Sales of illegal marijuana have long been subject to tax in Canada (notwithstanding the illegality of the sales), and legal sales of medical marijuana are also currently treated as taxable. From the outset, the federal government stated its intention to “legalize, tax and regulate marijuana” in a discussion paper by the Task Force on Marijuana Legalization and Regulation. While the function of tax is primarily to raise revenues for government, in the case of cannabis it has been suggested that tax may also serve certain policy-oriented ends, including:

• Managing price and discouraging consumption, particularly among youth
• Funding programs associated with cannabis legalization and paying for negative external costs of cannabis use to society (e.g., enforcement and dependence treatment), as discussed in a recent report by the Office of the Parliamentary Budget Officer.

The task force advised the federal government to work with provincial and territorial governments when crafting a tax regime for legal cannabis to ensure that prices are competitive with the illicit drug market. However, another explicit recommendation was that the tax scheme should be based (at least in part) on THC potency to discourage purchases of high-potency products with higher prices, as discussed in the task force’s final report.

The government has several existing models of taxes to choose from to implement these tax recommendations, including (1) sales taxes at the point of sale, based on purchase price (e.g., GST/HST or PST), (2) excise taxes payable by producers, per unit or by weight/volume (similar to alcohol and tobacco), and (3) additional taxes, whether charged at point of sale or by producers, based on potency or other considerations. The federal budget published on March 22, 2017, implied that any excise tax rates imposed on cannabis will rise over time, perhaps adjusted to the Consumer Price Index, similar to the new regime that was announced for alcohol. If the government does decide to impose excise or other taxes on producers, it will also have to consider how the tax authorities will enforce the rules to ensure that producers do not under-report their production for tax purposes.

One additional point that should be addressed by the government is the distinction between medical and recreational cannabis sales. Normally, prescription drugs are zero-rated (i.e., not subject to GST/HST). Based on existing jurisprudence, which interprets the term “prescription” narrowly, medical marijuana is considered to be subject to GST/HST because it is not prescribed, but rather a physician provides a declaration of support for an individual’s application for an Authorization to Possess under the Marihuana Medical Access Regulations (SOR/2001-227). Both the Tax Court of Canada and the Federal Court of Appeal have noted that the legislation “needs work.”

The task force recommended that the same tax system for medical and non-medical cannabis products should be applied, while recognizing that cannabis and cannabinoid-based medicines could be developed that are prescribed as medications and zero-rated for GST/HST purposes. Meanwhile, the Canada Revenue Agency has confirmed that it will allow the costs of medical marijuana purchased from a licensed producer as a medical expense for income tax purposes.

The forthcoming legislation presents an opportunity for the government to clarify the tax treatment of medical marijuana and make any appropriate price/tax distinctions between medical and recreational products.