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Competition Bureau gets into the weeds of the Cannabis Act

September 6, 2023 Competition, Antitrust & Foreign Investment Bulletin 7 minute read

The Cannabis Act[1] (the “Act”) came into force in October 2018, creating a legal and highly regulated market for the production, import and export, distribution, and sale of recreational cannabis in Canada. Parliament passed the Act in response to the failure of traditional cannabis control mechanisms to protect youth and quench the profitability of the illegal cannabis market. Its passage marked a departure from the government’s historical reliance on prohibitive measures to regulate cannabis use and positioned Canada as a global pioneer in this space.

Pursuant to section 151.1 of the Act, in September 2022 Health Canada launched a review of the legislation’s early impact­­s on consumers, producers, and the public, which included a public consultation.[2] To support this review, the Competition Bureau conducted its own study and published a submission providing “evidence-based advice to inform the review and modernization” of Canada’s cannabis policies.[3] This bulletin provides an overview of the Bureau’s recommendations.

1. Reduce Regulatory Compliance Costs in the Licencing Process

The Act and its regulations[4] created a competitive licencing regime designed to create a diverse, competitive legal market and a responsible supply chain for cannabis products in Canada. Licences may be obtained for cultivation, processing, sales, and other activities.

Health Canada introduced micro-class licences to support small producers and help illegal producers transition into the regulated industry. These licences impose stricter production and possession limits in return for lower fees and fewer physical security obligations. By July 2022, micro-licence holders made up 38% of all federal licence holders, numbering 340 in total. Despite this, micro-cultivators generated only 0.9% of unpackaged dried cannabis production across Canada and accounted for only 0.3% of total revenue from October 2019 to December 2021.[5]

The Bureau reported that existing licencing requirements and regulatory costs pose a barrier to market entry and competition in the cannabis industry. It pointed to licencing and application fees, physical building and/or retrofitting costs, physical security measures, mandatory security clearances, and Canada Revenue Agency security bonds. The Bureau expressed concern that these costs are slowing the growth of new cannabis businesses and putting them at a competitive disadvantage compared to illicit cannabis producers.

The Competition Bureau did not suggest that the cannabis market is insufficiently competitive. However, it asserted that the relatively large number of cannabis producers is not necessarily a marker of the industry’s competitiveness. It recommended that Health Canada take a proactive approach and minimize the regulatory burden imposed by the licencing regime to reduce barriers to entry and expansion, increase innovation, and improve competition both within the legal industry and against the illegal market.[6]

2. Increase THC Limits for Edible Cannabis Products

Another way the Act controls cannabis consumption is through THC limits in edible cannabis products, cannabis extracts, and topicals.[7] THC is the main psychoactive component of cannabis and is the component that creates cannabis’s intoxicating effects. It has some therapeutic effects but can be harmful in excess. To safeguard against overconsumption, the Act’s regulations limit the amount of THC that may be present in different products.

The Competition Bureau observed that these limits may have the unintended effect of inhibiting competition with the illegal market, especially for edible products. Consumers are increasingly choosing edible products over dried cannabis, but most consumers who buy edible products still source them illegally.[8]

Research suggests that the high-potency edible products available in the illegal market are a strong driver of its continued profitability.[9] In the legal market, edible cannabis may contain no more than 10 milligrams of THC per container.[10] Increasing the THC limit from 10 mg to 100 mg per container of edible products, the Competition Bureau suggested, could make legal edible products more competitive by attracting consumers and reducing costs.[11] This approach appears to have met with success in the United States, where the THC limit for edible products in most states that have legalized recreational cannabis is 100 mg per container and edibles products make up 11.8% of all cannabis sales, which is more than twice the percentage of the cannabis market captured by edibles in Canada (5.8%).[12]

3. Ease Advertising Restrictions

Regulatory restrictions on advertising for cannabis products have proven divisive. Some stakeholders advocate for more stringent standards to safeguard public health and safety. Others contend that looser regulation would better inform consumers about legal cannabis products and boost the market’s competitive edge against illegal sales.[13] Health Canada found substantial evidence that advertising significantly impacts the appeal, social acceptance, level of use, and “normalization” of a product in society. In addition, young people are considered more susceptible to brand imagery and more vulnerable to health risks from regular consumption of cannabis.[14]

The Act attempts to balance the goal of protecting young people with the recognition that advertising serves the legitimate purpose of providing information to consumers. Advertising is generally prohibited, and advertisements cannot under any circumstances be appealing to youth, rely on testimonials or endorsements, or promote a certain lifestyle. Informational and brand-promoting advertisements that respect these limits are permitted if their manner of distribution meets certain additional restrictions in the Act designed to ensure young people have no access to the promotional content.[15]

Survey data collected since 2018 shows that consumer awareness of the health risks associated with cannabis use has continued to grow post-legalization. Most consumers feel able to make informed choices, even as consumption trends upwards. Young people were found to have better awareness of certain cannabis health risks than their elders.[16]

Health Canada did not address to what extent this increased awareness of the risks of cannabis use may be attributable to advertising and warning labels as compared to ongoing public education and awareness campaigns. The agency cautioned against drawing definitive conclusions from these early trends, noting that it takes years to shift public attitudes and consumption patterns and that the COVID-19 pandemic has impacted Canadians’ substance use in ways that are still being studied.[17]

The Bureau reported that the Act’s advertising restrictions have made it difficult for producers to advertise innovations in cannabis production, which stifles the ability of producers to compete effectively. Similarly, the Bureau noted that the Act’s requirements for cannabis packaging and labels make it difficult for producers to set themselves apart from their rivals. The Bureau found that together, these restrictions are making it difficult for cannabis businesses to educate consumers, distinguish their products, and build brand loyalty. The Bureau recommended that these restrictions be amended to enable cannabis businesses to tell their story and educate consumers on what makes them different from their competitors, including non-price aspects of competition. Introducing flexibility into the Act’s advertising provisions would, the Bureau believes, boost consumer choice and attract consumers that may otherwise consider purchasing from illicit sellers.[18]

4. Reduce Excise Taxes and Standardize Policies

In concluding its report, the Competition Bureau turned its attention to two matters raised by stakeholders that affect competition in the cannabis industry, but that fall outside the scope of the Cannabis Act.

First, cannabis products are subject to excise duties under the Excise Act, 2001[19] and any company wishing to cultivate, produce or package cannabis must obtain a licence under the Excise Act, 2001 in addition to meeting the licencing requirements of the Cannabis Act.[20] These duties represent a significant and increasing portion of producer revenues, estimated to impact gross revenues by 30% or more.[21] The Bureau recommended allowing all cannabis producers to remit excise duties on a quarterly basis, as has been proposed by the Government of Canada, and the implementation of a tiered approach that would lower the duty burden for small producers.[22]

Second, the Competition Bureau observed that a lack of industry standardization across federal, provincial, and territorial policies has made it difficult for producers to operate in more than one jurisdiction. For example, requirements for distribution and retail sales across Canada vary, making it hard for producers to know how to get their products to market. These inconsistencies were found to hinder innovation and delay or even prevent products from reaching the market. The Competition Bureau recommended that improved transparency, clarity, and consistency across Canadian jurisdictions would help cannabis producers sell their products across Canada, ultimately improving competition in the national market.[23]

Conclusion

The legal cannabis industry is in its infancy, and the regulatory environment governing producers, retailers, and suppliers continues to evolve. Similar industries, like alcohol and tobacco, have been regulated for decades and those regulatory regimes still require frequent adjustments. Alcohol, the sale of which was once prohibited altogether,[24] now enjoys a robust legal market and relative freedom of advertising.[25] Tobacco has a long history of legal use, but producers must adhere to increasingly strict advertising and packaging regulations due to public health concerns.[26] This state of affairs would surely have been unimaginable to previous generations.

After five years of cannabis regulation, Health Canada and the Competition Bureau are signalling that the data gathered on the impacts of the Act so far supports legislative amendments. Health Canada is already seeking feedback on potential amendments to the Cannabis Regulations.[27] The Bureau’s recommendations advocate for a movement towards a more lenient regulatory framework, at least as to licencing costs, THC limits, and advertising. Ensuring a truly competitive market in this complex regulatory environment while preserving public health goals will ultimately require the cooperation of provincial, territorial, and federal governments, and the active participation of stakeholders and the public. If done right, Canada may yet boast a competitive and strong legal cannabis industry that accomplishes the government’s policy objectives: to protect youth, to support diverse producers, and to divert profits from the illegal market to legitimate business owners.

[1] SC 2018, c 16.
[2] Health Canada, “Government of Canada Launches Legislative Review of the Cannabis Act” (22 September 2022).
[3] Competition Bureau Canada, “Planting the seeds for competition” (26 May 2023), at 6 (“Competition Bureau”).
[4] Cannabis Regulations, SOR/2018-144.
[5] Health Canada, “Taking stock of progress: Cannabis legalization and regulation in Canada” (October 20, 2022), at 12-13 (“Health Canada”).
[6] Competition Bureau at 22, 27.
[7] Regulators placed no THC limit on dried cannabis due to concerns the legal industry would otherwise struggle to compete with the illegal market. Health Canada at 5.
[8] Competition Bureau at 29-30.
[9] Ibid at 29.
[10] SOR/2018-144, s 102.7. By contrast, cannabis extracts or topicals must not exceed 1,000mg per container. Ibid s 101.2.
[11] Competition Bureau at 30-31.
[12] Ibid at 31-32.
[13] Health Canada at 5.
[14] Health Canada at 6.
[15] Cannabis Act, ss 17. See also Cannabis Act, ss 20-21.
[16] Health Canada, at 6-7.
[17] Ibid at 8.
[18] Competition Bureau at 34-35.
[19] SC 2002, c 22.
[20] Competition Bureau at 35-36.
[21] Ibid at 37.
[22] Ibid at 37-39.
[23] Ibid at 39-40.
[24] Gerald Hallowell, “Prohibition in Canada”, The Canadian Encyclopedia (last edited 13 November, 2020).
[25] See for example in Ontario, Registrar’s Interim Standards and Requirements for Liquor, Appendix 2: Registrar’s Guidelines for Advertising and Promotion. These standards are issued pursuant to the Liquor Licence and Control Act, 2019, SO 2019, c 15, Sched 22, s 24.
[26] Health Canada, “Tobacco Products Appearance, Packaging and Labelling Regulations” (June 2023), online: Government of Canada.
[27] Canada Gazette, “Notice of Intent – Consultation on potential amendments to the Cannabis Regulations” (25 March 2023).

by Joshua Chad, Emily Hush and Karandeep Lall (Summer Law Student)

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2023

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