Canada Gives Provinces Bigger Cut of Pot Tax From Legalization

(Bloomberg) -- Canadian Finance Minister Bill Morneau agreed to share a greater portion of tax proceeds from sales of legalized marijuana with provincial governments, saying it will help them deal with added costs as the market starts up next year.

Morneau and his fellow finance ministers announced a framework agreement Monday at the conclusion of a meeting in Ottawa, signaling they expect to reap an estimated C$400 million ($311 million) in annual excise taxes from marijuana sales, implying an estimated legal market of about C$4 billion. Sales taxes would also be collected.

The 10 provinces will now receive 75 percent of excise tax revenue for the first two years, with the federal government taking the remaining 25 percent, Morneau said. The federal share would be capped at C$100 million annually, with anything beyond that going to provinces. Morneau said the price for legal product will be standardized nationally at about C$10 ($7.80) a gram -- including all taxes and production costs.

Provincial leaders resisted Prime Minister Justin Trudeau’s proposal last month for an equal split of pot tax revenue, arguing they would face a greater share of the start up costs such as policing impaired drivers. Several ministers warned Monday those costs will eat into revenue, as Canada prepares to be the first major economy to fully legalize recreational marijuana.

“Over the past few weeks we considered the importance of having an agreement that is truly a good agreement for our principles, which meant that we had to make sure that children are safe, the black market is out,” Morneau told reporters. “We had to consider municipalities and the provinces and their major challenges.”

July Legalization

Canada is seeking to legalize recreational marijuana by July, and shares of companies such as MedReleaf Corp. have surged this year as the government finalizes plans.

The two levels of government also agreed to Morneau’s earlier proposal for producers paying a tax of the greater of C$1 a gram or 10 percent of their price.

The plan is still in flux -- Canada has only said pot will be legalized by July 1, but hasn’t said the specific day, and Manitoba Finance Minister Cameron Friesen said he didn’t fully agree with the plan. He said Manitoba needs more time to study it and suggested the province may add its own tax on top of existing ones to pay for enforcement and other costs associated with legalization.

‘Not Naive’

"Manitoba’s not confident this will be adequate to cover our costs," Friesen said, adding the government will consider "whatever complement of taxes that we would see that would most adequately reach the level of taxation required."

Quebec Finance Minister Carlos Leitao stressed the projection of C$400 million in excise tax revenue was just an estimate, but that it could grow if the legal market manages to achieve Trudeau’s oft-stated goal of undercutting and eliminating the black market.
"We’re not naive. We know that on day one, there will still be a relatively large illegal market," Leitao said. "Eventually, it will be culled back."

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