Pot Tax Deal Could Bring Revenue Boom for Canada’s First Nations

From bloombergtax.com link to article by James Munson, Oct 21 2019

Indigenous leaders from across Canada want to vastly expand their stakes in the cannabis industry by striking a deal on sales tax revenue with the federal government.

An agreement would reduce lost tax revenue from illegal sales on First Nations lands, give indigenous businesses more power to work with mainstream pot firms, and provide indigenous governments with potentially billions of dollars in revenue, said Manny Jules, chief commissioner of the First Nations Tax Commission.

“There’s no doubt it’s substantial and it’s in those types of numbers,” Jules said of the potential revenue. His Kamloops, British Columbia-based group manages property tax revenue for 125 First Nations.

The commission is one of several groups working on a proposed framework for a deal that must be submitted to the federal government by April 2020, though Jules said it should be done much earlier. If Ottawa agrees to the framework, the federal government will have to introduce bills in Parliament and make regulatory changes to make it happen, he said.

Pot stores on First Nations lands, which have different levels of control over their revenue, have sprung up all over Canada since legalization took effect in October 2018.

Canada’s pot sector has grown to be worth C$8.3 billion ($6.3 billion) annually—a 24% increase over last year, Statistics Canada said in July.

The push to tax the industry in Canada comes alongside similar efforts in the U.S. Eleven states have already legalized pot, and two others—Florida and Pennsylvania—may be next. A Pennsylvania state lawmaker proposed taxing the product at 17.5%, a move that could bring in $500 million in the first year alone.



Negotiations Needed

Indigenous retail operations are generally more attractive to investors, because they are faster at approving permits than municipalities, Luke Biles, a Victoria-based senior manager at accounting firm MNP LLP.

About half of the 525 applications to open pot stores in British Columbia are waiting for approval from municipalities or First Nation governments, Biles said.

But the quest for greater First Nations participation in the pot business isn’t without its hiccups. Ottawa didn’t consult First Nations on how the industry would work in indigenous areas before legalizing pot, and no provision was made for First Nations to get any tax revenue.

First Nations ideally would see 100% of the tax revenue from pot sales in the framework, Jules said. Ottawa struck a deal prior to legalization that gave provinces and territories 75%.

First Nations are challenging who has jurisdiction over commercial activity in their lands and who should collect sales tax when non-indigenous buyers and suppliers are involved. That will require all First Nations with a stake in the industry to speak with one voice on the proposal, and agree to centralize some of the administration—a major hurdle, Jules said.

Non-indigenous people pay federal, provincial, and territorial sales taxes when they buy from First Nations stores and the stores pay a duty if they buy cannabis products from the licensed market.

The federal government—whose political activities are on hold until a general election takes place on Oct. 21—has been speaking with First Nations about changing tax revenue arrangements as part of its drive to create a new fiscal relationship with First Nations, Finance Canada spokesperson Marie-France Faucher wrote in an email.

The Assembly of First Nations, a national group of community chiefs, is currently arranging meetings on the proposed cannabis framework, spokesperson Monica Poirier wrote in an email.



Billions of Dollars

The outcome of those negotiations could result in a windfall for First Nations, whose tax revenue from cannabis sales could reach C$2 billion by 2022, said Isadore Day, CEO of Bimaadzwin, an advocacy group for First Nations.

Official figures on the size of First Nations pot sales don’t exist, but government figures on the size of the illegal market can help provide a picture. The bulk of black market pot is likely purchased from indigenous-led stores, said Day, who is also involved in proposing a tax deal.

Illegal pot accounted for about C$4.7 billion of the C$5.9 billion in household spending in the last three months of 2018 as an annual rate, Statistics Canada said.

A tax agreement would encourage unlicensed dealers on First Nations lands to get approval from their governments, which would increase tax revenue for the governments, Day said.



‘Going to Grow’

The Assembly of First Nations held its first national conference on taxing cannabis in early September and is also involved in the talks.

The Tseshaht First Nation in British Columbia opened Orange Bridge Cannabis in September along a stretch of highway that connects the surfing destination of Tofino, making the store a popular drop-in for tourists.

The store is starting to pay off its loans, and has hired several employees—but a tax agreement could mean the Tseshaht could expand their operations far beyond local ventures, said Ken Watts, a Tseshaht counselor.

“It’s going to grow into something pretty amazing for the whole province,” he said.

The same could be true for Manitoba’s Opaskwayak Cree Nation, which could grow its partnerships with outside cannabis companies, Chief Onekanew Christian Sinclair said.

The First Nation has made nearly C$4.5 million in the past nine months in fees for loans made to companies like Meta Cannabis Supply Co., in which it holds an 8.4% equity stake, Sinclair said.

“We’re paying off our initial investments and we’re reinvesting back into the community by way of social infrastructure,” he said.

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