7 Things You Probably Don't Know About Canada's Proposed Recreational Marijuana Tax

Marijuana stocks have been almost unstoppable in recent years. Many, despite a recent pullback, are still up by more than 100% over the trailing year, if not more. The buzz surrounding pot stocks essentially boils down to rapid sales growth and a shift in consumer opinion.

Despite rapidly growing weed sales, Canada is running circles around the U.S.

Within the U.S., sales of legal weed are estimated to soar by 45% in 2018, according to Marijuana Business Daily's report titled "Marijuana Business Factbook 2017." This surge in sales is likely a result of California's move to open its doors to legal recreational cannabis sales, as of Jan. 1. Meanwhile, national pollster Gallup found in October that support for the legalization of weed had hit an all-time high at 64%. Growing sales and support have played a key role in marijuana's expansion.

However, the cannabis market is quite bifurcated in North America. While legal sales are rapidly growing in the U.S., the environment isn't conducive to investment. Marijuana remains a Schedule I drug at the federal level, meaning it's categorized as entirely illegal and prone to abuse, with no recognized medical benefits. Not only does that classification make life difficult for businesses and patients, but Attorney General Jeff Sessions has also declared war on the U.S. cannabis industry.

On the other hand, the legal cannabis industry is burgeoning in Canada. Medical weed has been legal since 2001, with Health Canada overseeing the industry. And legislation Prime Minister Justin Trudeau introduced in April 2017 aims to legalize recreational cannabis by this coming summer. Should Canada follow through with adult-use legalization, which looks like a distinct possibility, it would be only the second country in the world to have done so, behind Uruguay. It would also add in the neighborhood of $5 billion in annual sales.

What you need to know about Canada's recreational pot tax

While public and political opinion are clearly going to be important in determining whether or not legal cannabis gets the nod in Canada during a Jun. 7 Senate vote, one of the more critical cogs in this bill's success will be the taxation of recreational weed. With a proposal already on the table, here are seven things you probably don't know about Canada's recreational marijuana tax.

1. You'll pay a higher tax on alcohol

The first surprise you'll encounter is that the proposed recreational weed tax rate is actually much lower than that of alcohol in Canada. The proposal, which was outlined in October, would impose a $0.78-per-gram tax (CA$1) on marijuana sales costing up to $7.80 (CA$10), and then a flat 10% tax on more expensive marijuana strains. Comparably, Aaron Wudrick, the Canadian Taxpayers Federation federal director, notes that Canadians are liable for about an 80% tax on spirits, a 65% to 70% tax on wine, and an approximately 50% tax on beer.

2. Not everyone is sold on the tax rate

One of the main reasons the tax rate is so low relative to alcohol is that Trudeau and the Canadian government want to drive out the black market and push consumers into legal channels. If the tax rate is low enough, it's believed that legal cannabis should be competitive with that of the black market.

Of course, not everyone is on board with this idea. Dan Kelly of the Canadian Federation of Independent Businesses had this to say, according to Global News Canada:

"While it's certainly fair game for the government to tax these products, the worry of course is if you don't get the taxation levels exactly right, it stimulates the underground economy."

3. Not all cannabis products will be taxed

Though most marijuana products will be taxed, the outline the Canadian government presented would allow some cannabis products to escape taxation. Cannabidiol oils with low tetrahydrocannabinol (THC) content -- THC being the psychoactive component of cannabis -- and low-THC therapeutic products will usually be exempt from taxation. In addition, prescription medicine derived from marijuana won't be taxed. That's a bit of a victory for medical patients.

4. Provinces will receive the bulk of tax revenue

Building on a previous point, the federal government didn't create this tax proposal with the intention of lining its pockets. In fact, the two-year agreement that the federal government reached with provinces will see 75% of tax revenue collected from the sale of marijuana head to the provinces, with the federal government netting the remainder. The reason for this 75-25 split? Since the provinces are on the front lines of regulation and enforcement, they'll need the bulk of tax revenue collected to support those goals.

It's also worth noting that if the federal government collects $78 million in marijuana tax revenue in a year (CA$100 million), any excess over this amount will be distributed to the provinces.

5. One province is holding out

Not all of Canada's provinces are on board with the federal government's recreational weed tax proposal. According to the Winnipeg Free Press, Manitoba remains the lone holdout.

Manitoba's finance minister, Cameron Friesen, said on Dec. 11, "Today we stand at a point where we know some costs, and there are other costs that we simply do not know." In a nutshell, Friesen is concerned that none of the provinces have any clue how much enforcement and education will cost and isn't certain that any of the provinces, including his own, will turn a profit.

6. Marijuana tax revenue could help fight the opioid crisis and be used for educational purposes

Though collected pot tax revenue will be used for enforcement at the provincial level, it could have a very different use for the federal government. Primarily, the federal government is expected to invest in public education campaigns that warn of the risks of cannabis use.

What'll be interesting, though impossible to track, is if weed tax revenue is used to fund the Canadian government's fight against the opioid crisis. It's already pledged $180 million (CA$231.4 million) to fight the opioid crisis over the next five years, including a one-time investment of nearly $117 million (CA$150 million). Assuming the Canadian government maxes out its tax collection over the next two years, it may funnel some of this funding into fighting the opioid crisis.

7. The government has no clue how much tax revenue will be generated

Last, but not least, the Canadian government has absolutely no clue how much tax revenue is going to be generated from the sale of recreational marijuana products. That isn't exactly surprising, given that no developed country has ever legalized adult-use cannabis before.

Conversely, this also validates the concerns of Manitoba's finance minister, in that if the total expected tax revenue is unknown, the costs for regulating the industry are probably unknown as well.

I fully expect Canada's Senate to vote to legalize recreational marijuana come June 7. But what'll happen in the tax-collecting department is still anyone's guess.

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