Cannabis Fees Order: SOR/2018-198

Canada Gazette, Part II, Volume 152, Number 21

Registration

October 1, 2018

CANNABIS ACT

Whereas, pursuant to section 143 of the Cannabis Act footnote a, the Minister of Health has consulted with any persons that the Minister considers to be interested in the matter;

The Minister of Health, pursuant to subsection 142(1) of the Cannabis Act footnote a, makes the annexed Cannabis Fees Order.

Ottawa, September 28, 2018

Ginette C. Petitpas Taylor
Minister of Health

Cannabis Fees Order

Definitions

1 The following definitions apply in this Order.

Act means the Cannabis Act. (Loi)

cannabis drug licence means a licence referred to in paragraph 8(1)(f) of the Cannabis Regulations. (licence relative aux drogues contenant du cannabis)

cannabis revenue means the amount by which the amount received from the sale of cannabis exceeds the amount paid for the purchase of cannabis from the holder of a licence for micro-cultivation, a licence for standard cultivation, a licence for a nursery, a licence for micro-processing, a licence for standard processing or a licence for sale for medical purposes. (recettes tirées de la vente de cannabis)

client has the same meaning as in subsection 1(2) of the Cannabis Regulations. (client)

export permit as the same meaning as in subsection 1(2) of the Cannabis Regulations (permis d’exportation)

fiscal year means the period beginning on April 1 in one year and ending on March 31 in the next year. (exercice)

import permit has the same meaning as in subsection 1(2) of the Cannabis Regulations (permis d’importation)

licence for analytical testing means a licence referred to in paragraph 8(1)(c) of the Cannabis Regulations. (licence d’essais analytiques)

licence for a nursery means a licence referred to in paragraph 8(3)(c) of the Cannabis Regulations. (licence de culture en pépinière)

licence for micro-cultivation means a licence referred to in paragraph 8(3)(a) of the Cannabis Regulations. (licence de micro-culture)

licence for micro-processing means a licence referred to in paragraph 8(4)(a) of the Cannabis Regulations. (licence de micro-transformation)

licence for research means a licence referred to in paragraph 8(1)(e) of the Cannabis Regulations. (licence de recherche)

licence for sale for medical purposes means a licence referred to in subsection 8(5) of the Cannabis Regulations. (licence de vente à des fins médicales)

licence for standard cultivation means a licence referred to in paragraph 8(3)(b) of the Cannabis Regulations. (licence de culture standard)

licence for standard processing means a licence referred to in paragraph 8(4)(b) of the Cannabis Regulations. (licence de transformation standard)

named responsible adult has the same meaning as in subsection 264(1) of the Cannabis Regulations. (responsable nommé)

site has the same meaning as in subsection 1(2) of the Cannabis Regulations. (lieu)

Annual adjustment of fees

2 The fees set out in sections 3 to 5 are to be adjusted in each fiscal year on April 1 by the percentage change over 12 months in the April All-items Consumer Price Index for Canada, as published by Statistics Canada under the Statistics Act, for the previous fiscal year and rounded to the next highest dollar.

Screening of an application for one licence

3 (1) The fee for the screening by the Minister of an application for the issuance of only one licence set out in column 1 of Schedule 1 is set out in column 2 and is payable within 30 days of submitting the application.

Screening of an application for more than one licence

(2) The fee for the screening by the Minister of an application for the issuance of more than one licence set out in column 1 of Schedule 1 is the following and is payable within 30 days of submitting the application:

Application for security clearance

4 The fee for the consideration by the Minister of an application with respect to a security clearance referred to in section 67 of the Act is $1,654 and is payable within 90 days of submitting the application.

Application for import or export permit

5 The fee for the consideration by the Minister of an application for an import permit or an export permit is $610 and is payable within 30 days of submitting the application.

Exemptions — analytical testing, research, etc.

6 Sections 4 and 5 do not apply with respect to an application for a security clearance, import permit or export permit with respect to a licence within the meaning of the Industrial Hemp Regulations, a licence for analytical testing, a licence for research or a cannabis drug licence.

Annual fee — entry year

7 (1) The holder of one or more licences set out in column 1 of Schedule 2 with respect to the same site must, not later than 60 days after the earliest effective date of those licences, pay the following fee:

Annual fee — first fiscal year

(2) The holder must, with respect to the fiscal year following the fiscal year during which the licence with the earliest effective date was issued for the same site, pay the following fee, not later than September 30 of that year,

Statement of revenue and annual fee — subsequent years

(3) The holder must, for the same site and with respect to each fiscal year subsequent to the fiscal year to which subsection (2) applies, pay the following fee, not later than September 30 of the subsequent year:

Interpretation

(4) For the purpose of this section,

Statement of cannabis revenue

8 (1) The holder of one or more licences set out in column 1 of Schedule 2 with respect to the same site must, no later than April 30 of a fiscal year, submit to the Minister a statement of the cannabis revenue for the preceding fiscal year with respect to those licences, including the amount received from the sale of cannabis and the amount paid for the purchase of cannabis that were used to determine the cannabis revenue.

Reconciliation

(2) The holder must pay the following fee, not later than September 30 following the fiscal year during which the licence with the earliest effective date was issued with respect to the same site, if the amount is positive:

Accounting standard for statements

9 Statements that are submitted to the Minister for the purposes of this Order must be prepared in writing in accordance with the generally accepted accounting principles established by the Accounting Standards Board, the primary source of which is, in Canada, the CPA Canada Handbook — Accounting, and must be accompanied by a written document signed by the person responsible for the financial affairs of the holder of the licence certifying that the records were prepared in accordance with the standards.

Exemptions — sale for medical purposes

10 (1) The holder of a licence for sale for medical purposes and any other licence set out in column 1 of Schedule 2 , if any, is not required to pay the applicable fee referred to in subsection 7(1) and paragraphs 7(2)(a) and (b) and (3)(a) and (b) and subsection 8(2) for a fiscal year and for the same site if

Exemption — separate sites

(2) The holder of a licence for sale for medical purposes with respect to a site and any other licence set out in column 1 of Schedule 2 with respect to another site is not required to pay a fee referred to in subsection 7(1) and paragraphs 7(2)(a) and (b) and (3)(a) and (b) and subsection 8(2) for a fiscal year and for any of the licences that the person holds if

Retention of documents and information

11 The holder of a licence set out in column 1 of Schedule 2 must retain the following for not less than seven years after the day on which they are prepared and in a manner that will enable an audit to be made in a timely manner:

Coming into Force

12 This Order comes into force on October 17, 2018.

SCHEDULE 1

(Section 3)

Licence Application Screening Fee

Item

Column 1

Licence

Column 2

Fee ($)

1

licence for micro-cultivation

1,638

2

licence for standard cultivation

3,277

3

licence for a nursery

1,638

4

licence for micro-processing

1,638

5

licence for standard processing

3,277

6

licence for sale for medical purposes

3,277

SCHEDULE 2

(Section 7, 8, 10 and 11)

Annual Fee

Item

Column 1

Licence

Column 2

Fee

1

licence for micro-cultivation

(a) If the cannabis revenue is $1 million or less, the greater of 1% of the cannabis revenue, and $2,500; or

(b) if the cannabis revenue is greater than $1 million, the maximum amount determinable under paragraph (a) plus 2.3% of the amount by which the cannabis revenue exceeds $1 million.


2

licence for standard cultivation

The greater of 2.3% of the cannabis revenue and $23,000.

3

licence for a nursery

(a) If the cannabis revenue is $1 million or less, the greater of 1% of the cannabis revenue, and $2,500; or

(b) if the cannabis revenue is greater than $1 million, the maximum amount determinable under paragraph (a) plus 2.3% of the amount by which the cannabis revenue exceeds $1 million.


4

licence for micro-processing

(a) If the cannabis revenue is $1 million or less, the greater of 1% of the cannabis revenue, and $2,500; or

(b) if the cannabis revenue is greater than $1 million, the maximum amount determinable under paragraph (a) plus 2.3% of the amount by which the cannabis revenue exceeds $1 million.


5

licence for standard processing

The greater of 2.3% of the cannabis revenue and $23,000.

6

licence for sale for medical purposes

The greater of 2.3% of the cannabis revenue and $23,000.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Order.)

Issues

In 2017, the Government of Canada provided $546 million in funding over five years to support the legalization and strict regulation of cannabis. The cannabis regulatory program includes licensing and inspections, amongst other activities. The Government has stated its intent to recover costs from those who benefit from the new regulatory program. Cost recovery is a standard practice in many federal regulatory regimes. The issue is how to design and implement fees for the regulation of the new cannabis industry while supporting the Government’s policy objectives, including establishing a diverse industry capable of displacing the illegal market.

Background

In June 2016, the Government of Canada created the Task Force on Cannabis Legalization and Regulation to provide advice on the design of a new legislative and regulatory framework for legal access to cannabis. In November 2016, the Task Force recommended that the Government establish a legal regime that would create a diverse and competitive industry that would include small producers and be capable of displacing the illegal cannabis market. It also advised the Government to implement a fee structure to recover administrative regulatory costs.

On April 13, 2017, the Government of Canada introduced Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts (the Cannabis Act) in the House of Commons. The Cannabis Act received royal assent on June 21, 2018.

The Cannabis Act establishes the foundation for a comprehensive national framework that legalizes, strictly regulates and restricts access to cannabis and controls its production, possession, distribution, sale, import and export.

The Cannabis Act also establishes the authority to charge fees to recover federal government costs of the regulatory program. Specifically, Section 142 provides the Minister of Health with the authority to fix fees through a ministerial order for the recovery of federal government costs for services, use of facilities, approvals, authorizations, exemptions or regulatory processes, as well as for products, rights and privileges that are provided under the Act.

In October 2017, the Fall Economic Statement committed $546 million over five years to support the objectives of the Cannabis Act and reaffirmed publicly the Government of Canada’s intent to implement a cost recovery regime under the Cannabis Act to reduce the overall cost of the initiative to taxpayers.

On July 11, 2018, the Cannabis Regulations were published. They established rules in a range of areas, including classes of licences for the production and sale of cannabis. The Regulations include the following classes of licences: cultivation (micro, standard and nursery), processing (micro and standard), analytical testing, sale, research, and a cannabis drug licence.

On July 12, 2018, Health Canada launched a 30-day consultation on the proposed approach to cost recovery for the regulation of cannabis. The following analysis incorporates and responds to the feedback received from stakeholders during this consultation.

Objectives

The objective of the Cannabis Fees Order is to recover the Government’s regulatory costs under the cannabis framework by fairly charging those that benefit from the new legal market, thereby reducing costs to taxpayers.

Description of fees

The Cannabis Fees Order aligns with the licence classes identified in the Cannabis Regulations. Under the Cannabis Fees Order, holders of cultivation, processing and sales for medical purposes licences are subject to fees, while holders of industrial hemp, research and analytical testing licences, as well as manufacturers or importers of health products containing cannabis would not pay fees in respect of those licences.

The Cannabis Fees Order establishes four fees: an application screening fee, a security clearance fee, an import/export permit fee, and an annual regulatory fee.

Application screening fee

The application screening fee recovers the costs associated with screening new licence applications, prior to an in-depth review, for those seeking a cultivation or processing licence, or a licence for sale for medical purposes. The fee for standard cultivation, standard processing, and federal sales licence applications is $3,277 and is discounted at 50% ($1,638) for micro-cultivation, microprocessing and nursery classes of licences.

Security clearance fee

The security clearance fee recovers the costs associated with screening, processing, and issuing or refusing security clearances. The fee per security clearance application is $1,654 and is applicable only in respect of cultivation, processing and/or federal sales licences.

Import/export permit fee

The import/export permit fee recovers the costs associated with screening, processing and issuing or refusing to issue an import or export permit for medical or scientific purposes. The fee is $610 and is payable in respect of cultivation, processing and federal sales licences.

Annual regulatory fee

The annual regulatory fee recovers the aggregate costs of administering the cannabis regulatory program that are not covered under any of the other fees outlined above. It is payable annually by cultivation, processing and federal sales licence holders.

Program costs recovered through this fee include licensing (except those costs recovered for the screening of applications and security clearances), policy, inspections, compliance and enforcement, public education, and program management and oversight.

The annual regulatory fee is designed to minimize the overall administrative burden by recovering these costs through one general fee as opposed to a more complex set of fees.

The costs to be recovered through the annual regulatory fee have been established at $383 million over four years, from fiscal years (FY) 2018–2019 to 2021–2022. This includes costs incurred by Health Canada, the Public Health Agency of Canada, the Canada Border Services Agency and Public Safety Canada to carry out functions to advance the purposes of the Cannabis Act.

The annual regulatory fee is based on a percentage of the licence holder’s revenue from the sale of cannabis less the amount purchased from another licence holder subject to the fee, or a minimum flat fee.

Regulatory and non-regulatory options considered

Do not recover costs (baseline scenario)

Health Canada considered the option of not recovering costs. This option aligns with current practices under the Access to Cannabis for Medical Purposes Regulations (ACMPR), where no fees are charged to licence holders.

The main benefit of this option is that additional costs are not imposed on the cannabis industry. However, the Government’s costs to administer the program would be funded by taxpayers.

This option was rejected because it is inconsistent with similar regulatory programs that Health Canada administers and with the Government of Canada’s cost recovery objectives.

Cost recovery

Cost recovery is the preferred option. Fees establish a more appropriate cost-sharing balance between taxpayers and industry. The public should not bear the costs of government activities in cases where private parties derive the primary benefit.

Health Canada is introducing administrative, nonbinding service standards for the application screening fee and the import/export fee. It will monitor the program closely, with a view to establishing service standards in a variety of areas as the requirements on the cannabis regulatory program normalize.

Benefits and costs

The benefits and costs described in the following section relate to the cost recovery option noted above and are deemed to be incremental to the scenario where costs are not recovered. The analysis examined the benefits and costs of the Cannabis Fees Order for four groups: industry, consumers, taxpayers and the Government of Canada.

In total, it is expected that the Cannabis Fees Order will result in a transfer of costs from taxpayers to industry in the amount of $204 million over four years. The figure of $204 million represents the mid-point of a sensitivity analysis that sees the Government of Canada recovering $86 million of eligible annual costs in 2021–2022. However, this number may vary based on a number of factors, including the number of licence holders by year, the amount of cannabis sold by licence holders, the prices realized by licence holders and the number of micro or nursery licence holders that will be subject to the lower rate for the annual regulatory fee.

At the top end of the sensitivity analysis, an estimated total of $295 million over four years would be collected, with $124 million or 100% of annual regulatory costs recovered in 2021–2022. Under this scenario, the Government of Canada would show a progression of 33% recovery of annual program costs in 2018–2019, 58% in 2019–2020, 77% in 2020–2021 and up to 100% in 2021–2022.

Industry

Benefits

Health Canada is implementing two non-binding administrative service standards: a 30-business-day service standard for the application screening fee and a 30-business-day service standard to issue or refuse an import/export permit. While each of these service standards is established under normal business circumstances, footnote 1 applicants for these services will benefit from greater certainty and predictability on the time required to process applications.

Industry will benefit from increased accountability and transparency, as the Minister is obligated to consult interested parties when fees are fixed. In addition, on an ongoing basis, Health Canada will engage with industry to discuss service standards and the administration of the fee regime.

Costs

Costs to industry were analyzed in two categories: the monetary costs associated with the fees, and the administrative burden associated with complying with the Cannabis Fees Order.

The monetary costs and the impact of these costs were analyzed for prospective licence holders and current licence holders.

For the purposes of this analysis, prospective licence holders are those who have yet to submit a licence application to Health Canada but may do so under the Cannabis Act. Monetary costs incurred by prospective licence holders include the application screening fee and the security clearance fee and, if they become licensed, the annual regulatory fee. Feedback from respondents was split as to whether fees would impact willingness to apply for a licence under the Cannabis Act. While some felt that the proposed fees were not prohibitive, others indicated that the fees would prevent them from seeking a licence. Although it is not possible to quantify the impact, it can be assumed that the introduction of fees will deter some individuals from seeking a licence under the Cannabis Act.

Current licence holders are those that have been issued a licence under the ACMPR and will transition to a licence under the Cannabis Act. Pending licence applicants are grouped into this category as it is assumed that the introduction of fees will not impact their willingness to participate in the legal cannabis industry. In the event that those pending licence applicants are successful, they will be subject to the annual regulatory fee, the security clearance fee for each new security clearance, and the import/export fee as required.

In total, it is expected that the Cannabis Fees Order will transfer the costs of administering the Cannabis Act from taxpayers to industry in the amount of $204 million over four years, with $129 million and $295 million identified as the lower and upper bounds respectively of expected costs recovered. As a result, each licence holder that is subject to fees under the Cannabis Fees Order will need to determine whether costs will be absorbed or whether the costs will be passed along to consumers in the form of higher prices. A number of variables could influence this decision, including the cost structure of the company, desired margin, the demand versus supply for certain cannabis products or strains, sales agreements with provincial or territorial wholesalers, and the industry’s response to illegal market prices.

Beyond the monetary costs associated with the fees, prospective and current licence holders will incur some administrative burden in complying with the Cannabis Fees Order through, for example, timely fee payments, proper tracking and reporting on cannabis revenue, and record keeping. However, the design of the Cannabis Fees Order is intended to keep such costs to a minimum, particularly by limiting the number of different fees and by recovering the majority of costs through the annual regulatory fee.

Consumers

Benefits

The analysis did not identify any benefits to consumers in relation to the Cannabis Fees Order.

Costs

In the event that industry chooses to pass the costs associated with the Cannabis Fees Order to consumers in the form of higher cannabis prices, it is expected that the overall impact will be minimal.

The largest fee, the annual regulatory fee, is structured so that the fee paid by a licence holder is commensurate with the size of the licence holder’s business and how much revenue it generates. In addition, since the fee is largely based on sales from licence holders to provincial or territorial wholesalers and not against the final retail price, the impact on consumers is less pronounced.

For example, assuming that the total costs of the application screening fee, the security clearance fee, and the import/export permit fee are absorbed into the cost structure of the company and the full cost of the annual regulatory fee is passed along to consumers, the impact of this fee is expected to be between $0.08/gram, based on an average wholesale price of $3.50/gram, to $0.14/gram based on an average wholesale price of $6.00/gram. In percentage terms, assuming that the final retail price is $8.00/gram, the impact of these fees is expected to increase the average retail price of cannabis by between 1.0% and 1.7%.

Taxpayers

Benefits

Taxpayers were determined to be the primary beneficiaries of the Cannabis Fees Order, as it is estimated that $204 million (or $129 million on the low end and $295 million on the top end) of the costs to administer the Cannabis Act will be transferred from taxpayers to industry.

Costs

The analysis did not identify any costs to taxpayers in relation to the Cannabis Fees Order.

Government of Canada

Benefits

It is expected that the Cannabis Fees Order will result in minimal benefits to the Government of Canada. Any monetary benefits realized will be passed on to taxpayers.

Costs

As part of the Cannabis Fees Order, it is expected that Health Canada and partner departments will incur additional administrative burdens by implementing, monitoring and administering the fees. However, it is expected that these costs will be minimal.

Cost-benefit statement

The amounts collected through cost recovery must not exceed the cost to the Government of Canada to administer the program. Given the unknowns about the operation of the legal market under the Cannabis Act, a sensitivity analysis was undertaken to estimate the amount that could be recovered under different scenarios and minimize the risk that the amount collected could exceed program costs.

As per the chart below, it is expected that the Cannabis Fees Order will result in a transfer of $204 million in costs over four years from taxpayers to industry.

A. Quantified impacts

   

2018–2019

2019–2020

2020–2021

2021–2022

Total

Benefits

Transfer of costs from taxpayers to industry

Taxpayers

$19,847,891

$40,649,780

$57,984,467

$85,863,370

$204,345,507

Costs

Transfer of costs from taxpayers to industry

Industry

$19,847,891

$40,649,780

$57,984,467

$85,863,370

$204,345,507

Net benefits (cost)

$

-

$

-

$

-

$

-

$

-

B. Quantified impacts in non-$

No data available

C. Qualitative impacts

Industry (benefits)

Greater certainty over service standards

Industry (costs)

Increased monetary costs

Additional administrative burden

Consumers (cost)

Marginal increase in cannabis prices

Taxpayer (benefit)

Transfer of costs from taxpayers to industry

Government (cost)

Additional administrative burden

“One-for-One” Rule and small business lens

As per the Hardwiring Sensitivity to Small Business Impacts of Regulation: Guide for the Small Business Lens and the Treasury Board of Canada Secretariat’s Canadian Cost-Benefit Analysis Guide: Regulatory Proposals, taxes, fees, levies and other charges constitute transfers from one group to another and are not considered to be compliance or administrative costs for business. Thus, the Cannabis Fees Order is out of scope of the “One-for-one” Rule and small business lens.

Nevertheless, to assist small businesses, the annual regulatory fee was designed to scale with the size of a business. A reduced rate will apply on the first $1 million in revenue from cannabis sales for micro and nursery licence holders. Furthermore, the fee for screening applications for micro and nursery licence class holders has been discounted by 50%.

Consultation

On July 12, 2018, Health Canada launched a 30-day public consultation to solicit public input on the proposed approach to cost recovery for the regulation of cannabis.

Health Canada received 108 submissions through an online questionnaire, 18 written submissions and 38 related inquiries through emails and other communication channels. The Department also received 755 form letters to petition for the delay of cost recovery and to express opposition to the 2.3% annual regulatory fee. A majority of the submissions were from industry and those associated with it, such as consultants and industry associations.

Summary of feedback

The following summarizes the feedback received and outlines Health Canada’s response.

1. Do you think the approach will be fair for both licence holders and the government? Please explain why or why not.

Almost all respondents accepted the principle of cost recovery and most accepted the goal of achieving 100% recovery of regulatory costs. However, a majority of respondents did not think that the approach was fair to licence holders because of the proposed timing, and they recommended deferring the implementation of cost recovery by one year to allow time for licence holders to displace the illicit market. Some of these respondents were concerned that signed supply contracts with provincial and territorial wholesalers did not take fees into account.

Additional feedback included that

A handful of stakeholders took the view that the approach was not fair to licence holders because Canadians are the primary beneficiaries of cannabis legalization and regulation.

Health Canada response

The Government’s intent to recover the regulatory program costs of cannabis legalization and regulation was communicated to Canadians and industry at a number of key moments over the past 18 months. For example, the Minister’s authority to set fees was part of the Cannabis Act when it was introduced in Parliament in April 2017. In October 2017, the Government’s Fall Economic Statement confirmed the implementation of cost recovery under the Cannabis Act to reduce the overall cost of the initiative to Canadians. The Government’s commitment to recover regulatory program costs was also restated in the consultation paper that was prepared and circulated widely as part of the consultations on the Cannabis Regulations in November 2017.

In response to the concern that the annual regulatory fee does not allow time for the industry to mature and grow to compete against the illegal market, it is important to highlight that the annual regulatory fee is designed specifically to accommodate the establishment and growth of the legal industry. Rather than a set of flat fees, the annual regulatory fee is based on revenue. In addition, the rate was chosen so that full cost recovery would be achieved incrementally over a few years after the coming into force of the Cannabis Act rather than at the outset.

Moreover, as a result of input received during the consultation, the annual regulatory fee will be based on actual revenue from the previous year rather than on forecast revenues or some other measure. footnote 2 As a result, its full impact is in effect delayed by a year and provides industry with greater predictability on the fees that will be payable in any given year.

For example, in 2021–2022, revenue from the annual regulatory fee will be based on industry sales in 2020–2021. As such, the Government would only fully recover its aggregate 2021–2022 regulatory costs (that are not recovered by other fees) if licence holders subject to the annual regulatory fee generated approximately $4.5 to $5.0 billion in revenues in 2020–2021.

Health Canada will be monitoring the performance of the fees on an ongoing basis. As noted in the consultation paper, in the unlikely event that the annual regulatory fee results in the Government collecting more overall revenue than the overall cost of the cannabis regulatory program, Health Canada will assess the cost recovery regime and report on any resulting actions as part of the annual fee reporting process required by the Treasury Board Secretariat.

2. Will the proposed fees affect your ability to compete in the Canadian cannabis market? If yes, please provide an explanation.

In general, a majority of respondents felt that the fees would affect their ability to compete. They expressed concerns that the cumulative effect of fees and taxes at different levels of government would disadvantage new participants. A few respondents were concerned that the import/export fee would be too low to protect producers from international competition.

Health Canada response

Health Canada has taken a cautious approach to keep the costs for new businesses reasonable. The initial outlay for these fees is minimal in comparison to the overall start-up costs that licence holders incur to be licensed under the Cannabis Act.

With regard to the annual regulatory fee, Health Canada has based the fee on revenue, meaning that licence holders will be subject to a minimum fee if their revenue is below $250,000 for micro and nursery licence holders and $1 million for standard licence holders. Micro and nursery licence holders further benefit from a reduced rate of 1% if their revenue is below $1 million.

With respect to some respondents’ concerns about protecting the domestic cannabis market, the import/export permit fee is designed to recover only the costs of screening, processing and issuing or refusing to issue an import or export permit for medical or scientific purposes and the fee is necessarily limited to the costs of performing such an activity.

3. Will the proposed fees support the development of a diverse industry that includes small business? Does the proposal help maintain access to cannabis for medical purposes?

A majority of respondents did not think the proposed fees would support a diverse industry for small businesses, indicating that the fee structure would not give smaller enterprises the ability to generate enough revenue to displace the illicit market, and that the fee differential did not go far enough to encourage small players and a diverse market. Respondents recommended raising the micro-revenue threshold from $1 million to as much as $2 million to encourage growth and to narrow the perceived competitive imbalance between micro and standard producers.

There were mixed views as to whether the proposal would help facilitate access to cannabis for medical purposes. Many respondents supported the proposal to exempt licence holders who sell exclusively for medical purposes from the regulatory fee. Others expressed that the proposed exemption would be a disincentive for licence holders to sell in both medical and non-medical markets, possibly limiting the supply of cannabis for medical purposes. Some respondents advocated that the exemption from the annual regulatory fee apply to all sales for medical purposes, regardless of whether the licence holder also sells to the non-medical market.

Health Canada response

The Cannabis Fees Order applies a 50% reduction ($1,638) to the application screening fee for micro and nursery applicants, with the difference between the cost to the Government and the fee funded by tax revenue. Because security clearances are on a per-individual basis, micro and nursery licence holders will require fewer screenings than standard producers, thereby incurring lower costs.

In addition, the annual regulatory fee is based on revenue. A smaller company with lower annual revenue pays a proportionally lower fee. Furthermore, a lower 1% rate applies to micro and nursery licence holders if their annual revenue is $1 million or less. This reduces the cost of the annual regulatory fee by as much as $13,000 footnote 3 for micro and nursery licence holders. They are also subject to a lower minimum fee of $2,500 instead of $23,000.

Health Canada will actively monitor the uptake of micro and nursery licences and assess whether further adjustments may be warranted in the future.

The exemption of licence holders who sell cannabis exclusively for medical purposes from the annual regulatory fee is intended to facilitate the supply of cannabis for medical purposes. All licence holders who sell cannabis for medical purposes will receive the full retail price of the product as opposed to the wholesale price they would receive from sales of cannabis for non-medical purposes. As such, there are financial incentives for all sales for medical purposes.

This exemption is intended to provide an additional incentive to licence holders that are dedicated to meeting patient needs. Health Canada will actively monitor the supply of cannabis for medical purposes and may consider adjustments in the future if required.

The fee reductions for micro and nursery licence classes and the exemption to the annual regulatory fee for licence holders that sell cannabis exclusively for medical purposes represent taxpayer funded subsidies in the public interest and are not cross-subsidized by other fee payers.

4. With regards to the annual regulatory fee, do you think that prior year actual revenue or current year projected revenue would be a better base for this fee? Are there alternative approaches which Health Canada should consider for allocating general regulatory costs? Please explain why.

Respondents were near unanimous that prior year actual revenue would be a better base for the annual regulatory fee than current year projected revenue. They indicated that projected revenue is unreliable, easy to manipulate and would be administratively burdensome for Health Canada and licence holders.

Some respondents also suggested that rather than using revenue as a base to calculate the annual regulatory fee, earnings or profit be used instead.

Health Canada response

Based on respondents’ input, the Cannabis Fees Order adopts prior year actual revenues as the basis for the annual regulatory fee, as follows:

  1. In the entry year, a new licence holder will pay the minimum fee of $2,500 or $23,000, depending on the licence class at the time they receive the licence. At the end of the entry year, the licence holder pays the applicable rate on their actual revenue, less the minimum fee, if applicable.
  2. In the following year, which would be the first full year of operation, the annual regulatory fee is based on the average daily revenue from the entry year × 365 days.
  3. The annual regulatory fee in the second full year and onward is based on prior year revenue.

Some respondents proposed using earnings before interest, taxes, depreciation and amortization as an alternative to cannabis revenue. This is not a viable option for a number of reasons, including but not limited to the increased complexity and the increased administrative burden and potential disputes between licence holders and the Government to determine the appropriate amount for the fee. It would also make it more difficult to achieve the objective of full cost recovery.

5. What do you think of the proposed service standards? Are they set at appropriate levels considering the context of the new legal regime? What is your biggest priority for Health Canada in establishing additional service standards? Please elaborate.

There was general agreement among respondents that the proposed service standards are appropriate in the context of the new legal regime. However, some respondents advocated for binding service standards for all fees, particularly for the security clearance fee. In addition, a few respondents recommended establishing an industry liaison committee to provide a forum to discuss service standards and the administration of the cost recovery regime.

Health Canada response

Health Canada recognizes that stakeholders benefit from a reliable application process with predictable timelines. Health Canada is introducing non-binding administrative service standards for the application screening and the import/export fee. However, a service standard for security clearances is not feasible for a number of reasons, including the unknown impact of the regulatory changes to security clearance requirements for personnel on processing times; high variations in the time to process security clearances because of an individual’s history (e.g. they previously lived outside of Canada); and the need to verify, on a case-by-case basis, with third-party law enforcement agencies whether an individual has associations with organized crime.

Health Canada is committed to monitoring its administration of the cannabis regulatory program closely, as the requirements on this program normalize over the next few years with a view to establishing defined service standards in a variety of areas, such as the processing of licence amendments, which will support transparency and predictability for regulated parties.

Health Canada will also establish a forum with representatives from the industry to discuss the administration of the cost recovery regime and the development of service standards.

6. Health Canada plans to review its fee structure in the future. What would be an appropriate time frame in which to review the fees relating to the regulation of cannabis?

The majority of respondents suggested that Health Canada should review its fee structure annually, following the legalization and regulation of edibles and other cannabis products, which will occur one year following the coming into force of the Cannabis Act. There were also suggestions that, as this is a new industry with no baseline and high risks, an initial review of the fee structure in the first year with subsequent reviews every two to three years would be appropriate.

Health Canada response

Health Canada will actively monitor the impact of the fee structure on the policy goals of the Cannabis Act and on industry, as well as the progress made toward achieving full cost recovery. A full review will be conducted in 2021–2022.

7. Additional issues — Perspective of Indigenous groups and organizations.

Indigenous groups and organizations indicated that the exemption of the annual regulatory fee for holders of a licence to sell cannabis for medical purposes exclusively should be expanded to include all sales from or in partnership with Indigenous groups.

Health Canada response

Cost recovery is intended to recover costs from those who directly benefit from the cannabis framework. Health Canada has taken steps to ensure consistency with the Cannabis Act and its Regulations, and has structured the fees based on the licence classes under the Cannabis Act.

As a result, fee exemptions and lower rates apply to Indigenous businesses that meet the criteria, for example those that hold a micro or nursery licence or that hold a licence to sell cannabis exclusively for medical purposes. In addition, to support greater Indigenous participation in the industry, Health Canada has established a navigator service to guide self-identified Indigenous applicants through the licensing process. A licensing professional is available to help Indigenous applicants understand and meet regulatory requirements.

Rationale

The 2017 Fall Economic Statement identified costs to the Government of Canada of $546 million over five years to support the objectives of the Cannabis Act. It is expected that the Cannabis Fees Order will recover an increasing proportion of these costs from industry, in the amount of $204 million over four years, which represents a transfer in costs from taxpayers to industry.

The Cannabis Fees Order is consistent with other regulatory programs that Health Canada administers and with the Government of Canada’s cost recovery objectives. In addition, the Cannabis Fees Order supports the Government’s objectives of enabling a diverse legal cannabis industry, facilitating cannabis research, and maintaining access to cannabis for medical purposes.

The Cannabis Fees Order is expected to result in increased monetary costs for industry as well as increased administrative burden. While it is possible that some of these costs will be passed on to consumers in the form of higher cannabis prices, the analysis suggests that this impact will be minimal.

Implementation, enforcement and service standards

Implementation

The cost recovery regime for the cannabis program will be implemented on October 17, 2018, with the coming into force of the Cannabis Fees Order. This date coincides with the coming into force of the main provisions of the Cannabis Act and of the Cannabis Regulations.

Enforcement

Health Canada will only begin to screen a licence application, process a security clearance or an import/export permit if the fee in respect of this service has been paid by the licence holder.

A licence holder may be subject to interest charges and their licence may be suspended or revoked if the annual regulatory fee is not paid by the date established in the Cannabis Fees Order. Non-compliance with the Order can also be grounds to refuse to issue, renew or amend a licence or permit.

Service standards

A non-binding, 30-business-day administrative standard has been established for application screening and import/export permit applications. As mentioned above, Health Canada is committed to monitoring the administration of the cannabis regulatory program closely, as the requirements on this program normalize over the next year or so, with a view to establishing defined service standards in a variety of areas, such as the processing of licence amendments. Health Canada will also establish a forum with industry representatives to discuss the administration of the cost recovery regime and the development of service standards.

Performance measurement and evaluation

Health Canada will monitor its administration of the cannabis regulatory program closely over the next few years with a view to establishing performance standards in a variety of areas such as the processing of licence amendments.

The cost recovery program will be subject to departmental evaluation as well as internal audits to ensure the fees are consistent with Government of Canada legal obligations and policies.

Under the Treasury Board directive on charging and special financial authorities, comprehensive periodic reviews of activities required to manage user fees are to be conducted at least every three years. Health Canada is required to report information on its fees in the manner prescribed by the Treasury Board of Canada Secretariat.

As the current Parliamentary appropriation of funding for the cannabis program will expire in FY 2021–2022, its performance will be assessed at that time.

Contact

Todd Cain
Director General
Licensing and Medical Access
Cannabis Legalization and Regulations Branch