What’s Up in Weed

December 1, 2017

By: Andrea Hill

I am pleased to bring you this instalment of my blog, rounding up what’s currently happening in the cannabis industry in Canada and abroad.

Have your say on the juicy details: Health Canada proposes approach to Cannabis Act regulations, seeks public input

• Health Canada has issued a Consultation Paper setting out its Proposed Approach to the Regulation of Cannabis, in order to solicit public input on regulations to the Cannabis Act (the Act itself has now been passed by the House of Commons and sent to the Senate for its first reading). All Canadians and interested stakeholders are invited to share their views on the proposed regulatory approach online until January 20, 2018.
• Regulations often contain the fine details of a legislative scheme, as opposed to acts, which set out broad-strokes rules. The Consultation Paper, although still only a proposal, is a wealth of information about the federal government’s vision for the cannabis industry.  For example:
  • Proposed licences range in both scale and activity – this handy chart sets all of them out. Recreational cannabis licences would be more activity-specific than the current all-encompassing producer’s licences under the ACMPR.  The Consultation Paper contemplates licences for cultivation, “processing” (including manufacturing, packaging, and labelling of cannabis products), and sale to the public for either “medical” or “non-medical” purposes.
  • The inclusion of “medical” purposes is an important hint that Canada’s medical cannabis framework could eventually be encapsulated by the Cannabis Act and its regulations, rather than the ACMPR.
  • Here’s a chart setting out proposed requirements for cultivation, processing, and sale licences.
  • The concept of cultivation in particular would undergo a renovation under the Consultation Paper. The ACMPR requires production to take place in an indoor licensed facility and, while maximum production caps apply (measured by kilograms of product as set out in the licence), those caps are usually linked to a LP’s practical production capacity, and so the amount of cannabis a LP can produce is ultimately limited only by the size of its production facility – a fact that has driven LPs to construct massive expansions.
  • Under the Consultation Paper, cultivation licences would be issued for both indoor and outdoor facilities, in four forms: standard (which would authorize the large-scale growing of cannabis plants), micro-cultivation (for small-scale growing), industrial hemp (which would authorize the growing of hemp only – plants of the cannabis family containing 0.3% THC or less), and nursery (which would authorize the growing of cannabis plants to produce starting material, such as seeds and seedlings).

Canada: “Where the money is”

• The Economist notes that US cannabis companies are turning to Canada to raise capital and become publicly listed. Funding from US investors can be elusive, and getting a return on capital can be a challenge in an industry where, due to the illegality of cannabis under US federal law, state-legal marijuana businesses can face effective tax bills as high as 70% of their income due to an inability to write off business expenses – a tax rule known as 280E.  Here’s more information about it.  (Proposed amendments to 280E allowing for state-legal marijuana businesses to write off their expenses are currently being debated in the US Senate.)
• Canada, on the other hand, has no such legislative dissonance and its investing community has a healthy appetite for cannabis companies, making it an ideal place for US marijuana companies to raise capital. “That’s where the money is,” said the CEO of iAnthus Capital Holdings, a cannabis investment firm, using bank robber John Dillinger’s famous rationale.
• Canada also has the advantage of allowing cannabis companies to write off their business expenses for tax purposes – even if those businesses themselves are illegal. Of course, it is perfectly legal to produce and sell cannabis in Canada if you are a licensed producer.  But even illegal dispensaries, which are still subject to paying tax on their income, can write off certain business expenses (although penalties like fines are not deductible).  That’s because while 280E sprang from US Congress’ outrage over drug dealer Jeffrey Edmondson’s successful write-off of his business expenses after being busted in 1974, Canadian tax courts have taken the opposite view.  For example, in a 1964 case called Eldridge, the Canadian Exchequer Court allowed an illegal escort service to deduct “operating expenses” such as rent and employee wages from its income.
• As an aside, the prim tax court’s analysis of prostitution-related expenses is a delightful read – take this quote, for example:

“The concluding item for the year 1959 is a claim for $1,000 as having been paid for assistance to the girls. It frequently happened that a girl sent on an assignment would encounter difficulty with the customer. In these events the respondent had an arrangement with certain men possessed of physical strength and some guile, which they exercised when sent to extricate a girl from difficulty, for which services these men were paid. By cheque dated July 2, 1959 the respondent paid P. Graham $100 for these services performed by him, which, in my opinion, is properly deductible as a business expense.”

• Becoming publicly listed is also easier in Canada for a marijuana company, but it’s not a guarantee. The TSX has made it clear that involvement in the US cannabis industry is a breach of its listing requirements, although the CSE and NEO stock exchanges still appear to be open for business to US marijuana firms (iAnthus is listed on the CSE, and NEO is currently courting a $125 million cannabis SPAC – special-purpose acquisition company – which features a Colorado and Nevada-based marijuana operator as its Chief Operating Officer and is open to investing in cannabis opportunities in both Canada and the US).

Legal Weed: Bringing Down the House (Prices?)

• As the Economist notes, legalization comes with an interesting economic quirk: because of expanded supply and competition, the wholesale price of a pound of marijuana in Colorado has dropped from a peak of $2,000 in January 2015 to $1,300 today – a price so low that Mexican drug cartels appear to be losing market share (the first signs of this trend were already visible in 2014, when a Mexican cannabis grower complained to the Washington Post that “it’s not worth it anymore” to grow marijuana for the US after the wholesale cartel price plunged from $100 to $25 per kilo).
• Economic effects of legalization aren’t limited to cannabis prices. A Globe and Mail article recently considered whether legalization could affect Canada’s economy by possibly depressing demand for luxury goods, exotic motor vehicles and expensive housing as illegal business operators, sometimes associated with such lavish lifestyles, feel the pinch.  “It would sure be interesting,” noted the Globe, “to see pot at least partly doing what policy initiatives couldn’t accomplish on a sustained basis by deflating house prices.”

What’s Up in Weed is not legal or financial advice. It is a blog by SkyLaw which is made available for informational purposes only and should not be used as a substitute for professional advice from a lawyer. This blog is subject to copyright and may not be reproduced without our permission. 

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