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marijuana legalization

A man lights a marijuana cigarette during a protest on Parliament Hill in 2012. After plans for the federal excise tax were tabled on Tuesday, premiers promised to fight to collect more than half of all revenueSean Kilpatrick/The Canadian Press

Ottawa will charge GST on recreational marijuana in addition to the planned excise tax of $1 a gram, threatening to make legal cannabis more expensive than its black-market competition.

The federal government's plan to legalize marijuana by July 1 is designed to replace the illegal market with a heavily regulated industry, but experts say the final sales price will be key to its eventual success or failure. Parliamentary Budget Officer Jean-Denis Frechétte warned Wednesday in a blog post that an excise tax would likely push the price of legal marijuana above black-market prices observed in 2015-16.

Ottawa announced the planned excise tax on Tuesday, stating that the revenue would be shared equally with provincial governments.

The Department of Finance said on Wednesday that it would also charge the goods and services tax on recreational marijuana, just like it does with alcohol and tobacco.

"The treatment of cannabis products is in keeping with this approach," said Chloé Luciani-Girouard, a spokeswoman for Finance Minister Bill Morneau.

The debate over taxing marijuana comes amid warnings from the federal budget watchdog that high taxes on the drug will only boost the illegal market.

According to the Parliamentary Budget Officer, governments have little leeway to tax marijuana and remain competitive with unlicensed producers. The PBO estimated in a report last year that legal cannabis would cost about $7.50 a gram before taxes, compared with $8.80 for illicit cannabis.

"The government may have little fiscal space to apply tax without pushing the price of legal cannabis significantly above the illegal market price," the PBO report said.

Colette Rivet, who leads a group of licensed producers called Cannabis Canada Association, said it's "hard to say" whether Ottawa has found the right taxation level for legal marijuana at this point. In particular, she said, other elements will increase the final price tag for consumers, such as the potential cost of government-run distribution and retail networks in provinces such as Ontario.

"A government monopoly would definitely be more costly and taxpayers would be covering the cost," she said.

Vancouver lawyer Kirk Tousaw, who works with a number of players in the marijuana industry, said licensed producers should be able to compete with the black market even with the addition of the excise tax.

"The much bigger problems are, federally, the lack of sufficient production capacity and the continued overregulation of producers, and the provinces that opt for government monopolies on retail and vastly underestimate the amount of storefronts that will be necessary," he said.

Liberal MP Bill Blair, who is the parliamentary secretary to the ministers of justice and health, said Ottawa deliberately decided to keep taxes low on marijuana after looking at other jurisdictions that have legalized the drug. In Washington State, for example, marijuana is subject to a 37-per-cent excise tax.

"The feedback we're getting from the industry is that it's a very responsible approach and consistent with everything we've said about the importance of keeping the price low to compete with the black market, but not so low that we incentivize people, particularly young people, to enter the market," Mr. Blair said.

Philippe Lucas, executive director of the Canadian Medical Cannabis Council, said marijuana must ultimately come in at less than $10 a gram, taxes included, to be competitive. He said Ottawa should remove sales taxes on medical marijuana to ensure that ill Canadians don't start using recreational products.

"If there is no price difference between the medical and recreational markets, it will create a disincentive for patients to continue their relationship with their physicians," he said.

Bruce Linton, the founder and chief executive of Canopy Growth Corp., said his firm is capable of producing marijuana for $1.28 a gram, making it competitive with illegal producers. However, he cautioned that other costs, such as overhead, shipping and packaging, also need to be factored in.

"There is room for everybody to work in this, because the black market isn't a bargain and it won't get cheaper if they face pressures from law enforcement," he said.

After plans for the federal excise tax were tabled on Tuesday, premiers promised to fight to collect more than half of all revenue.

B.C. Premier John Horgan said the responsibility for enforcement and regulation of recreational cannabis sales "will be done largely at the provincial level, largely at provincial costs [and] should not be an opportunity for the federal government to collect revenues."

With a report from Justine Hunter in Victoria

Prime Minister Justin Trudeau is proposing a federal tax on recreational cannabis, once it becomes legal. Premieres at a Tuesday first ministers meeting argued provinces should get most of the revenue due to expected legalization costs.

The Canadian Press