Proceedings of the Standing Senate Committee on
National Finance
Issue No. 66 - Evidence - May 8, 2018 (afternoon)
OTTAWA, Tuesday, May 8, 2018
The Standing Senate Committee on National Finance, to which was referred Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures, met this day at 1:32 p.m. in order to continue its study of the entire subject matter of this bill.
Senator Percy Mockler (Chair) in the chair.
[Translation]
The Chair: Welcome to this meeting of the Standing Senate Committee on National Finance.
[English]
I wish to welcome all of those who are with us in the room and viewers across the country who may be watching on television or online at sencanada.ca. My name is Percy Mockler, senator from New Brunswick and chair of the committee.
Also, as a reminder to those watching, the committee hearings are open to the public and available online at sencanada.ca.
Now I would like to ask the senators to introduce themselves, starting on my left.
Senator Neufeld: Richard Neufeld, British Columbia.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Andreychuk: Raynell Andreychuk, Saskatchewan.
[Translation]
Senator Pratte: André Pratte from Quebec.
Senator Moncion: Lucie Moncion from Ontario.
The Chair: I would also like to introduce the clerk of the committee, Ms. Gaëtane Lemay, and our two parliamentary analysts, Sylvain Fleury and Alex Smith, who team up to support this committee’s work.
[English]
This afternoon, we continue our consideration of the subject matter of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018, and other measures. It is what we call the BIA, or the budget implementation act.
Today, we will focus our study on Part 3, which implements a new federal excise duty framework for cannabis products.
To the witnesses, thank you very much for accepting our invitation so that you can share with the Finance Committee of the Senate comments, views and recommendations.
In the first hour, we have the following witnesses: from Beer Canada, Luke Harford, President; from Cannabis Canada Council, Allan Rewak, Executive Director; and as an individual, Sarah Diamond, Chief Administration Officer and Counsel of the Halton Regional Police Association.
To the senators, I have been informed that the presenters will be Mr. Harford first, Mr. Rewak second, and Ms. Diamond third. To the witnesses, following that there will be questions from senators.
Mr. Harford, the floor is yours.
Luke Harford, President, Beer Canada: Beer Canada is a national association that is the voice of the people who make beer in Canada.
I appreciate the opportunity to appear today to explain the concerns of the beer industry with Part 3 of Bill C-74. Before I do so, I’d like to say thank you on behalf of all Canadian brewers, and I think I can add Canadian wineries and spirits producers as well, for this committee’s efforts last spring to repeal the excise duty escalator from Budget 2017.
The amendment to Budget 2017 was tabled by Senator Marshall, and the support it received from the other members of the committee was very much appreciated by Beer Canada, its member companies, their employees and beer drinkers across the country.
In the end, the amendment was prevented from making it all the way to the finish line. The government’s beer tax escalator is now in place, entrenched in legislation, but we are not giving up. We will continue to work toward repealing the beer tax escalator and hope we can continue to count on the support of the National Finance Committee.
Beer Canada has 50-plus Canadian beer companies as members. Some are large. Some are small. Some are medium in size, and we have everything in between. Together, they account for 90 per cent of the beer manufactured in Canada and cover all 10 provinces and one territory.
Directly, Canadian brewers employ 12,000 Canadians and pay close to $1 billion in wages and benefits annually. The sale of beer in Canada supports 149,000 full-time Canadian jobs, according to a 2018 Conference Board of Canada study. Statistics Canada’s interprovincial input-output model reveals how provinces benefit from the sale of beer within their own borders but also from the sale of beer in the rest of the country. For example, in Atlantic Canada, 11,000 full-time jobs are supported by the sale of beer. Some 43 per cent of these jobs are the result of beer that is sold outside of the Atlantic region.
Part 3 of Bill C-74, the budget implementation act, proposes to amend the Excise Act, 2001, to introduce an excise duty framework on cannabis products. The federal government has structured the excise duty framework on cannabis to coordinate with the provinces and keep taxes on cannabis products low. The government aims to keep the tax on cannabis low to keep prices low and encourage sales through legal market channels.
Bill C-74 proposes a flat 25-cent excise duty per gram of cannabis product as the federal portion, with plans later to introduce a 75-cent per gram portion that will go to the provinces or territories. Beer Canada views this tax proposal as unreasonably low in the context of current Canadian taxation policy and given the evidence from the United States.
Evidence from the United States indicates that the price of cannabis will fall as large volume cannabis producers come on stream and get up to capacity, while industry analysis of the recreational market in Canada also shows that cannabis prices will drop by half with legislation.
In Colorado, since 2014, recreational marijuana excise tax revenues have grown by 540 per cent, with the state having increased its marijuana sales tax from 10 per cent to 15 per cent in July 2017.
In Washington state, where recreational marijuana is subject to a 37 per cent state excise tax, sales grew by over $1 billion in the last two years, with state excise revenues increasing from $65 million in 2015 to $314 million in fiscal 2017.
Canadian marijuana taxation levels should not be driven solely by a concern about pricing too high to cannibalize the illegal marijuana market. Convenience, product knowledge, quality assurance and personal safety will drive sales through the legal channels even at higher tax rates.
What is especially noteworthy about the experience of the U.S. is that their marijuana taxes are much higher than their beer taxes. Colorado, Washington and Oregon have all implemented marijuana tax rates that are double and triple the rates applied to beer.
In Canada, the potential for legal marijuana to cannibalize beer is more significant compared to the U.S. because of our high beer taxes and higher prices.
The tax on a case of beer in Canada is five times higher than it is in the U.S. Marijuana taxation rates need to be informed by basic principles of fairness and potential economic impacts in addition to black market activity.
Since 2010, there have been 45 tax increases on beer in Canada. These taxes on a case of beer now make up on average 47 per cent of the price a Canadian pays for a case of beer. The federal government last year increased the excise duty on beer by 2 per cent. It was increased by another 1.5 per cent this past April, and it is set to increase every year because of the federal government’s new automatic beer tax escalator.
Canadians are upset over high beer taxes. Some 50,000 Canadians have signed on to our Axe the Beer Tax campaign. They have demonstrated a desire to be engaged in the issue. The frustration with high beer taxes has also come through in the sentiments Canadians expressed on social media over the Supreme Court’s April 19 Comeau decision.
Domestic brewers are concerned about legal recreational marijuana. It will have a negative impact on beer sales which have already declined 10 per cent in Canada on a per capita basis over the last 10 years.
The implication is clear that low cannabis taxes will increase cannabis sales while high beer taxes will decrease beer sales, leaving the government on balance with less revenue. We are left asking ourselves: Is it worth investing in the Canadian brewing industry?
Not only are taxes on cannabis higher than beer taxes in the U.S., but the U.S. government recently rolled back federal excise taxes on beer to help American brewers grow and compete. The 2017 U.S. Tax Cuts and Jobs Act lowers beer taxes while Canada is going in the opposite direction.
From the beginning of 2017 to the end of 2019, Canada will add $63 million in higher excise duty costs on beer while the U.S. lowers its federal excise burden on their brewers by $280 million. At the beginning of 2017, a brewer producing one million hectolitres of beer in Canada paid an excise duty rate 60 per cent higher than an American brewer with the same volume of production. By April 2019 the difference will be 93 per cent.
Canadians know they pay more for beer compared to their neighbours south of the border. They know because they visit the U.S. and come back talking about how expensive beer is here. Beer Canada aims to explain why that is, why Canadians pay $20 in tax on a case of beer while Americans pay just $4 in tax and how both federal and provincial governments are layering one beer tax on top of another, hoping that Canadians don’t notice.
Beer Canada believes that the low-tax approach to cannabis proposed in Bill C-74 is unreasonably low in the context of the high beer taxes paid by Canadian consumers. This is not fair for Canadian beer drinkers. It is not reasonable for the government to set marijuana taxes at such a low level while increasing one of the world’s highest beer tax rates year after year.
Beer Canada urges the National Finance Committee to consider the implication of low-tax marijuana on beer sales and on government revenues. Higher taxes on beer will not help domestic brewers invest in their facilities, invest in their people or reverse declining beer sales.
Canada needs a more balanced approach to tax policy that is fair for beer drinkers and brewers alike. We request that future increases to the federal beer excise tax be eliminated and that the government consider a higher tax rate for marijuana products which is more consistent with its approach to competitive products. Thank you.
Allan Rewak, Executive Director, Cannabis Canada Council: Thank you for the opportunity to present to the committee our thoughts on Bill C-74.
The Cannabis Canada Council is the trade association for all producers of medical marijuana licensed by Health Canada under the ACMPR. Our group has recently undergone a significant and positive transition at our recent annual general meeting. Just two weeks ago, members of Cannabis Canada Association, the Canadian Medical Cannabis Council and Canopy Growth Corporation united into one stakeholder organization, the Cannabis Canada Council.
Our objective is to be a resource to you as policy-makers, to the community and to the media in getting cannabis policy right, specifically on matters of taxation, production and new dosage forms.
Our strengthened and enlarged organization can now confidently say that we represent the vast majority of licensed producers in the country, including large scale producers who invested hundreds of millions of dollars into our communities and will continue to do so, and small craft producers who are creating jobs in small parts of the country.
We believe in the creation of a common inclusion framework for our members and for Canadians. That’s why we want to talk to you a bit around the excise component of taxation proposed in Bill C-74 related to medical cannabis.
As I am sure many of you are aware, our industry and patients are rightly concerned around the application of a sin tax to medicine. This is something that will impact over 300,000 Canadians, and we believe it is unfair.
We recognize and appreciate the federal government’s efforts in Bill C-74 to try to strike a balance of respecting and meeting the needs of patients while recognizing that adult consumers who use cannabis should and will be taxed fairly. We are happy to pay our fair share in that regard.
However, the thresholds proposed for an exclusion from the excise tax proposed in Bill C-74 are problematic and overly prescriptive. The proposed CBD/THC mix of 0.3 per cent for THC would actually exclude everything but 1 per cent of medicinal cannabis sold today. Actually it would be 0.6 per cent, and we believe this is far too low.
Ultimately, THC has a strong role in various therapeutic treatments. This is having an impact on people’s lives today. Whether it’s Dravet syndrome, HIV or cancer treatments, people are receiving benefits from cannabis and they are turning away from opioids. This is not something we should fight; this is something we should encourage.
That is why I am here today, and not to talk about the generalized excise framework that we agree with and support. We need to migrate illegal consumers who are paying no tax and supporting organized crime to a legal marketplace where we will collect tax, build a globally dominant industry and continue investing in our communities. We want these tax dollars to build hospitals, roads and infrastructure, not subsidize organized crime.
At the same time as we deal with that broad social issue, we have to ensure that the rights and needs of patients are protected. That’s why we are here to recommend that Health Canada exclude medicinal cannabis from sin taxation for year one. We need to get this right.
We ask that this committee recommend to the federal government to strike a working group rather than tax innocent patients to look at how a medicinal system should be gated, run and developed in conjunction with medical professionals, patient advocates and/or industry appropriate thresholds for CBD/THC for exclusion of excise tax.
With regard to Beer Canada’s comments around the unfair taxation applied to adult consumer use cannabis, I would respectfully disagree. I would say that because we are happy to invest in Canadian communities. We will continue to do so. We are not creating a new marketplace. We are migrating 22 per cent of Canadians who are illegally consuming cannabis on a daily, weekly and bimonthly basis illegally into a legal system. As that system grows, matures and develops, we can treat this as an integrative process over time and continue to develop appropriate taxation rates for our industry.
We stand ready to invest in Canada. We stand ready to keep cannabis away from kids. We stand ready to keep profits away from organized crime. We also stand ready to defend the rights of our patients.
That is why we respectfully encourage this committee and these honourable senators to recommend to the government that we exclude medicinal cannabis from excise tax for year one as we study and build an appropriate medical system. Thank you.
Sarah Diamond, Chief Administration Officer and Counsel, Halton Regional Police Association, as an individual: Prior to taking my position as chief administration officer and general counsel for the Halton Regional Police Association, I was also a uniformed officer in the city of Toronto. I worked for the Toronto Police Service, and before that I was a Bay Street lawyer.
I hope I am bringing to this presentation today a combination of some corporate, commercial and fiscal perspective, along with the front-line officer impact of the legalization regime.
I will be restricting my comments to the recreational market. I’d like to offer you a perspective on exactly what the current market, as I call it, looks like. It is also known as the illicit market, and it is either mischaracterized or underemphasized when talking about the legalization of marijuana.
If the goals of the legalization of marijuana legislation are to decrease consumption by young people, ensure consumer safety, generate revenue through taxation and, in particular, divert profits from the hands of criminals, I am hoping to establish in my time here that the first step needs to be eliminating the current market. I believe that applying taxation to the legal market will have a significant impact on that. Specifically, my concern is that the illicit market will continue to flourish if the taxation scheme is not done properly in the first place.
First, I’d like to discuss what the market is. Second, I’d like to briefly set out who the government’s competition will be. Third, I’d like to offer a brief explanation of current pricing and profitability because I think it’s highly relevant.
The current market or the illicit market has existed for decades. In fact, it has only been gaining in strength, particularly since the announcement of the legalization of recreational marijuana was made. The market is so significant, healthy and robust that a provincial enforcement expert described enforcement to me as being both a daunting task and an exercise in futility.
The current market is highly sophisticated, deeply capitalized, broadly established, international in scope, and an equal opportunity issue. It services consumers of all ages, races and socioeconomic backgrounds. It is not composed or dominated by what my mother would refer to as neighbourhood toughs, as it probably once was. I would argue that its composition is critically important to its success as a market.
Currently, the market is dominated by outlaw motorcycle gangs, traditional organized crime, street gangs that have evolved from mom and pop shops into what I call conglomerates, and other groups of individuals who have collected together for what appears to be more traditional corporate purposes, yet still meet the legal definition of a criminal organization.
With the market being dominated by criminal organizations, you get geographically broad criminal networks and other criminal activity which would include trafficking narcotics, such as cocaine and heroin, and human trafficking. To put it another way, rarely is the business just trafficking marijuana. There are always other high revenue generating businesses that go with it.
Because of the breadth of the network and the depth of the capitalization, enforcement is often just seen by these players as being what I would call the cost of doing business. It’s not unusual at all for a major raid these days to net 150 kilograms of dried marijuana, for example. The people involved with that organization barely bat an eye at losing a quantity like that because their network will ensure they have new supply in a matter of days. This leads me to my next point.
In speaking to my contact of legitimate producers, as it stands, before any taxation is applied, my position would be that legitimate producers cannot compete with the illicit market on the cost of producing or the sales revenues on a per gram basis. I will speak in terms of per gram.
I am told the costs for legitimate licensed producers, of which I understand there are between 90 and 100 at present, is between $1.50 and $3.00 per gram. The factors in that include the costs of hydro, fertilizer, soil, equipment, lighting, venting, computer systems, or anything a legitimate business would need to be successful.
By contrast, illicit growers can produce one gram for as little as 10 to 20 cents or, at the very high end, $1 per gram. They often steal hydro. They have little to no formal infrastructure, improper labour practices and no taxation.
Looking further at the supply chain, legitimate licensed producers are selling to the next step in their chain for an average of $8 to $12 per gram, whereas their illicit counterparts are selling at $2 to $3 per gram, which is a significant difference.
From there, on the illicit market it goes to the end user for between $10 to $20 per gram, depending on quality or perceived quality. In fact, sometimes the organizations are so sophisticated that they own the entire supply chain and can take it right from start to finish.
The impact for larger, more organized producers who on average have five to seven storefronts at present, is that on a low estimate they have gross revenues of $8.5 million to $18 million per year, which is approximately 75 per cent profit to them. They’re collecting proceeds in seizures of $250,000 to $1 million on a regular basis through major enforcement initiatives.
With profitability this high, in order to eliminate the illicit market the legitimate market needs a fair chance to establish itself. The best chance there would be to eliminate the black market.
Taxation will, of course, have no impact on the black market or the illicit market; but I believe, as the Parliamentary Budget Officer would probably be better positioned to tell you, taxation on the legitimate market may be a major determinative as to how successful the overall regime will be, including the elimination of the illicit market. Thank you.
Senator Marshall: Thank you to all for your presentations. I will start with Ms. Diamond because she presented some interesting information. She mentioned the Parliamentary Budget Officer, and he is to meet with us later this afternoon.
When I think of the illicit market, I think of that as the private sector really geared up to do business. You seem to be saying the same. I can’t see that the legalization of cannabis will have that big an impact on the black market. You referenced this but you didn’t use the same terminology.
One of the objectives of the government with the legalization of cannabis is to deter criminal activity by imposing serious criminal penalties for those operating outside the legal framework. Even the Parliamentary Budget Officer is estimating that 50 per cent, and this is my interpretation, is from the illicit market.
If people have a choice between paying even a higher price for a product that’s coming through a regulated supply, I would have thought the majority of people would buy from the regulated supply.
Why would you not think that’s where people would go for their cannabis as opposed to the illegal market when they really don’t know what they’re buying, even if it is cheaper?
Ms. Diamond: I would say a number of factors are at play there. I think that convenience will be a major factor. I understand two dispensaries in the area have been approved: one in the Barrhaven area and one somewhere in the southwest part of Ottawa. To get to one of those legal dispensaries could be a significant challenge. If they’re not available enough, then that would be one factor.
I don’t think it can be understated that the current market is a true market. There is branding. There is advertising. When I say it’s sophisticated, I mean it operates in a manner not unlike any of the other markets we know.
People want specific things. In time, if the product is perceived to be better and the price is at least competitive, maybe you could get people migrating over.
Senator Marshall: Is that over to the legal?
Ms. Diamond: Over to the legal or legitimate market. That’s why I say, at least at the outset, I think the black market needs to be eliminated. Price will be a major determining factor based on everything we’ve seen. When you have a profit margin of 75 per cent, the illicit market has a lot of wiggle room. They can drop their prices significantly and still make lots of money. It will still be a cousin of their other businesses.
Even if they continue to produce illegally, from the producer perspective it’s interesting that there is a large market south of the border for Canadian product. Canadian cannabis is renowned for its quality and is highly sought after, particularly in the United States. Where it can’t be sold here, it can be exported to the U.S. in exchange for cocaine or handguns, for example.
That market will continue to exist. The best hope we have is doing exactly what you think might happen, which is having the average consumer migrate over to the legal market. I do believe pricing will be a major factor.
Senator Marshall: I am going to bring Mr. Harford into it. He is advocating higher taxes on cannabis. What he is suggesting contradicts what you’re saying. You’re saying reduce, and he is saying to increase. That’s my interpretation.
Mr. Harford, you’re saying to increase the taxes because you’re looking at beer and cannabis as recreational products. Right now, because of the taxation difference, people may choose cannabis over beer. That’s my interpretation of what you’re saying.
Mr. Harford: That’s right. In the United States markets that have become legal we have seen that the wholesale price of marijuana has dropped significantly.
We’re saying the modelling the government has used to set their 25-cent excise rate and 75-cent tax to the provinces is based on a price that isn’t reflective of what we think will happen and as has happened in the United States.
It’s an interesting conversation to have about how the government now has to use taxation and pricing to beat the black market. If they really wanted to do that, why don’t they just own it and give it away for free? Then they can get rid of the black market, and they can corner it.
At a time like this when you have 43 per cent tax on a six-pack of beer and you’re proposing 23 per cent tax on a gram of marijuana, we think that’s unfair. We think the modelling done doesn’t reflect the information we’re getting from the U.S. in terms of the way prices will go down on their own.
Senator Marshall: It sounds like a lot of the competition won’t come from the legal cannabis market. It will come from the black market. You’re not comparing apples and apples.
I know my time is running out. Mr. Rewak, you were talking about the taxation on medical marijuana. What representation have you made to the government? I have received a lot of emails and representations on this issue, so could you just update us as to what representation you have made to the government? They made a conscious decision with regard to the taxation. Could you just let us know?
Mr. Rewak: We have been very consistent in our position both on paying our fair share for adult consumer use cannabis and on migrating consumers from an illegal market to a legal market.
We have been clear in regard to medical taxation. We believe all forms of taxation on medicine are wrong. We have over 300,000 Canadians, as I am sure you saw in The Globe and Mail. We are seeing a transition from opioid use to cannabis use but opioids are tax free. We think that’s a mistake. We believe that cannabis should be treated in a lateral fashion. We should learn the appropriate gauge.
We have been consistent on no taxation. We recognize the government’s concerns about wanting to make sure the system is it free of abuse, so we have always proposed to work with government to determine the right thresholds and the appropriate disorders with the medical community to ensure patients aren’t paying tax on medicine.
Senator Marshall: You’ve made representations to the government, to Minister Morneau.
Mr. Rewak: Correct, but we have also supported our patient advocates because that’s for whom this really matters. I am sure many of you have heard from CFAMM, Canadians for Fair Access to Medical Marijuana. They have been actively fighting for their rights to fair access to medicine.
We don’t believe in speaking for patients. We believe in empowering them. At the end of the day it’s important to clarify that excluding medical cannabis will cost us money as producers. We’re all gearing up for the adult consumer use marketplace. We are putting millions and millions of dollars into packaging and processing lines. It would be far easier for us to stamp one stamp on every product coming off the line.
We’re taking this position because we think Canadians shouldn’t pay tax on medicine. We think it’s wrong. We support our patients in that regard.
Senator Pratte: Mr. Harford, if I understand correctly, beer producers now see cannabis as a competitor, right?
Mr. Harford: Yes.
Senator Pratte: It’s interesting that you see them as a competitor. Therefore, the fact that the excise tax will be so low, you see them as being able to undercut you as far as prices are concerned.
Mr. Harford: They are being given an unfair tax advantage over an established industry that has 400 years of history in the country.
Senator Pratte: From the government’s point of view I can’t go back that far in history, but I am sure that when governments began to tax wine, beer and alcohol generally they started at a pretty low level and increased progressively. I suppose that’s probably what they will do with cannabis. They will start low to be able to displace the illicit market, hopefully, and then, if Colorado is an example, they will rapidly realize that maybe they can afford to tax a bit higher and will do so.
It may simply be a question of being patient enough. I am sure if government realizes they can make more money out of it, they will do so.
Mr. Harford: I have no doubt that is true. I am trying to express the concern of the industry. The government has brought in a mechanism to increase the tax on beer every year while it’s introducing low tax marijuana. It makes for an environment that is not an attractive one to invest in and one that doesn’t look like it has prospects for being able to compete vibrantly.
Senator Pratte: Mr. Rewak, I understand you suggest the creation of a working group to try to establish with government the appropriate threshold.
Is there any evident reason why the government chose the 0.3 per cent threshold? Is there a scientific or whatever reason for that threshold?
Mr. Rewak: We are actually a little confused by that. We have proven benefits with cancer, HIV and spasticity with multiple sclerosis. Most cannabis oils available that have therapeutic benefits generally require some degree of THC. The lowest oil I am familiar with being sold in the Canada marketplace that has THC content is one of the CanniMed oils. It is the first licensed producer in Canada that was recently acquired by Aurora Cannabis. That’s a 0.7 per cent THC. That’s such a low level the psychoactive effects are insignificant.
This means a patient who is giving that to a child for Dravet syndrome will pay tax on that medicine, and opioids would be free. I think that’s wrong.
Senator Pratte: You did mention that it would benefit 0.6 per cent of patients.
Mr. Rewak: That’s based on sales of the actual cannabis thresholds within that product. Some is actually mainly dried flour as opposed to oil. We are transitioning to oils and gel caps for medicinal use. It’s better for dosage control. It’s a safety issue. Parents and family who look at that see it as safer.
From an industry perspective, we think that’s beneficial because it doesn’t normalize smoking for youth, something we are very cognizant of.
Oil production has gone up 800 per cent each year. It will continue to rise, and we think that will become the normative distribution point for medicine. We need to develop greater knowledge in determining different thresholds. This is something that will only happen post Bill C-45. We just don’t have the evidence yet because for 94 years everyone was scared to study this.
Senator Pratte: How do you envisage solving the problem that as you raise the threshold evidently there is a risk of people wanting the benefit of it being tax free for recreational purposes?
Mr. Rewak: That issue was raised. We have an opportunity to really build something special in Canada. The global medicinal market, with 30 countries legalizing cannabis for medical use, will be a $75 billion industry centred in Canada by 2025. That marketplace should only exist if it’s legitimate.
I would suggest to this committee that CBD/THC mixes are not the complete defining factors of an impact of cannabis. Terpene count and everything else fit into it. No one will game the system for 12 per cent THC cannabis when you can buy 17 per cent or 23 per cent at your Ontario cannabis store.
It simply will not be something that drives it. It would be the equivalent of selling a beer with a microscopic alcohol content, as opposed to the kind of beer we would buy at the store. It just will not happen because there will be better cannabis for the consumer experience available at your corner store.
Senator Pratte: Whatever thresholds are eventually chosen for medicinal cannabis, you believe it would be lower thresholds usually than what would be preferred by consumers for recreational cannabis.
Mr. Rewak: Absolutely. In rare cases where a higher THC threshold could be linked to a specific disorder or a proven disorder that could be above that threshold, we think medical professionals should really define what that is so that only people with the specific disorders, whether it’s HIV or cancer, can access a higher threshold excise free.
No one wants to penalize veterans. No one wants to penalize HIV sufferers. No one wants to penalize these folks. We just need to work together to find the right levels.
Senator Eaton: My questions are for Mr. Harford. I can’t believe that the government got away with putting an escalator tax on beer. It employs a lot of people. We have already seen problems when a province takes too much like in the case between Quebec and New Brunswick.
Do you think it’s because you don’t have a strong lobby? Is it because you have not lost enough jobs? Why do you think the government found it so easy to get an escalator tax?
Mr. Harford: It’s possible that we weren’t talking about our economic impact enough, but certainly the federal budget of 2017 motivated and mobilized the troops, if you will. We’ve launched our “Axe the Beer Tax” campaign in our platform because there have been 45 separate tax increases since 2010 across all provinces and federally.
We have seen the taxes increase on beer at twice the rate of inflation. We came out with our study in January that showed 149,000 jobs are supported by the sale of beer. That’s down from 163,000 in 2013.
Senator Eaton: To compare, beer prices are substantially lower in the United States. I guess that’s mostly due to taxes.
Mr. Harford: We just came out with a study yesterday that compares Canadian beer taxes to the U.S. beer taxes. On average, there’s a $20 tax on a case of beer in Canada. It’s $4 across all 51 jurisdictions in the U.S.
Senator Eaton: Do you feel that’s almost entirely responsible for the 20,000 lost jobs between 2013 and now?
Mr. Harford: Taxation is driving the price of beer up and that is driving consumers to other things for sure.
Senator Eaton: Cannabis is just entering the picture. Before cannabis were people turning to wine?
Mr. Harford: With wine, spirits, coffee and tea it’s a crowded marketplace. We think that federally and provincially the attractive thing about beer taxes is that they can slide it in without talking about it. It is basically hidden from the consumer. They have the excise tax and then they layer on provincial taxes, and then PST and GST bump themselves up automatically.
Governments are looking for revenue but don’t want to ask Canadians for it, so they try to hide it in beer taxes.
Senator Eaton: Have you compared the rate at which you’re taxed as a Canadian-made product to the way Canadian wines are taxed? Is it even, or are Canadian wines taxed much lower?
Mr. Harford: Each province is a little different. Federally we are taxed differently. You pay excise on the very first drop of beer that you produce, whereas if you’re a 100 per cent Canadian winemaker, just using Canadian agricultural products, you pay no excise. There is a difference there.
Senator Eaton: They only get taxed at the sale.
Mr. Harford: They pay a provincial liquor board markup and then PST and GST on top of that, just like beer does.
Senator Eaton: You pay all of those taxes as well as an excise tax.
Mr. Harford: That’s right.
Senator Eaton: We know that a substantial percentage of our population lives along the border. Have you ever done studies showing how many potential sales in beer you would lose with people crossing the border?
Mr. Harford: We don’t have a number on that. What motivated us to do the study that we published yesterday were all the comments from Canadians when we launched our campaign in January. We got over 20,000 comments on our Facebook page. We had 50,000 Canadians sign up to our campaign platform.
There were many references to how much more affordable beer was in the United States: “That’s why I buy my beer in the U.S.” For that reason we decided to take a deep dive and look at the provincial tax on a case of beer versus the tax on a case of beer in a bordering state.
It’s significantly higher. It’s on average five times more tax in Canada on a case of beer than in the U.S.
Senator Eaton: I’ll finish with a comment. I am a woman who likes beer, especially in the summer.
Senator Moncion: So do I.
Senator Eaton: If you drink it in a wine glass with ice, it’s delicious. I have all my favourites.
You don’t often see beer ads appealing to women. You might think of Senator Moncion and me next time you do a beer ad. It’s always big, hearty guys.
Mr. Harford: Sure. If I could just put that message in a bottle, I’ll take it back to my members and say, “Here, fix this.”
Senator Eaton: Thank you.
Senator Moncion: Why do you think beer is taxed so much?
Mr. Harford: If we go back in our history, it was because the government had very few tools to measure, impose tax and collect it. That’s where the excise tax comes in. The other thing is that we recognize, as do other Canadians, that it is not a necessity. It’s a luxury to be able to buy beer, as it will be for recreational cannabis, so the government charges Canadians for that privilege.
We’re not saying that we’re opposed to tax. We’re saying enough is enough. We don’t want taxes to go up any further. Tax is already half the price of beer, and we just want to stop the tax increases.
Senator Moncion: I understand. When you use arguments like people buy beer in the States because it’s cheaper, people also buy clothes online because it’s cheaper in the United States. A lot of the Canadian market goes to American companies because Canadians are looking for cheaper deals.
The tax is the problem. It is not one of consumption. With the online system customers can buy wherever they want. I don’t think they can buy beer and have it sent over, but they can pick it up.
That argument I see as a matter of choice for the customer.
Mr. Harford: For sure. All we’re saying is that right now in the United States they are rolling back beer taxes while we’re increasing beer taxes.
The government is looking for ways to increase value-added agricultural industries. Beer is one of those. Our question is: Why are you creating an environment where it’s less attractive to invest vis-à-vis our neighbours to the south?
Senator Moncion: Ms. Diamond, to produce cannabis in Canada you say it costs $1.50 to $3.50. I think you said we should sell it at that price if we want to get rid of the illegal market. Then the black market would not be interested because it would be too cheap.
Did I understand you correctly?
Ms. Diamond: I wasn’t suggesting a price. Rather, I was hoping to make a point in light of the profit margins being so different for legitimate producers as compared to illicit producers. By not setting taxation levels at the right spot, it will price legitimate producers out of the market. It will not do enough to impact the black market.
When they are producing it for 10 to 20 cents a gram, versus an average of $2 per gram, that’s a significant difference. Without any of the overhead, the profit margins are incredibly different.
Senator Moncion: Mr. Rewak, I completely agree with you that if it’s medical it should not be taxed. If we were to look at reducing the price of marijuana because we want to get rid of or at least hurt the illicit market, how would you look at that proposition?
Mr. Rewak: In a perfect world, we would treat this as an integrative process. We would apply no taxation in year one until we were ready and fully understood the market dynamics.
Much of the cost and pricing structure will be influenced by the retail and provincial distribution systems because in most marketplaces we will have a provincial wholesaler and distributor and then either government-owned retail or private retail under that. In many cases that creates a middleman, even where we do have private markets, and that does drive up the cost.
Ms. Diamond is absolutely correct. The cost licensed producers carry is immense. We have invested hundreds of millions of dollars in Canada. We will continue to do so.
What is so wonderful about this industry is that many of these investments are almost counterintuitive. They are going into communities that have been wiped out by an exit of light industry. We’re going in and investing in those facilities, whether it’s a chocolate factory or a compressor plant. We’re creating jobs in these locations. We’re creating the value-added supply chain from packaging and insurance. There is a lot of cost to that.
Many of our companies don’t even have revenues yet because they’re waiting for the Bill C-45 world to come to be. In a perfect world, we’d like to see zero taxation year one and taxation imposed after that.
That being said, we don’t live in a perfect world. From our comments today, you’ll see that cannabis is a little different. We’re a big business and we’re going to continue to be. There is a culture, a community and a belief in helping each other and caring for Canadians.
We don’t mind paying our fair share. We will pay our tax in year one. We’re ready for it because we know that Canada is giving us an opportunity. It’s one we take as a sacred obligation. We recognize and appreciate the taxation levels proposed in this legislation. We think it’s a good starting point for year one. We may find we have to bring it down in year two, or we may find that we’re successful in displacing the black market and can look at even increasing it. We will do that together with our partners in government because we want to get this right.
Senator Neufeld: Mr. Harford, you said 149,000 jobs. Is that direct, or is that indirect and direct?
Mr. Harford: That’s direct and indirect. That’s all your supply chain, from the barley farmer all the way through to the server in the restaurant.
Senator Neufeld: Second, you say the tax is already half the price of the beer. When you were talking about it, questions were asked about raising taxes.
Governments find it quite easy to raise sin taxes of all stripes, to be perfectly honest. You say the tax is half the price of beer. Just for a comparison, I would like you to know that when the carbon tax goes to $50 a tonne, the price of carbon will be twice what the price of natural gas is to heat your home.
That’s where this government is actually going, so just keep that in mind. That’s more of a comment than anything.
Mr. Harford: I appreciate that. The 47 per cent tax rate I am making reference to is all commodity specific taxes such as your excise, your liquor board and your PST/GST. Carbon taxes, payroll taxes and all that stuff are on top of that and built into the price.
Senator Neufeld: I am not talking about the GST or anything on it but just the carbon tax.
Ms. Diamond, it seems as though we are talking about the need to legalize marijuana so that we can get rid of the black market.
Is there any other way that we can get rid of the black market? Is there some way that we have not tried to actually eliminate the black market?
Ms. Diamond: I think with enforcement, if done properly, we would have hope that it would work. I think it would cost an enormous amount of money.
At this point, the market has been permitted to grow. It has become more socially accepted to use cannabis for recreational purposes over the past 20 years.
Anecdotally, as a high school kid, it was the bad kids that went out to grassy knoll. Now it’s much, much more common than that with professionals, soccer moms and grandparents.
Currently the enforcement isn’t working because they are under-resourced to do the amount of enforcement they need to do. Partly it is out of hand; it’s just like a skinned knee.
When some of these shops are raided, they are losing $250,000 in cash, and it means nothing to them. The penalties that come at the end through the justice system have maybe not been enough to dissuade people from entering it.
When I went to law school in Windsor, we were strongly cautioned against taking any marijuana across the border because of the sentencing that existed in Michigan.
When Mr. Harford was speaking about the market in Colorado, I think it’s different there because the enforcement was different. I don’t think the culture ever grew to the point that it’s at now recreationally in Canada. I don’t think it ever had the level of social acceptance that it has had in Canada for at least the past 10 years.
It is possible, but I think there would need to be a significant commitment.
Senator Neufeld: My last question is for Mr. Rewak. You constantly refer to marijuana as medicine, at least from what I understand you’re saying. Does the CMA agree with your calling it medicine?
I understand only one in nine doctors prescribe medical marijuana. I don’t know that for a fact, but that is what I’ve been told. You call it medicine, but they don’t. Tell me.
Mr. Rewak: There is a point of dissension in the CMA in their position on this. This is something new. After 95 years of prohibition, our understanding is evolving. I think that we should take our cue from Dr. Mark Ware. Many of you were at the recent breakfast in which he described all the different medical impacts of cannabinoids on the brain.
It’s not just him. The Health Effects of Cannabis and Cannibinoids was published in January 2017. It was a comprehensive review of all scientific evidence and some observational studies. Because there has been a bit of a prohibition on academic research, we’re still developing this.
It was clear. It has proven effects on chemotherapy, induced nausea, vomiting, HIV and spasticity in patients with multiple sclerosis. I’ve heard the stories. You’ve seen them. Some of you have met Mandy McKnight. Some of you have heard the story of Liam McKnight. You’ve seen what cannabis has done for that child with a very low THC but above the proposed threshold. It’s working.
We’re seeing people turning away from opioids. You’ve all seen a 32 per cent reduction in the use of opioids in Canadian Forces vets who are turning away from that and increasingly using medicinal cannabis.
While the CMA might be coming along with us and is not quite there yet, pharmacists associations in some cases are, as are tens of thousands of Canadian doctors and other medical professionals. I’ve personally heard the stories and seen the benefits in people’s lives. We’re getting there.
Senator Neufeld: What I’ve heard is that they agree with some of that, but the Canadian Medical Association certainly does not agree that it’s a medicine because of a whole bunch of other things that have to be done. We could probably argue about that for quite a while.
You say that hundreds of millions of dollars have been invested in Canada for quite some time back, waiting for marijuana to be legal. Can you tell me where all that money is coming from?
Mr. Rewak: I think I know where you’re going.
Senator Neufeld: I am not going anywhere. I am asking you.
Mr. Rewak: Most of it has been raised on the markets. A lot of private equity firms have entered into this. We’ve had some investments from banks recently, and recently you’ve been seeing organizations like Constellation Brands, major alcohol manufacturers, investing in cannabis companies because they want to be a part of this economic miracle.
The reality is cannabis has a lower incidence of addiction and rates of harm than alcohol or tobacco, and 22 per cent of our population are consuming it despite its illegality. They want to get a piece of that action.
Senator Neufeld: All the money you’re talking about that has been invested is all above-board money. Is that what you are saying?
Mr. Rewak: It has to be. The ACPMR review on controlling individuals in any licensed producer of medicinal cannabis is extremely rigorous. It is far more than any other product in this pseudo-category, be it alcohol or tobacco, goes through with the RCMP oversight of checks, five degrees of distance and family members being looked at, just to make sure it is free of corruption or negative elements.
I am in this business because I want to transition an illegal market to a legal one. I believe prohibition has failed. We have an economic opportunity to build something in Canada and regulate this industry in a way that’s good for all. That’s what I want to continue doing.
The Chair: If you feel, Mr. Rewak, you want to add to the last question of Senator Neufeld above and beyond what you have said on record, please do it in writing through the clerk.
Mr. Rewak: Absolutely.
The Chair: Thank you very much, Ms. Diamond, Mr. Rewak and Mr. Harford.
We will continue our study and discussion on Part 3 of Bill C-74. We now welcome the Parliamentary Budget Officer, Jean-Denis Fréchette. Thank you very much for again accepting our invitation to come and share your opinions and recommendations with the Senate Finance Committee.
[Translation]
We also welcome Jason Jacques, Senior Director, Costing and Budgetary Analysis, Office of the Parliamentary Budget Officer, who is accompanying Mr. Fréchette. Mr. Jacques, thank you for joining us.
[English]
We have C.T. (Manny) Jules, Chief Commissioner of the First Nations Tax Commission. Mr. Jules, you make us proud. There is no doubt that is a sentiment from many senators. Thank you for being here to share your comments, your vision and your recommendations.
[Translation]
Mr. Fréchette, the floor is yours.
Jean-Denis Fréchette, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer: Mr. Chair, Madam Deputy Chair, Mr. Deputy Chair, honourable senators, thank you for inviting us to discuss the fiscal impact of the legalization of recreational cannabis.
[English]
Your current study pertains to an excise tax framework for the pending legalization of recreational cannabis as it was proposed in Budget 2018.
More specifically, the Government of Canada would impose an excise tax of $1, with a 25-75 federal/subnational split. You have the table in front of you because we circulated our report.
The federal share would be 25 cents per gram of cannabis flowers, .075 per gram of cannabis trim, 25 cents for each cannabis seed, and 25 cents for each cannabis seedling.
For our projection of the tax base we used Statistics Canada estimates that Canadians consumed over 770 tonnes of cannabis plant product at an average annual rate of consumption of 4 per cent since 2010. With the absence of a specific date of imposition in Budget 2018, we assume that legalization will occur on October 1, 2018.
The nominal federal amounts would be $50 million in 2018-19 and $100 million in 2019-20. The latter corresponds to the federal government’s commitment of imposing a cap for the first two years following the legalization.
We assume that retail sales of other cannabis-related products will be legalized on October 1, 2019, and that the market size for these products would be equivalent to an average ratio of cannabis plant products to cannabis non-plant products sold in Washington state from 2015 to 2017, which would push federal revenues up to $195 million in 2021 and to $350 million the following year.
[Translation]
Finally, I am aware that the Senate views the issue of home-grown production of cannabis somewhat critically, and that you prefer a prohibition. The proposed production of four plants must be expected to have a downsize risk on market sales, particularly for daily users, who are also likely to be the most price sensitive.
The decision by some provinces, mostly in Eastern Canada, to implement a more limited number of retail outlets compared to some American states will also hinder the shift from the illicit to the retail market. For example, with a population of 7.5 million people, Washington State has 523 locations and Colorado, with 5.6 million people, has 813 medical center and retail store locations. In comparison, in Ontario, with 14.2 million people, the plan is to have 40 stores in 2018, increasing to 150 stores in 2020. Quebec will open 20 outlets in the first year of legalization and about 100 in three years.
Thank you. My colleague Jason Jacques and I will be happy to answer your questions.
[English]
The Chair: Thank you.
C.T. (Manny) Jules, Chief Commissioner, First Nations Tax Commission: Thank you for the opportunity to appear as a witness before this committee as part of your study on the Excise Act 2001 provisions in Bill C-74, the budget implementation act.
On February 28, I made an appearance before the Standing Senate Committee on Aboriginal Peoples studying the cannabis act. I expressed my concern that our tax jurisdiction was not considered in the legislation of cannabis. I pointed out that we had asked this to be considered before the cannabis act was introduced in April 2017.
I followed up that presentation with a series of proposed amendments to facilitate our jurisdiction, which I provided to the Standing Senate Committee on Aboriginal Peoples. Some of those amendments were related to the Excise Act, although we did not have the benefit of Bill C-74 at that time.
I would like to go through these proposed amendments for your consideration, but I want to make two points clear at the outset.
First, the First Nations Tax Commission well recognizes the challenge in establishing and implementing First Nations tax jurisdiction. We invented it. We know that you must create tax room for our governments in legislation. We know that our governments must opt into this room with their own laws. We know that you must need an efficient tax collection method. We know that our institutions must support our governments to implement their jurisdictions efficiently and effectively.
However, this will take time. We are pleased to see that the Standing Senate Committee on Aboriginal Peoples supports our tax jurisdiction. We hope you do as well.
We believe that you can signal this commitment to our tax jurisdiction in the short term by making a few amendments to Bill C-74. Then we will work together over the summer to create amendments to the legislation outside of Bill C-74 in order to establish our cannabis tax jurisdiction by the fall. In this way, establishing our tax jurisdiction need not be a reason to slow the passage of the cannabis act.
To begin, I presented the policy rationale for our cannabis tax jurisdiction in February and made three points. First, ignoring our jurisdiction is the difference between words and action. Implementing UNDRIP, establishing a new fiscal relationship, recognizing our rights and jurisdictions, and other reconciliation commitments must be practically implemented, and this is the opportunity to start.
Second, cannabis legalization will impact our communities, and we need jurisdiction and secure revenues like other governments in Canada.
Third, ignoring our cannabis jurisdiction will lead to reduced tax revenue for all governments, as has occurred with tobacco.
I want to reiterate from my February presentation that we have created a framework to successfully implement First Nation jurisdiction through the First Nations Fiscal Management Act. As you may know, the FMA and the FMA institutions provide sample laws, administrative support, accredited training, a transparent fiscal relationship, access to long-term financing and improved financial management systems to support First Nation jurisdiction.
Over 230 First Nations have voluntarily joined the FMA system. It is the most effective, efficient and successful method to implement First Nation jurisdiction in Canadian history. Expanding this system is the best way to effectively support First Nation cannabis jurisdiction.
We also believe that the best legal and administrative approach to cannabis excise tax jurisdiction is a system similar to the FNGST, the First Nations commodity tax system. Under this approach, First Nations who choose to occupy the jurisdiction will enact their own excise tax laws.
The excise tax or duty, as it is referred to in the Excise Act, will be coordinated with the federal duty rate and the additional provincial rate. It would apply the same rules and requirements as the federal cannabis excise framework.
Each participating First Nation will have an administrative agreement with Canada to facilitate the administration and enforcement of the framework. These agreements would enable the efficient return of the duty to the participating First Nation. Canada would ensure compliance with the general application and administrative rules for the cannabis duty.
With this policy rationale, institutional framework and administrative system as our foundation, what follows are the specific recommendations we are making to this committee. The following changes would signal Canada’s commitment to create and implement First Nation cannabis tax jurisdiction:
Amend Bill C-74 to add a reference to First Nations, First Nations cannabis duty laws to be made under the FMA, First Nations lands, First Nations cannabis duty and First Nations administrative agreements.
Amend Bill C-74 to provide for the imposition of First Nations cannabis duty for prescribed First Nations, for entering into administrative agreements with those First Nations and the application of the existing cannabis duty framework to First Nations cannabis duty.
Amend Bill C-74 to enable regulations that set out the content for administrative agreements, the formula for determining the duty attributable to a First Nation and provisions for making payments to a First Nation.
As well, regulations would provide for coordination of the cannabis duty and any additional cannabis duty imposed in respect of a specified province.
I would like to point out that Bill C-74 already anticipates a coordinated cannabis duty system between the federal and provincial governments. This existing approach is easily adapted to enable a coordinated, three-party system that includes specified First Nations.
With these amendments we could work with Canada to develop the regulations necessary to complete the legal framework.
In summary, I would like to reiterate the two-part strategy for the consideration of this committee to establish our cannabis tax jurisdiction:
First, work with us over the next few weeks to make our proposed amendments to the Excise Act, 2001, in Bill C-74. This signal would tell us that there is no need to delay the cannabis legislation.
Second, work with us over the summer to introduce the necessary amendments to establish First Nations cannabis jurisdiction as we have proposed. These could be introduced and passed in the fall session.
In closing, I believe the work we are doing here is the nuts and bolts of applied reconciliation. I hope we can seize this opportunity and continue to work together practically to reconcile our governments in the federation.
In this regard, we hope to return at a later date to present approaches to establish our tobacco and resource tax jurisdiction. As well as improvements to the FNGST, we would also like to discuss how to establish two new FMA institutions to support better First Nation infrastructure and statistics.
As well, we would like to discuss the proposed rights and jurisdiction legislation recently promised by the Prime Minister. We hope to discuss the jurisdictional-based fiscal relationship and institutional framework necessary to implement that proposal.
Thank you for this opportunity to take another step on our shared journey.
The Chair: Honourable senators, please be mindful that this panel will end at 3:15 in order to proceed with a steering committee meeting that we must conduct to conclude and prepare for the continuing study of Bill C-74, the budget implementation bill.
Senator Marshall: I will start with Mr. Fréchette because he had issued a report on the legalization of recreational cannabis. I am referencing that report. The most surprising thing in it is the 50-50 split between the licit and illicit markets.
You cited your reasons, but how did you come up with 50-50? Why not 60-40 or 25-75? I’d like if you could explain that. Then I’d like for you to indicate why your revenue projections are different from the government’s. I know one of the big ones is behavioural impact. The 50-50 split was the big surprise for me.
Mr. Fréchette: The 50-50 figure comes from the literature and what we have seen happen in other jurisdictions at the beginning. Of course, when the market gets more mature, you may have a change.
What we identified is really important. As I mentioned in my remarks, if you have a lower number of outlets at the beginning and if you don’t allow the production as this committee seems to wish to recommend, those are impacts on consumption.
It’s more difficult, then, to get consumers out of the illegal market and into the legal market. Plus the behaviour and, of course, the price itself. Those are the explanations at the beginning of a market.
Senator Marshall: How do you quantify it so that you come up with a 50-50 figure? Is that just judgmental?
Mr. Fréchette: No. Do you want to answer?
Jason Jacques, Senior Director, Costing and Budgetary Analysis, Office of the Parliamentary Budget Officer: Sure. With respect to the pricing, there was actually a survey done in Washington state prior to legalization there which actually asked people how much more they would be willing to pay for a legal cannabis plant product.
Based upon that survey, we used that data to assess in the Canadian context how much more or less Canadians would be willing to pay once the product is legalized here.
It should probably not come as a surprise to anyone that the majority of folks in Washington state, at least, weren’t willing to pay a significant premium for legal product.
To the extent that the consumers of cannabis plant products are very price sensitive, and highlighting the other point Mr. Fréchette raised, a small group of individuals are consuming about one-half to two-thirds of cannabis across the country. Based upon data from Statistics Canada, it also indicates that they are consuming very frequently and in many situations on a daily basis. You have individuals who are consuming a lot and those individuals are price sensitive.
Based upon the current price levels in the illicit market versus what the government has on the table with respect to the retail market, the prices will be somewhat similar across the country. The data from Washington State indicates to us that there would be about a 50-50 split at the outset.
Senator Marshall: Is that why the revenues you projected are lower than the government’s revenues? It seems like the big factor is behavioural impact. Is that why you’re forecasting lower revenues than the government?
Mr. Fréchette: Is that after two years?
Senator Marshall: Yes.
Mr. Fréchette: It’s a mix of the price sensitivity of consumers. It is also about the availability of the product, the capacity to produce your own cannabis, or having access to outlets that may not be in the context of a provincial market but in the context of private markets competing against each other. Prices will vary within that provincial market. This is the real impact.
You have asked a very good question. The 50-50 is based, as we mentioned, on literature and on the survey. I’ll give you another example. In 2016, when we did our main study on cannabis, we had a tax base of a little less than 700 tonnes per year. Statistics Canada does a survey regularly, and we’re now using their current number at 770 tonnes. You can see that within two years we already have 70 more tonnes. This is probably because legalization is closer to being in effect.
The survey says that people say they will consume cannabis now that they know it’s coming,but it remains a survey.
Senator Marshall: It can’t be very encouraging for the government because one of their objectives is to deter criminal activity. By legalizing marijuana, they are hoping they will decrease the black market; but from what we’re hearing from witnesses now, I don’t know if that will be the case. It is not that I was convinced of initially, anyway.
Mr. Fréchette: Our table in 2016 is still valid because we had zero excise tax and the margin of the manoeuvre was really small. Actually, the median price was $8.80, and that was with zero excise tax. If you add $1, you’re up to $9 and you’re well above the illegal price. Therefore, you won’t get the illegal consumers.
Senator Marshall: Yes, it will be cheaper.
Have you read the report of the Senate Aboriginal Peoples Committee? They recently released their report in which they made several recommendations. I am wondering if you’ve seen the recommendations, whether you agree with them, whether you’re happy or whether you would like to see more.
Mr. Jules: As I mentioned to the Standing Senate Committee on Aboriginal Peoples, I was there to lobby, if you will, for amendments to the existing legislation that was put forward.
I made very clear in my presentation as well that I didn’t want to see this as a hindrance to the passage of the legislation. What I want to see is our jurisdiction applied to these products on our lands.
In response to the broader question, that is one of the reasons why I am advocating not only tax jurisdiction but a regulatory role for First Nation governments. If you don’t do both, you will have serious problems in relation to what we’ve seen all over the country in terms of what I call a grey market, not a black market.
Senator Jaffer: I’ll start with you, Mr. Jules. I am always happy to see you here. We come from the same province, and I really appreciate the very thorough way in which you set out your presentation. I will certainly look at it very carefully.
I have a bigger question for you because I know you are very involved in the community as well, I see this bill as the first step. I don’t see it as the last. There will be many more bills, as we’ve had with impaired driving and with other bills.
How I see this bill, and I take the government’s word for it, is that the first thing they want to do is to protect children and to find a way to regulate. I know you do too.
Do you not think this is a good first step? I am sorry I can’t repeat what you said about looking at other things later, but you said it very well. What you set out was very valid, that we should look at it after the bill is passed.
Mr. Jules: I am proposing that there be a clear message sent to First Nations across the country:
First, you agree that First Nations and their governments should ultimately be included in this piece of legislation and, second, that you can get into agreements with them to share in the revenue. The third component is all of the other things that are necessary to develop a rules, regulations and standards approach to dealing with the issue.
Without doing that, you will be having lots of problems in our communities like children having easy access to edibles and those kinds of things.
Our councils and First Nation governments should be involved, through the tax commission, in developing standards and working with the communities to do that. If you don’t do that, you’ll have all kinds of problems when it’s legalized.
What I want to see happen and the purpose of my visit here today is to ensure we have tax jurisdiction so that we get the revenues and we are in a position to look after the children ourselves. With the way it is now, we would have to be completely dependent on the federal and provincial governments to invent an on-reserve program.
If we have our own resources, and tax revenue is a resource that all governments rely, we would be able to use it to develop our own treatment centres utilizing the First Nations Finance Authority. We would have in place a transparency and accountability mechanism through the First Nations Financial Management Board.
As I mentioned earlier, one of the two institutions that I want to promote here is an infrastructure institution so that we would be able to use revenues like tax streams to build infrastructure that will be required in our communities, such as policing, health centres, treatment centres, and all those things that are important for other governments. We need them as well, but we can’t do that without the revenue.
Senator Jaffer: If I understand you correctly, and I will not repeat all the things you said, you are saying, just like the federal government is divided with the provinces, you also need to be there so that you can look after your communities.
Mr. Jules: That’s right. I said earlier that the first step in any reconciliation is: Let’s reconcile; let’s work together. In our particular case, we want to be able to govern ourselves within the Canadian framework. That means working with what I call the indefeasible government, which is both the federal and provincial governments.
In this particular case that’s what we will have to do. We will have to make sure that we work with the provinces because each one of them will have a different nuanced approach to the legalized product.
Senator Jaffer: I have many more questions but the chair will cut me off, so I’ll talk to you privately.
Mr. Fréchette, perhaps I can quickly ask not a very quick question. In the calculations you have made, there would be private sales and government sales, not just government sales.
We have the liquor board, and the liquor board distributes liquor around my province. It’s not like that. It will be private sales and government sales. Is that correct?
Mr. Fréchette: That includes all the retail sales.
Senator Jaffer: It is not just one.
Mr. Fréchette: All the taxpayers I mentioned.
Senator Jaffer: All your assumptions are really based on the research you have done. You have seen behaviour in other jurisdictions, but there is no other way because we don’t have the system in place as yet. Is that correct?
Mr. Fréchette: That is correct.
Senator Eaton: In our last panel, Mr. Fréchette, we had Beer Canada objecting to an automatic escalator tax. This budget applies an automatic increase in tobacco excise taxes on an annual basis, so we now have tobacco and beer.
Do you see, as part of a trend, the government taking a one-time hit and slowly reaping more and more money as it sort of indexes? Is this where our taxation is going?
Mr. Fréchette: You’re asking me a difficult question. I cannot say if there’s a trend in what the government announced.
[Translation]
Senator Eaton: This is the second time we have seen that.
Mr. Fréchette: Yes, I know.
Senator Eaton: Will the third time be a tax on cannabis?
Mr. Fréchette: On derivative products. I really have no good answer for you.
[English]
Senator Eaton: Is this something you see in other countries?
Mr. Fréchette: Yes, it is the case in Colorado. They imposed a local state tax, and they had to come back and reduce the tax because it wasn’t working.
Uruguay had the same problem. Uruguay is a different model because they offered a co-op system to many illegal producers and told them, “Get out of the illegal market, become legal, create a co-op, and then you will be able to continue being in the business of selling cannabis.”
In Colorado, the literature shows that at the beginning the illegal market continued to flourish because the tax was too high.
It’s an adjustment. It’s a new territory. As Chief Joe said, we don’t know. We still have a tax on tobacco that is often too high.
Senator Eaton: I think tobacco has been vilified with an anti-smoking campaign. Alcohol has not, yet Canadians sit there quite happily and watch the cost of a case of beer or wine go up automatically every year, and we don’t do anything. This could be a new trend.
Mr. Fréchette: It could be a new trend. In this case it’s not called weed for nothing.
We mentioned producing four plants. It is easy to grow them, apparently. It’s not like producing very good wine or very good beer. Not everybody can do that to have a good Bordeaux in their basement. It is very difficult. Weed is a totally different story.
That will have an impact, clearly. That’s what we show in our report. The price is too high in provinces where they will be able to have homegrown cannabis, and that’s what will happen.
Senator Pratte: Mr. Jules, before we get to where you want us to be, how much work is there to do? The way you explain it, it seems like you have done a lot of work already. It is all to your credit.
You mentioned earlier that you would need the summer. Is the summer enough, first of all? It seems to me you have a lot of work to do.
Mr. Jules: We are proposing simple amendments to Bill C-74. If that signal goes forward, we can then turn our attention to the required amendments to the First Nations Fiscal Management Act, and that would take the summer.
We have done a lot of that work already, so I don’t anticipate it will be hard work. All it is, basically, is creating rules and regulations around it. We will be importing a lot of it from the federal and provincial governments, so I do not see it as being insurmountable.
Senator Pratte: Would you mind explaining it to us? You are saying that you will import this from the federal and provincial governments.
Mr. Jules: We’re proposing two amendments to Bill C-74. The first part would reference First Nations because you will have to work with them.
The second part would allow the government to enter into an administrative agreement with that.
The third part is making sure that the payments will be commensurate because what we’re proposing is optional legislation.
To back up a bit, what happens with the excise is that it applies to everyone. I pay it on reserve like everybody else. When this particular product comes on to the reserve there will be no exemption. You will be getting on-reserve exemptions from the provincial government for the GST, et cetera.
I am saying those things can be dealt with under a different piece of legislation called the First Nations Fiscal Management Act. All we’re asking is for this committee to look at Bill C-74 to make sure that First Nations are recognized as a standing government, to make sure you can get into an administrative agreement with that government, and to make sure how much is being paid to them is commensurate with how much is being collected.
The fourth component is looking at the legislation under which I operate, the First Nations Fiscal Management Act. That’s where we would look at the implementation.
We do this with real property tax. We have to look at what happens in the province. As I mentioned, every one of them will be a bit different. We develop national standards and then we have to look very specifically at how British Columbia will implement it.
It is complex. It is not easy. It is doable, and I work with a very professional group of people.
Senator Pratte: Will the First Nations’ share of the excise tax revenue come from the 75-25 deal that was reached by provinces and the federal government?
Mr. Jules: That will depend because what I am proposing is that this be optional.
Senator Pratte: Nations can join if they want.
Mr. Jules: That’s right. Otherwise, they are not going to join.
What we have done is propose an optional approach to deal with it. This means that First Nations would have to look at the rules and regulations and agree. We would all have to agree to that.
A lot of that work is done. They will be subject to the tax already because it applies to all Canadian citizens or anybody who is paying it. Where you get into the nuances is the other portions.
Also I want to address the notion of ultimately having a true fiscal relationship. You get this situation on the Six Nations Reserve where just about $200 million is collected annually as a result of the excise tax being collected from Grand River Enterprises which manufactures tobacco.
If you’re looking at that situation for one community, in that particular case, yes, we have to talk about a new fiscal relationship and actually equalization between all of the member communities. We’re not at that stage. We have to take the baby steps to ultimately go there.
I would like to see a new fiscal relationship with First Nations dealing with cannabis, tobacco and resources that are exploited within our traditional territories so that we can begin to look after ourselves.
The problem with the makeup as it is now is that we’re completely dependent, first, on the federal government to do everything for us and, second, on the provincial government that says, “Go and talk to the feds. That’s where your responsible government is.”
We’re always in this fight between federal-provincial offloading arguments between themselves. We want to be able to carve out a section for ourselves so that one day we’ll be able to argue among ourselves who gets what.
The Chair: Chief, you have referenced it in your comments. I will ask the library analysts to talk to you after the meeting so that we can look at the logistics of the procedure for asking the committe to consider recommendations as amendments.
Mr. Jules: Okay.
The Chair: There is a process for that.
Senator Andreychuk: My question is Mr. Fréchette. I am sure you meant to say fine British Columbia Bordeaux.
On a more serious question, you’re basing it on the only projections we have. Those are states in the United States and landlocked Uruguay in South America.
We are a large, diverse complex country. We really don’t know how this will shake out. If we had the U.S. involved, we might have had something. If we had Germany involved or France, et cetera, it would be a better assumption.
You’re using the stats you could find. Is that correct?
Mr. Fréchette: That’s right.
Senator Andreychuk: We’re in the same boat. We will have to look ahead, guess and adjust, should the bill go through as is.
The Chair: To the senators, it is now 3:15 and I will adjourn the meeting.
To the witnesses, thank you very much for your presentations and comments.
(The committee adjourned.)