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The federal government of Canada has stated many times that its number one priority with cannabis legalization is to stamp out the black market. Concurrently, the feds are also creating one of the most robust revenue streams this country has ever seen.

In theory, both ideas are sound. In practice, it’s a delicate balance between keeping legal pot prices low while taxing the commodity enough to cover the costs of added infrastructure.

Case in point is an open letter that Toronto Mayor John Tory sent to Ontario Premier Kathleen Wynne last month which stated, among other items, that Mayor Tory may want to see an added municipal tax on adult-use pot when it is legalized.

“[Tory’s]  concerns in this open letter were that there will be increased costs for the City of Toronto,” said lawyer Matt Maurer in an interview with Marijuana.com. Maurer is the Chair of the cannabis law division of Minden Gross LLP. “We are hearing across the country at the municipal level that they are concerned about enforcement and regulation and all the costs that go along with it.”

Maurer added that Mayor Tory stated increased taxes have been implemented in some U.S. cities to offset enforcement costs.

Escalated costs for Canada’s largest city are certainly a concern, however, it would behoove Toronto to tread carefully and look at the existing data that U.S. cities have thankfully presented in this area.

The Washington Cannabis Consumption Survey found that customers in the legalized cannabis market are very price sensitive and that taxes put legal weed at a premium over cannabis purchased from the illegal market. If the tax exceeds a certain threshold, consumers will switch back to illegal marijuana.

The survey determined that if legal cannabis sold for $4 USD more per gram than its illegal counterpart, legal sales would make up less than half of the total U.S. market.

In April, the C. D. Howe Institute issued an open letter to MP Bill Blair, Canada’s point man on pot legalization. This letter stated that Canada will be forced to choose either legal marijuana revenue or stamping out the black market, but not both.

City of Toronto Act

The choice between revenue and ending the black market aside, Mayor Tory has the added challenge that Toronto is not permitted to place a municipal tax on cannabis. The City of Toronto Act sets out what the municipal government can and cannot do, and section 267 (2)(5) states that the city is not permitted to impose a sales tax on a person in respect to the acquisition or purchase of any tangible personal property, service, or intangible property.

Maurer agrees that if taxes on legal cannabis are too high, it will hinder the efforts of eliminating black market cannabis. “[The government]  will want to keep the price low in order to stamp out the black market. If the municipalities or the province started adding extra tax on, and increase the price above an acceptable threshold, it would go against those objectives.”

Maurer added that he does not know at this point if Mayor Tory will actually be successful at getting an added tax approved, but Maurer does believe Tory will receive help with costs. “I do think he’s going to get ultimately what he wants in terms of revenue from the provincial government.”

There has been no word of tax rates or even where retail sales will take place in Toronto or elsewhere across Canada, but legal marijuana is still scheduled to be available by July of 2018.

Photo courtesy of KMR Photography