent on the legal side, are they winning the day against taking this out of the hands of the illegal sellers and youth, for instance?

Ms. Jesseman: I’d like to clarify that revenue generation was never a part of the objectives of the Canadian Cannabis Act. I give great credit, actually, to the Canadian government for that because that is something we did see in the United States. So it is not the objective of legalization to increase the consumer base. We’re not looking to increase the number of consumers or the rates of consumption. I’d like to highlight that right off the bat.

Aside from that, in terms of the objectives, it is a rather delicate balance between protecting public health, for example, through reducing youth use while also protecting public safety while reducing the scope of the illegal market.

Senator Klyne: Are we on track in that regard?

Ms. Jesseman: It’s too early to say. We really need to wait until we see some greater market stabilization. We cannot expect to compete with the illegal market right out of the gate. Those who have well-established routes of supply are not likely to break those routes of supply quickly or easily. It’s going to be a gradual transition to the regulated market.

Senator Klyne: I suspect there was a lot of “we didn’t know what we didn’t know” going on, and it will go on for a bit yet.

Mr. Armstrong: Fifteen to 20 per cent is a first step. Prior to legalization, the only legal cannabis consumption was on the medical side, which works out to less than 10 per cent of the overall cannabis market. So you could say we’ve doubled the legal share of the market so far, but there’s a long way to go.

The next couple chunks of that market will come as producers improve their processing and get more finished product out to the retailers. After that, it becomes more of a direct competition. Once you have enough product, then you’re competing. As some of the other witnesses said: Do you have a price that’s competitive? Do you have enough product variety? Do you have all the various edible products that some consumers want? Do you have enough stores to serve your market?

All the things that happened in the other industry will take effect and become important in the legal versus illegal cannabis industry. We’re probably six months to a year away from that starting to become important. Right now, we just need more product.

Mr. Clement: On the question of more products, what would be appreciated from the federal government is a more dynamic approach to how the industry is regulated in terms of seeing where the issues are and responding quickly to them. There are plenty of people out there who are pointing out or forecasting a lot of these errors, and they happen. The government is particularly slow at changing particular regulations, or actually goes in the opposite direction. An example of that, in my opinion, would be the new production regulations that act as a barrier for new entries into the production market.

From the Consumer Choice Center’s perspective, all that does is discourage new entries, which discourages competition, discourages increased supply and just topples on to some of the other complications we’ve discussed already.

[Translation]

Senator Forest: Mr. Clement, you have just told us that a number of errors were made, and that makes it difficult for new suppliers to enter the market. Did I understand correctly?

[English]

Mr. Clement: Yes.

[Translation]

Senator Forest: I do not have this information for the other provinces and territories, but, in Quebec, we have seen quite a significant interruption in supply in this market, and the shops were stormed. The ultimate objective is not to encourage cannabis consumption, but to remove that consumption from the illegal market. Obviously, if there is no diversity with the products, and if the supply is interrupted, people who consume cannabis will get their supply on the illegal market. I have heard less about an interruption in supply recently, but is it the case in Canada as a whole?

[English]

Mr. Clement: Yes, availability is a problem across the country. It’s not just Quebec who is experiencing that problem.

In terms of those errors, if there are additional questions on what those errors have been federally, I can certainly elaborate on that. In terms of supply and what’s available on shelf space across the country, for the most part it’s a uniform problem and there are some federal excise tax issues that actually prevent that stock issue from getting corrected or that prevent the market from reallocating product based on demand regionally.

[Translation]

Senator Forest: How does the excise tax prevent a balance in the diversity of supply being reestablished or new products being manufactured?

[English]

Mr. Clement: The cannabis market excise tax was set up in a similar fashion as tobacco and its excise tax stickers. Once a product is delivered to the province in which it’s to be sold, it is given an excise tax sticker and that means that product cannot be sold outside of the province. In a more dynamic or open market, you would have legal, licensed retailers or legal, licensed wholesalers — in many cases, provincial bodies run by the government — broker deals based on what residents in a particular region want for product availability.

You could have the Nova Scotia Liquor Corporation in negotiation with the OCS in Ontario to reallocate products accordingly, because, let’s say, there’s a little bit more demand in Toronto and Nova Scotia has over-purchased specific strains or particular products. That can’t happen in the existing excise tax system. So it landlocks products once it has arrived in a particular province.

That’s a big problem because, in order to respond to demand, there’s the sheer volume question. We have to have the sheer volume to respond to demand, but then that product has to have the mobility to adjust to demand regionally around the country. Mr. Armstrong did mention that in his opening remarks, and I think that’s a tremendous suggestion in terms of reevaluating the excise tax system and ensuring product can move between provinces.

Senator Ravalia: My question is for Professor Armstrong. In the medical prescription cannabis world, there’s anecdotal evidence to suggest that increasingly CBD products are being prescribed for anxiety, mood disorders, et cetera. Are you seeing any evidence of this in the data that you’re following up, or is this still primarily a THC world?

Mr. Armstrong: The data I’m following is Statistics Canada, Health Canada monthly reports, and they mostly don’t go into the details of the product potency, it’s more aggregate — how many kilograms, how many litres of oil. I don’t see that level of detail.

In terms of anecdotal reports, yes, I’m aware that some medical users like the high-CBD-potency oils. Apparently, that’s also become a popular product in some of the recreational users, what we are starting to call the wellness market. That is, people who don’t have a medical prescription but also aren’t looking to get high. They’re looking to try to improve their health in some sense. They’re asking for the oils that are high in CBD. So it has become popular and difficult to keep in stock, whereas for oils overall, stock levels are not too bad. The high CBD ones do tend to run out.

Ms. Jesseman: As a physician, you recognize that the health claims around CBD are still to be substantiated in the health community.

Senator Ravalia: I hope the next five years will give us some evidence in that respect, so thank you.

[Translation]

Senator Forest: Ms. Jesseman, one of the objectives of the bill is that people who consume cannabis should no longer get their supply on the illegal market. We do not want to encourage consumption, of course, but would it not be advantageous to focus on the quality of the products on offer on the legal market, with advertising campaigns, for example? Would it not be helpful to draw consumers’ attention to the fact that what they are buying on the street corner is most probably of much lower quality, whereas the products bought legally are subject to regulations on the rates of THC and CBD? Would that not be a good way to encourage consumers to buy legally rather than illegally?

[English]

Ms. Jesseman: There have been public education campaigns. I think there can be more. We can do more to promote, for example, the Lower-Risk Cannabis Use Guidelines, which include recommendations to use products of known composition and quality. We can go further. We work in partnership with my colleagues at Health Canada. I understand there will be more products coming out at the federal level and I also know that several provinces are also planning additional campaigns.

We also need to recognize that the regulation — and I support this — greatly restricts the amount of marketing and promotion that private industry can do in terms of products. From a public health perspective that’s a valuable approach because, again, we don’t want to incentivize use.

Mr. Clement: I have one additional point on that. From the perspective of consumers, which may or may not be at odds with the public health perspective, depending on the issue, right now the legal framework for advertising in the cannabis space is nearly non-existent. If you were to ease that up, you could create a scenario where consumers are better informed about what their legal options are, better informed about different product varieties that are available to them and lower-risk products available to them. There is a means of loosening some of those quite strict rules to inform consumers.

When we look at branding and advertising — and this is how the legislation was originally written — they were solely understood under the context of promotion. But there is a strong informational factor that is at play there. I don’t think the existing legal framework either complements or allows for that, nor does it allow industry to educate consumers in that way.

I think there could be room to obviously keep things reasonable in terms of promotion and the promotion of use, while also ensuring that consumers are being educated about availability, price and how the legal market is superior. If you’re already a consumer of cannabis, here is X, Y and Z why you should purchase legally. I think there’s a way to change current advertising laws to accommodate that goal and increase consumer information.

Mr. Armstrong: I agree with that. Right now, the industry is largely prevented from communicating with their consumers. Also, I don’t want to see wide-open advertising but prefer letting industry explain to consumers, in some manner, the advantages to switching to their products. For example, here with the ones you might like if you have this preference in the black market; here are some we think you might like. Some of that might be possible within the current legislation if Health Canada would just come out with some clarification on what the regulations are and how they’re interpreted. That’s a grey area right now. The industry is not really sure what they’re allowed to do, even with the existing rules. If we could have, more clarity, maybe some examples as to some informational ads they could run, that would be a helpful step.

[Translation]

Senator Forest: Could you send your arguments to the clerk? The information would be useful to us as we study this bill.

[English]

The Chair: Yes. To the witnesses, if you want to add as we go forward, before we table our report in the chamber, in the Senate, please do not hesitate to send your comments through the clerk of the committee.

Before we close, senators, I have a question. We’re still in uncharted waters. About three weeks ago, I had the opportunity to speak to students at a university and we had business professors present. They asked a question and I told them that when the time comes, I’ll ask the professionals. I see three professionals in front of me that also have experience and you’ve seen where we are going with this product. So I’m asking you: Would the distribution/sale of cannabis work better if it were managed by the private sector? I’m going to start with Professor Armstrong.

Mr. Armstrong: That’s a very wide-open question. It’s more a question of whether it’s managed well as opposed to whether it’s managed privately or publicly.

We have a mixed model in Canada. We have private producers, heavily regulated by the federal government and less private. Most provinces have a government wholesaler and about half the provinces have a private or a public retailer.

So far the only hint in the data is it doesn’t matter whether the stores are private or public so much as if they are accessible; that is, are there enough stores for the population. For example, Quebec doesn’t have many stores, given its relatively large population. It has the same number of stores as Nova Scotia — well, it’s slightly ahead now. Its sales per capita, its share of the market, is consequently lower than most other provinces.

The advantage of the private sector — and this is something that some other comments have alluded to — is that it tends to respond more quickly to change and when new information becomes available, as well as to what consumers want and what the right products are. The public sector can be slower at doing that.

Ms. Jesseman: From a public health perspective, it’s important to keep in mind that private industry is accountable to shareholders, and government is accountable to the public. So if we are looking at keeping a public health perspective front and centre in our regulation of cannabis, which I think is a laudable objective, we need to make sure that we align with public health rather than private-revenue goals.

Mr. Clement: The answer to that question is a resounding “yes” for me, in terms of the private sector being able to better handle this and the question of distribution. The private sector, simply put, is more dynamic. It’s able to change and deal with fluctuations in demand far better than government institutions are.

On the question of retail, it’s a fair point to say that consumers are generally happy with access whether it’s public or private. The difference between public retailers and private retailers is that private retailers don’t pass on their losses to taxpayers. The example being Nova Scotia. I think their loss, annually, is north of $20 million. It’s ultimately taxpayers who are paying for that. The alternative would be a system like Alberta or where there are private stores. When those stores fail, they don’t pass on those losses to taxpayers. They have a better incentive not to fail, which means they’re more consumer-friendly and competitive on pricing.

That would be my answer to that question.

The Chair: Thank you. To the witnesses as we close, thank you very much for sharing your opinions and comments. It’s been very informative, and you’ve given us clarity.

Honourable senators, tomorrow afternoon at 2 p.m. we will be receiving the Minister of Finance of Canada at our meeting.

(The committee adjourned.)