Canadian Prime Minister Justin Trudeau proposed a tax of one dollar a gram on sales of marijuana when it’s legalized next year, his most detailed proposal yet on how he would raise revenue to pay for extra government costs while discouraging illegal sales.

The C$1 (80 U.S. cents) tax could apply to recreational marijuana sold for up to C$10 a gram, Trudeau said after meeting the leaders of Canada’s 10 provinces in Ottawa on Tuesday. For marijuana sold for more than C$10 a gram the tax could be 10 percent, he said. The tax money should be split between the federal and provincial governments, Trudeau said.

Canada is still grappling with how to tax legal pot at a price low enough to squash the black market. The nascent industry has ballooned in value amid optimism over Trudeau’s plans for recreational sales, which Canaccord Genuity Group Inc. said could reach C$6 billion by 2021.

Trudeau needs to negotiate with provincial leaders who by next July must set up a system of retail distribution and train police on roadside checks for impaired drivers. The provinces also share power over some sales taxes with the federal government, and Trudeau said the premiers resisted his proposal because they are seeking more money.

“The burden of legalizing and implementation of this will be borne by provinces, and by doing so we believe the lion’s share of the revenue form the tax should end up with the provinces,” Nova Scotia Premier Stephen McNeil said after Trudeau spoke.

Illicit Sales

Trudeau stressed that the total tax take can’t be so large as to keep the black market alive.
“Nobody’s mindset on this approach is about bringing in tax revenue,” Trudeau said, adding it’s about making sure governments “protect our kids” from illicit sellers.

In order to lure consumers from the black market, the final tax price needs to be at an attractive point, said Neil Closner, chief executive officer of MedReleaf Corp. Companies like MedReleaf are hoping the governments will soon clarify precisely what provincial and federal taxes will be, he said.

“Taxes, both federal and provincial, are an important element of the final sales prices to the consumer,” Closner said by phone.

The federal government is probably taking cues from different U.S. jurisdictions that have legalized marijuana, as a C$1-per-gram tax would still allow companies to be competitive, said Cam Battley, an executive vice president at Aurora Cannabis Inc. Currently, a gram of illicit cannabis sells for around C$8 to C$10 across Canada, he said.

“That sounds to me like a reasonable proposal and not a barrier for Aurora to successfully compete with the black market,” Battley said by phone. “It’s in all of our minds that that’s a critical objective to carve away the black market.”

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