It’s been one year since recreational cannabis was legalized in Canada, but the black market is still in bloom. An alumni panel of experts weighed in on this dilemma and other issues at the Toronto event, “Cannabis in Canada: a year in review,” on October 17. 

“How can we create a better market so that legal cannabis flourishes?” Professor Art Cockfield, Law’93, tax law scholar and consultant, posed that question to his co-panelists: 

• Matt Maurer, Law’06, Partner & Co-Chair, Cannabis Law Group, Torkin Manes LLP; 
• Ruth Chun, Law’06, Founder and Advisor, Chun Law Professional Corporation;
• Jason Sonshine, Law’09, Vice-President, Strategy, Auxly Cannabis Group; and 
• Gareth Stackhouse, Law’11, Associate, Condo Law Group, Fogler, Rubinoff LLP. 

Maurer, host of the panel sponsored by his firm, responded, “To combat the illicit market, we have to have stores. But, as a provincial example, the Alcohol and Gaming Commission of Ontario has now disqualified almost as many licenses as they granted since the start of the year.” While some producers that were granted licenses remain in compliance by not changing ownership for one year, they are at risk of being disqualified for such reasons as wording in their applications not being repeated verbatim in contract documents that followed. 

Agreeing that the Ontario government should allow more retail stores to open, Chun cites an example, “In B.C, the number of stores is abysmal and the black market is mature.” Another alternative she suggested was changing the tax policy on medical cannabis. “It’s the only prescription medicine that is taxed and that’s an access to medicine issue in terms of cost affordability,” she says. “If you need cannabis as medicine and you can’t afford it, you’re going to go to the black market.” 

Cockfield restated his middle-ground solution: “Continue to impose the HST, but get rid of the excise tax. Adding it was a political gambit. It allows the black market to flourish because it drives up cost.” 

Stackhouse added, “The product mix has to come around.” He dealt with a case in which a consumer who could afford higher-cost products from a retail store instead continued to purchase cannabis oil from an illicit dispensary located in a condo. The consumer’s rationale: “I like this oil but can’t get it at a licensed store.” 

Using cannabis café stores (“drug dealers”) as an example, Sonshine said, “As an industry, we need to apply pressure to actually enforce laws.” 

An audience member asked where the panelists saw the Canadian industry in 10-15 years as other countries legalize recreational marijuana.

“They always say is a cannabis year is like a dog year,” replied Chun, noting that five years is as far as one could reasonably project. “Price compression is already a reality and looking at the theoretical capacity of licensed producers, we’re at a massive over-supply,” she said. “The Canadian export-import rules are very strict and protectionist and I think other cannabis-producing countries will be protectionist, as well. 

“We’re already seeing a bloodbath in capital markets now,” she added. “I think there will be a shrinkage of licensed cannabis production companies,” comparing the legalization of recreational pot to the end of alcohol prohibition that began with a market of 100 distillers and now consists of only a handful of big liquor companies. “Eventually we will see some recognizable brands,” she continued. “Right now, there aren’t any. The products will eventually mature into consumer-packaged goods (CPG).”
  
Sonshine agreed. “I think the CPG route is inevitable when pot becomes a commodity – like flour or coffee – you have to be good enough be able to differentiate your product and make it better than your competition because everyone is going to be able to make it.” 

According to the law, Maurer pointed out, Canada “can only import or export cannabis for medical or scientific purposes. The government should give policy guidance saying it is not the intention to allow mass imports or exports.” Noting the rush of licensed producers over the past five years to build facilities costing a minimum of $5 million and creating thousands of jobs, he doesn’t see there being a political will to import cannabis. “I think the industry will go through a bit of a rocky time,” he adds. “There are just too many companies with licenses.” 

Chun would like Canada to be more innovative. “We’ve got this amazing advantage as the first G7 country to legalize medical and recreational cannabis for adults,” she said. “I would be happier taxing medical pot if a portion of the tax dollars goes to independent research and development in the industry. In terms of Canada losing its first-mover advantage, that’s an easy point of slippage.” 

The problem,” said Cockfield, “is because of Health Canada regulations, producers have been focusing on growing their companies through M&As. It’s a rational business strategy, but has nothing to do with proper branding.” He brought up the example of Sam Bronfman who started Seagrams and built an extraordinary global brand over decades of manufacturing high-quality alcohol. “We’re seeing the biggest cannabis companies engaged in financial engineering and yet the brand – the quality of the cannabis – is terrible. That’s a wasted first-mover advantage.

“If there is a real global marketplace with U.S. firms competing,” Cockfield concluded, “they will absolutely crush our licensed producers.” 

To learn more about what our experts said – from a myriad of issues facing condominium owners and deficiencies in regulations to licensing differences on reserves – watch the panel discussion on YouTube.

By Lisa Graham