Morneau wants provinces to keep taxes on legalized marijuana low

Theglobeandmail.com
June 19, 2017
By Barrie McKenna

Ottawa is seeking a pledge from the provinces that they will keep marijuana taxes low after legalization to help drive criminals and black market dealers out of business.

Finance Minister Bill Morneau intends to push for a low-tax commitment from his provincial counterparts in meetings Sunday and Monday in Ottawa.

“Our government’s goals are clear: we want to keep criminal elements out, and we want to keep cannabis out of the hands of children.” Mr. Morneau said in a statement. “This will mean keeping taxes low and working together on an ongoing basis to ensure a co-ordinated approach.”
Ottawa is worried that millions of Canadians will continue buying on the black market if taxes trigger a jump in the price of recreational marijuana, which is set to become legal in July 2018 under federal legislation tabled earlier this year.

Mr. Morneau wants broad agreement among his provincial counterparts on the principle of keeping taxes low and co-ordinating marijuana policies across the country, according to a federal Finance source. He also intends to present proposals to the province on what he sees as the most effective way to tax cannabis, including how to handle online sales.
One of the key reasons for legalizing the product is to shut criminals and gangs out of the lucrative trade.

But federal officials acknowledge that the combination of excessive taxation and inadequate supply of marijuana from authorized vendors could play into the hands of illegal dealers, creating a gaping hole in legal sales.

Meanwhile, some provinces see legalization as a way to create a new - and taxable- industry.

The Parliamentary Budget Officer has estimated Ottawa and the provinces could generate sales taxes of anywhere from $356-million to $959-million in the first year of legalization. The estimate is based on projected annual consumption of 655 metric tons of cannabis in 2018 and the assumption that Ottawa and the provinces will tax marijuana as they do most other goods – at the average national sales tax rate of 12.1 per cent - according to a report released last year.

Finding the ideal price-point won’t be easy. The PBO warned that black market dealers would keep two-thirds or more of all sales if legal marijuana winds up being $5 per gram pricier than marijuana on the street ($15 versus $10 per gram).

The impact of high taxes on cigarettes and alcohol has been a chronic challenge for governments in Canada. Consumers have a greater incentive to buy these products on the black market when there is a substantial gap between pre-tax and after-tax prices.

Several provinces, including Quebec and Alberta, have expressed concerns that the extra revenue from marijuana sales won’t cover costs associated with legalization, including enforcement, education, addiction treatment and distribution problems. Some want Ottawa to share its tax take.

Federal Health Minister Jane Philpott has pledged to spend more on cannabis-related programs.

Federal and provincial officials have been working behind the scenes in recent months on the details of what the legal market will look like, including tax levels. Details on the structure and level of taxes are at an early stage, according to a federal source. The meeting in Ottawa is the first opportunity for Mr. Morneau to talk face-to-face with provincial finance ministers, the source added.

Ontario Finance Minister Charles Sousa says he too wants an approach to selling cannabis that is “fair and collaborative,” said spokeswoman Jessica Martin.

“We remain committed to developing a balanced framework that is focused on protecting youth, maximizing public health and road safety, and reducing harm,” Ms. Martin said.

Quebec Finance Minister Carlos Leitao likewise insisted he’s eager to reach a consensus with Ottawa and the other provinces on taxing cannabis. “I think the objective is to get to a consensus amongst the provinces and the federal government as to what is it that we think that we should be doing,” Mr. Leitao told The Canadian Press.

Also on the finance ministers’ official agenda is a review of the state of Canada-U.S. relations as the countries prepare to renegotiate the North American free-trade agreement with Mexico, as well as gaps in so-called “beneficial ownership” rules for private companies and trusts. Canada is among the laxest Group of 20 countries when it comes to disclosure of the real owners of trusts and corporations, inhibiting efforts to crack down on money laundering and tax evasion, according to Transparency International Canada. Roughly nine of 10 companies are registered at the provincial level and rules often vary widely between jurisdictions.

Bank of Canada Governor Stephen Poloz is also slated to give finance ministers an overview of the suddenly resurgent Canadian economy.