Nearly eight years after Canada legalized cannabis, the illicit market remains resilient, largely due to tax policies that have hindered the growth of the legal industry. The tax framework established under the 2018 Cannabis Act was intended to reduce youth access, curb criminal profits, and promote public safety by creating a regulated market. While legal sales now represent roughly 75 percent of the market, illegal dispensaries continue to operate openly, including an estimated 77 unlicensed outlets in Toronto alone. Unauthorized online sellers and street dealers remain active nationwide.

Legal producers and retailers face stiff competition from black-market suppliers who avoid the costs and regulations imposed on the formal sector. According to Health Canada, illegal cannabis is more prone to contamination with heavy metals, pesticides, and microbes, posing health risks. Moreover, unregulated suppliers are often linked to organized crime networks involved in illegal firearms and human trafficking.

Stronger enforcement against illicit vendors is part of the response, but the core aim of legalization was to use market forces, rather than police action alone, to eliminate the illegal trade. One key challenge is price: illicit cannabis is consistently cheaper. This is not simply a matter of buyers breaking the law; legal cannabis is heavily taxed, which raises retail prices.

Cannabis is subject to a federal excise tax of 10 percent or $1 per gram, whichever is higher. Initially based on an assumed price of about $10 per gram, the tax has become disproportionately burdensome as prices fell. For example, the average wholesale price for dried flower sold by Ontario Cannabis Stores was $3.75 per gram last year, making the $1 excise tax nearly 27 percent of the wholesale price. In addition to the federal excise, provincial excise taxes and sales taxes apply, and provinces that operate their own retail outlets impose further markups. Altogether, government draws can exceed 40 percent of the final consumer price.

This taxation approach has turned cannabis into a significant revenue source for governments. Statistics Canada reports that in the 2024-25 fiscal year, legal cannabis sales totaled $5.5 billion, with federal and provincial governments collecting $2.5 billion in taxes and fees.

Despite early optimism for commercial success, most private licensed producers and retailers have struggled to achieve profitability. Government-run enterprises remain among the few cannabis businesses turning consistent profits. Analysts, including Michael Armstrong, an associate professor at Brock University, attribute industry difficulties to intense competition and oversupply alongside taxation challenges. The Competition Bureau has specifically highlighted the excise tax as a threat to the sustainability of small and mid-sized producers.

Another complicating factor is the requirement for different excise stamps on products destined for each province or territory, certifying legality and tax payment. This practice increases regulatory complexity, as producers must manage multiple stamps and navigate interprovincial barriers when redistributing unsold inventory. Observers argue a single national excise stamp would reduce these inefficiencies, especially since tax revenues are centrally collected by the Canada Revenue Agency.

Stakeholders suggest that to achieve the original goals of legalization—eliminating the black market and fostering a healthy legal industry—governments should consider lowering taxes and simplifying regulations. Such reforms could reduce the appeal of illegal cannabis and enable the legal market to expand its share more effectively.