Nation & World

Canada is about to legalize marijuana; here’s why Californians should care

On Wednesday, Canada will become the second and by far largest country to legalize the sale of recreational marijuana.

While the new rules up north will look familiar in California, where the recreational cannabis market has been legal and growing since Jan. 1, they could accelerate Canada’s already significant role in the marijuana industry in California and the United States at large. Booming Canadian companies already have been buying up U.S. marijuana ventures, and American pot companies have expanded after getting investors from Canadian stock exchanges.

The start of marijuana sales in Canada also presents the first opportunity to study how legalization impacts issues such as public health, crime, road safety and the black market in a large, wealthy nation.

Many policymakers will be waiting to see if Canada will suffer repercussions for violating international treaties that expressly ban legalizing marijuana. And if that doesn’t happen, will other powerful nations — including the United States — follow their lead?

“I think this is a trend that we’re going to see continue,” said David Wood, an attorney with the Canadian law firm Borden Ladner Gervais and a member of the Tustin-based MAPLE Business Council, which promotes opportunities between Canada and Southern California. “I think we’ll see legalized, regulated adult use sales come to other countries, certainly within the decade.”

How Canada got there

Canada and the United States — California, in particular — have a similar history when it comes to cannabis.

Hemp and medical marijuana were both widely used in 19th-century Canada, until all cannabis was outlawed in the 1920s. In the 1960s, the counter-culture movement led to a spike in weed use and marijuana rights protests. And in 2001, five years after California became the first U.S. state to legalize medical marijuana, Canada made it legal for citizens with certain medical conditions to grow cannabis at home or buy it from a government-sanctioned grower.

Three years ago, when current Canadian Prime Minister Justin Trudeau was on the campaign trail, he touted a plan to legalize and regulate recreational marijuana. Upon his election, Trudeau quickly formed a task force to develop policy recommendations, with a proposed bill released in 2017.

Canadian Prime Minister Justin Trudeau (AP Photo/Jeff Chiu)

“Right now, young people have far too easy access in Canada to marijuana. Criminal organizations make billions of dollars a year in profits on the sale of marijuana,” Trudeau told the Canadian Press in May. “We need to move forward on a system that controls and regulates while In protecting our kids and our communities.”

The Canadian legislature overwhelmingly passed the cannabis bill in June, setting Oct. 17, 2018 as the start-date for legal sales.

One nation has already paved the way.

In 2013, Uruguay became the first nation to legalize cannabis, a move that was aimed at curtailing the country’s thriving and sometimes violent black market.

But the roll out was slow, with sales only starting in summer 2017. The market is also tightly controlled, with sales allowed only at approved pharmacies and prices set by the government. Tourists in Uruguay are not allowed to buy marijuana.

Since legalization, Uruguayan pharmacies have run into banking issues — similar to hurdles faced by some California merchants — with U.S. financial institutions threatening to shutter their accounts if they sell marijuana. Plus, Uruguay is a small country, with about the same number of people in the entire nation as in Orange County alone and an economy that’s a fraction the size.

So, while it’s clear the sky hasn’t fallen in Uruguay, the country’s unique circumstances have likely limited any ripple effects the first nationwide cannabis market might have had on the rest of the world.

“With respect to Uruguay, they just don’t have the influence and the international community that a G7 nation like Canada does,” said Harrison Phillips, vice president of Viridian Capital Advisors, a New York-based financial advisory firm focused on the cannabis industry.

That’s why so many eyes are now on our neighbor to the north.

What Canadian legalization will look like

While Canada is roughly 23 times larger than California geographically, the two areas have similar populations, with 37 million people in Canada vs. about 40 million in California. The cannabis markets also are about the same size, with New Frontier Data projecting each at roughly $6.8 billion in 2019.

Much like California, Canada will regulate marijuana in a manner that’s similar to its rules for alcohol. All legal marijuana will be tracked from seed to sale. Quantity limits will be slightly looser in Canada (an individual can possess up to 30 grams in Canada vs. 28.5 grams in California), while limits on the number of plants residents can grow at home (four vs. six) will be tighter. And Canadian weed will be be sold in more muted packaging, with no colorful graphics or branding allowed.

Also, Canadian provinces will get to decide whether to welcome cannabis retailers, creating a patchwork of localized marijuana policies — something similar to what’s played out in California, where cities and counties can approve or ban cannabis-related businesses.

And, as in California, the new marijuana rules in Canada figure to usher in at least some chaos. Canada’s most populous province, Ontario, won’t allow sales to start Wednesday; not unlike how Los Angeles wasn’t ready for legal sales when California’s market launched on Jan. 1.

Still, more than 100 marijuana shops are expected to open in Canada on the first day of sales, with other areas relying on mail-order business, according to a recent survey by the Associated Press. Some provinces, such as Alberta, are allowing privately run shops. Others, including Quebec, will permit only government-run stores.

Canadian jurisdictions also can set rules about where residents can consume marijuana. Many are only allowing it in private residences, as dictated by state law in California. But the province of Alberta will let adults smoke cannabis anywhere that tobacco is allowed so long as the area isn’t frequented by kids.

Another major break with California policy is that Canada, for now, will only allow sales of cannabis flower, oil, capsules, plants and seeds. Edibles and concentrates — which, when combined, make up roughly half of California’s retail market — can’t be sold legally in Canada until sometime in 2019.

But other differences with the Canadian market might lure visitors from U.S. states, who will just need an ID to purchase legal cannabis.

Canadian shoppers will only have to be 18 or 19 (depending on the province) to buy marijuana, for example, while every U.S. state has set the minimum age at 21.

Canada will tax all marijuana sales at 10 percent, or $1 (Canadian) per gram, whichever is higher. That’s lower than California’s 15 percent excise tax, though provinces there (as with cities and counties here) can tack on their own sales taxes.

Consumers should note that, while California reduced or eliminated penalties for nearly every marijuana-related crime, Canada is enacting strict penalties for people who break its cannabis laws. Anyone who supplies weed to minors, for example, can get sent to prison for up to 14 years.

Canada isn’t facing the same pressure as California and other U.S. states to help balance criminal justice problems, such as prison overcrowding, through marijuana legislation, according to LuAnne Morrow, a Los Angeles-based attorney. She said that’s why the Canadian government feels “quite comfortable” sticking with harsh penalties for behaviors they’re interested in discouraging.

Travelers should also keep in mind that they still can’t bring any marijuana across the border in either direction, even if they’re crossing to or from a state such as Washington or Alaska where marijuana is also legal.

Earlier this year, travelers were thrown for a loop by U.S. Customs and Border Protection indicating anyone involved in Canada’s cannabis trade would not be allowed to enter the United States.

But U.S. customs officials clarified that this month, saying Canadian citizens will “generally be admissible” so long as they aren’t coming to the U.S. on marijuana-related business.

“I think that was a huge relief for a lot of people here,” Morrow said.

Impacts already being felt

It’s not yet clear how other countries will react to Canada’s break from international drug treaties.

Wood said he wouldn’t be surprised if some countries with particularly punitive drug laws push back. That might lead to impacts on trade negotiations and other diplomatic relations. It also might effect impact how Canadian visitors to those countries are treated, with the potential for stricter visa requirements or security checks at customs.

But experts said they don’t expect Canada to feel much resistance given the cautious way the country is implementing a regulated cannabis market.

“As long as it doesn’t go terribly wrong, I don’t really see the international community cracking down,” Phillips said. “I think they’re being given sort of a pass to give it a shot, but I do think they’ll be watched closely.”

Some impacts of Canada’s coming legalization are already being felt in California.

Since cannabis remains illegal in most of the United States, California’s market is limited by roadblocks that Canada won’t face. California businesses can’t write off traditional expenses under U.S. federal tax code, for example. They can’t legally ship cannabis through the mail, fly with it or drive it across the border, even to a neighboring state where marijuana is also legal. And they can’t access major banking or lending services, which limits their ability to raise the capital that’s helped Canadian companies, such as Canopy Growth and Aurora Cannabis, gain multibillion-dollar valuations.

That’s why a number of American marijuana business are opting to go public in Canada.

“It’s just been a much more favorable environment to do business,” Phillips said.

Some stock exchanges in Canada have blocked American cannabis companies, citing conflicts with U.S. federal law. But the Canadian Stock Exchange has welcomed the industry, with roughly 150 marijuana stocks now listed on the third-tier exchange.

Customers line up at MedMen in West Hollywood, CA to purchase legal marijuana Tuesday, January 2, 2018. (Photo by David Crane, Los Angeles Daily News/SCNG)

One of those companies is Culver City-based dispensary giant MedMen, which on Friday was trading at $5.71 a share on both the Canadian Stock Exchange and the U.S. over-the-counter market. That was a 28 percent jump from Thursday, when news broke that MedMen had doubled its market reach by using newly found financing to buy out the chain PharmaCann for $682 million — believed to be the largest cannabis acquisition in U.S. history.

More American companies are expected to follow suit, with the Denver-based edibles company Dixie Brands on track to go public in Canada before the end of the year.

The federal illegality of cannabis in the United States has also kept valuations of American businesses low. That’s prompting Canadian firms to snatch up U.S. operations before any loosening of federal laws here — from opening banking services to full legalization of recreational cannabis — might send values skyrocketing.

Toronto-based Captor Capital Corp., for example, owns cannabis shops run by MedMen in Santa Ana and West Hollywood. And the firm recently purchased another shop in Santa Cruz for $6 million.

Canadian-owned businesses still account for a small percent of the U.S. market — less than 5 percent, by Phillips’ estimation. But new cross-border deals continue to emerge in the ramp-up to Canada’s legalization day.

“The United States has 10 times the demand for product that Canada has,” Phillips said. “A lot of the Canadian companies know that the U.S. is the end game.”