Believe it or not, legal marijuana is one of the hottest industries on the planet right now. Roughly two decades ago that would have been almost impossible to believe, with just 25% of respondents in Gallup's 1995 survey showing favorability toward legalizing cannabis nationwide. Comparatively, almost two-thirds of those surveyed by Gallup in October 2017 now favor the idea of legalizing adult-use cannabis.
Furthermore, a separate poll from the independent Quinnipiac University in August 2017 found 94% approval for legalizing medicinal cannabis, compared to just 4% who opposed the idea. This is why three-fifths of all U.S. states now have medical marijuana laws on their books, and more than 90% allow the use of cannabidiol, the non-psychoactive component of cannabis, for select ailments.
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You'd think with support like this that the United States would be leading the charge of progressivism on cannabis, but it's actually quite the opposite. Congress has dug in its heels on cannabis in the U.S., leaving its Schedule I classification firmly in place. This means marijuana remains wholly illegal, prone to abuse, and has no recognized medical benefits. It also means businesses involved in the weed industry in the U.S. can't take normal corporate income-tax deductions, per U.S. tax code 280E, and that access to basic banking services is extremely limited, if not cut off entirely.
Five reasons Canada's recreational weed bill will become law by June
Instead, we've seen Canada take the lead in advancing their cannabis industry. In April 2017, bill C-45, known more commonly as the "Cannabis Act," was introduced in the Senate as a means to legalize recreational marijuana. Should this bill become law, Canada would be only the second country in the world, the other being Uruguay, and the first developed country overall, to legally allow adults over 18 to purchase marijuana for personal use. In total, we could be talking about the addition of $5 billion or more in annual sales.
The big question, of course, is: Will it pass?
Though nothing is a given when it comes to politics, I'd consider it an all but foregone conclusion at this point that the Cannabis Act will be signed into law by sometime in mid-June. How can I be so confident in its passage? Here are five reasons to bolster the argument for passage.
1. The opposition is in the minority
One telltale sign of passage? Even though not everyone supports the Cannabis Act, conservatives in Canada's parliament make up too small a group to stop it from passing.
Plus, it's worth pointing out that a number of the concerns conservative lawmakers have had are being addressed. Just as in the U.S., conservative lawmakers in Canada worry about adolescents gaining easier access to pot if C-45 becomes law, as well as how legalizing adult-use cannabis could impact driver safety. These worries are being addressed at the provincial and local level, with local police in charge of enforcement, if approved.
2. Low excise tax rates allow legal pot to be price-competitive with illicit marijuana
Secondly, the proposed excise tax rate on legal cannabis should make it very price-competitive with the black market. Prime Minister Justin Trudeau, who's been campaigning for legal adult-use pot for years, has sought a way to cut the black market out of the equation. A devised tax rate of roughly $0.77 per gram (CA$1) on cannabis costing up to $7.70 per gram (CA$10), or a flat 10% on cannabis above that price per gram, should do the trick. This excise tax rate is significantly lower than what Canadians currently pay for alcohol and should compel consumers to make their cannabis purchases in legal channels.
What's more, it's worth recognizing that unlike the U.S., Canada's goal of legalization isn't to generate tax revenue. Though this tax revenue will cover some aspects of local regulatory costs, as described in more detail in the next point, it's really about creating a price-competitive product to drive the black market out of Canada.
3. Tax-sharing agreements in place with all but one province
Next, the Canadian federal government worked out a two-year tax-sharing agreement with all provinces, save for Manitoba. Under the terms of the agreement, each of the provinces will receive 75% of excise tax revenue collected, with the remaining 25% going to the federal government. Why more for the provinces, you ask? Since they're on the front-line of regulating the Cannabis Act, they'll need the money for enforcement purposes.
Additionally, a provision exists within the tax-sharing agreement that may allow the provinces to collect even more. Over the first two years, the maximum the Canadian federal government can take in annually is $77 million (CA$100 million). Every cent over this amount, should it be hit, will be distributed back to participating provinces. In other words, the individual provinces are onboard and financially happy (with the exception of Manitoba).
4. A proven track record of success with medical cannabis
Fourth, Canada has a proven track record given that it legalized medicinal marijuana back in 2001. Since this legalization, Health Canada, the Canadian equivalent of the U.S. Department of Health and Human Services, has overseen aspects concerns licensing, patient enrollment, production, and even product quality. The fact that this has been ongoing for years shows that Canada has laid the infrastructure needed to be successful.
Not to mention, we've already witnessed a handful of large-scale cannabis growers turning nominal profits solely on account of medical patient sales. Both Aphria (NASDAQOTH: APHQF) and MedReleaf (NASDAQOTH: MEDFF) have reported full-year profits in each of the past two years solely on the basis of medical marijuana revenue.
5. Follow the money trail
Last, but not least, follow the money. Again, while nothing is a given when it comes to politics, we've witnessed hundreds of millions of dollars being invested in capacity expansion in Canada over the past two years. There's absolutely no reason these growers would have undertaken such projects had recreational marijuana not been a near-certainty in the future.
What sort of projects are we talking about here? For instance, the aforementioned Aphria and MedReleaf are each working on organic and inorganic expansions. Aphria has a more than $100 million grow facility that'll span 1 million square feet and yield 100,000 kilograms of weed a year that's slated to be done by January 2019. It also has a partnership with Double Diamond Farms that should produce 120,000 kilograms of dried cannabis annually.
Meanwhile, MedReleaf is organically expanding its Bradford facility in Ontario, and it recently acquired 164 acres of land -- 69 acres of which already had an existing facility that it can retrofit for cannabis production -- in a cash-and-stock deal to quadruple its annual output to 140,000 kilograms.
Without putting a stamp on it, I'd strongly suggest that legalization is a foregone conclusion at this point in Canada.
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