Canada's largest grower 'comfortable' with federal government's pot tax plan

The federal government's plan for a 10 per cent "sin tax" on legalized recreational marijuana sales sounds pretty good to the head of Canopy Growth Corp., Canada's largest, publicly-traded marijuana producer.

Questions remain about how pot tax will affect black market drug sales

The federal government's plan for a 10 per cent "sin tax" on legalized recreational marijuana sales sounds good to the head of Canada's largest, publicly-traded marijuana producer.

"This is sort of at the mid-to-low point on the models we ran. It's a comfortable number. It works," said Bruce Linton, founder and CEO of Canopy Growth Corp. He notes that it's lower than the excise tax on other "optional or luxury products," such as alcohol.

The federal government laid out its pot taxation plan on Tuesday during a meeting with the premiers. Prime Minister Justin Trudeau proposed an excise tax of $1 per gram of cannabis for pot sales up to $10, with a floor of 10 per cent of the total price for pot selling over $10, once the drug is legalized in July 2018.

That tax would be in addition to the federal and provincial sales taxes. So while the total amount of taxes paid will vary from one province or territory to another, it could mean a combined tax rate of roughly 25 per cent in several provinces. All while the legal product tries to compete with black market producers who won't pay any tax at all.

But Linton isn't worried.

"We are able to sell our product now at about $7.50 a gram and we charge GST or HST on top of that even though it's a medicine. To think it could retail for $10 and have the taxes embedded … that's not a big stretch. And that's at or below the average black market price."

He believes legal producers will have an added advantage because they will be able to grow in larger quantities, while illegal producers have to contend with potential arrest. On top of that, he argues Canadians will prefer a regulated and legal source of cannabis over the uncertainty of an illegal product.

Trudeau has repeatedly said one of the main reasons he wants to legalize pot is to cut off a source of funding to the black market. He has referred to the "shady character in a stairwell," as well as street gangs and gun runners who profit from the illegal market. 

Tax not 'unreasonable,' says former pot czar

  Colorado decided to allow legalized possession of marijuana in 2012 and opened up the market to storefront sales in 2014. The state's former director of marijuana co-ordination, Andrew Freedman, said that while there is still a black market, much of it is people who are growing in large quantity to sell out of state, where he says profits are four times higher.

When Colorado legalized, its tax rate approached nearly 30 per cent, though about half of that was a wholesale tax paid by retailers. He thinks Canada's proposed taxation plan is just about right.

"It doesn't seem unreasonable to me."

Freedman said it's important to consider the goal of taxation.

"My goal would be to ensure that the product continues to be expensive enough as to not create more users who are likely to abuse the drug. A roughly 25 per cent tax is likely to keep at least initially the prices at a fairly high rate, not too cheap to bring a whole bunch of new entrants into the market."

But he says the real issue is less the tax and more the cost of producing recreational pot. In Colorado, the price has dropped "precipitously" because it's become cheaper to produce.

Market will dictate price

While Canadian officials have said it is important to get the price of legal pot right, Parliamentary Secretary to the Ministers of Justice and Health, Bill Blair, told CBC News that ultimately the market will dictate the price.

He notes that in places where there is a total government monopoly on retail pot sales, the government will have control, but he believes market forces will have the final say.

"If you want to be competitive with the organized crime sales price, you've got to respect the market that sets that price and you've got to come in below it."

Blair also notes that other jurisdictions have set taxes even higher. Washington state, for example, has 37 per cent tax on marijuana and related products.

Tax plan 'ridiculous'

But not everyone is sold on the government's taxation plan.

"I think that's ridiculous," said Anindya Sen, director of the master of public service program and an economics professor at the University of Waterloo.

He cites the Colorado experience as evidence that Canada's proposed taxation levels are too high.

He notes that Colorado does still have what he calls a "thriving" black market and attributes that to higher taxation levels in the state.

"According to data which I've seen, sometimes all it takes is a dollar or a dollar and a half to result in a significant black market."

In an open letter to Blair that he co-authored for the C.D. Howe Institute, Sen argued that there should be an overall tax of 10 per cent on legalized marijuana and that it should be evenly distributed between the federal and provincial/territorial government.

At that price, he and his colleague estimated 90 per cent of the marijuana market would be legitimate.