Regulators play 'Whac-A-Mole' as Vancouver's illegal pot shops flourish

The provincial government says it has no estimate of how much potential tax revenue is lost due to the illegal cannabis retailers’ continued operation. Statistics Canada has found B.C.’s pot consumers are the least likely in Canada to use the legal market.

Across B.C., other legal cannabis shops also report seeing a “measurable impact” when a nearby illegal competitor closes down, said Jaclynn Pehota, executive director of the Association of Canadian Cannabis Retailers.

“That is a universal experience across the province,” Pehota said.

Members of her industry association report that when a nearby unregulated shop is raided and closed for some period of time — usually reopening within a few hours — their legal store typically sees about a 30 per cent boost in sales.

Jaclynn Pehota, executive director of the Association of Canadian Cannabis Retailers, outside Kiaro Cannabis on Graveley Street in Vancouver. PHOTO BY MIKE BELL /PNG

More than two years after cannabis legalization came into effect across Canada, illegal retailers remain a significant challenge, especially in B.C.’s most populous city, Pehota said. “Vancouver seems to be something of a stronghold for these unregulated operators.”

She compares it to fighting “a hydra.” When regulators cut off one head, she said, “seven more pop up all over the place.”

B.C. launched a new organization called the community safety unit, or CSU, to police illicit cannabis sales. But while legal cannabis operators criticize the CSU for its apparent lack of enforcement, the unit has received public backlash on some of the rare occasions when they have taken action.

Most British Columbians view cannabis as innocuous, so the B.C. NDP government might feel that the potential blowback from cracking down on illegal dealers outweighs the public appetite for such enforcement, Pehota said.

“From an optics perspective, no politician wants to be perceived as stealing the medicine of cancer patients.”

‘Like a Whac-A-Mole game’

There are about 275 privately owned licensed cannabis retailers  in B.C., and 25 government-owned stores.

The Ministry of Public Safety does not know how many illegal cannabis stores operate in B.C., a ministry representative said in an emailed statement. “Illegal unlicensed cannabis stores open and close on a regular basis and temporary cannabis stores can pop up without our knowledge.”

But in the City of Vancouver alone, there were 18 unlicensed weed stores at last count, compared with 36 licensed retail locations.

Vancouver’s chief licence inspector, Kathryn Holm, acknowledges the number of unlicensed stores in the city has not been decreasing in the two years since legalization. New illegal stores keep popping up, Holm said, so the number fluctuates in “a dynamic ebb and flow.”

Often, when one illegal shop is closed, another one opens across the street, Holm said. “Like a Whac-A-Mole game.”

“I completely understand and appreciate their frustration that these illegal operators persist,” Holm said. “It’s a transition, and it’s going to take time.”

Most of Vancouver’s unlicensed stores have no business licence at all, said Holm. “Generally they operate without any form of authorization from the city, whether it’s land use or licensing.”

That’s a particular frustration for legal pot sellers in Vancouver, where the cannabis retail licence fee costs $33,958 a year — more than 15 times the price of a liquor retail licence,and almost triple the maximum licence fee for a casino or horse-racing track. Cannabis licence fees in other municipalities are a fraction of what Vancouver charges.

Not every municipality has the same problem with illegal shops. City hall representatives this week from Surrey, Richmond, Burnaby and North Vancouver said they were aware of zero unlicensed cannabis storefronts inside their borders.

The ‘new breed’ of illegal retailers

Matthew Greenwood’s licensed Mount Pleasant cannabis shop, Up in Smoke, had been running since 2014. It voluntarily shut down when cannabis was legalized in 2018, in order to get licensed and become a legal seller. The licensing took almost two years, during which time Greenwood and his partners borrowed money from family members to stay afloat and keep paying rent to their landlord for the empty space.

But during the 21 months Greenwood and his partners waited, an unlicensed storefront kept selling pot across the street. That store, which was known as Herbs R Us until Toys R Us got a Federal Court order last year forcing them to change the name, is still running.

Up in Smoke Cannabis Shop co-owners (from left to right) Dominic Mateer, Matthew Greenwood and Maximillien Amato outside their legal cannabis store in Vancouver. PHOTO BY JASON PAYNE /PNG

Then, shortly after Greenwood’s shop was finally licensed last year and started selling legal weed, a second unlicensed competitor opened down the street.

Greenwood said the city has told him his $33,958 annual licence fee helps cover enforcement and administration of cannabis bylaws, but his unlicensed competitors keep running.

“I am extremely frustrated because I have paid for a service that I have not received,” he said.

Greenwood, who’s also president of the Association of Canadian Cannabis Retailers, believes his store could beat its illegal competitors on quality of product, value and customer experience, if only he were able to tell the world what he offers. But, he said, he’s hamstrung by the government’s strict advertising restrictions, which don’t apply to his competitors, who plaster power poles and advertise online.

“We do not want to be viewed as complainers,” Greenwood said. “We just want to compete on a level playing field because we know we will win.”

Since the CSU launched in April 2019, it has visited more than 270 unlicensed retailers “for the purposes of education and to raise awareness about cannabis laws,” the ministry said, adding that more than 150 of those shops have now closed or stopped selling cannabis.

But those figures suggest that almost half of those visits did not prompt stores to stop selling illegal cannabis. In the 20 months the CSU has been operating, it has levied 19 monetary penalties. As of this week, only one penalty, worth $771,557, has been paid.

That penalty was paid by Trees Cannabis in Victoria, which director Alex Robb described as a “grey market compassion club.” When Trees received the penalty in January of 2020, Robb said, they were awaiting a provincial licence, were in compliance with the City of Victoria’s bylaws, and had already been running for four years.

Alex Robb outside one of his empty locations in Victoria. PHOTO BY CHAD HIPOLITO /PNG

After the penalty, Trees shut down, in the hopes of eventually entering the legal system, Robb said, and they recently obtained a provincial licence.

But while Trees was in the “grey market,” it paid taxes, Robb said, including PST and GST, even though it didn’t have a provincial cannabis retail licence. Robb said paying taxes in that way — despite not being fully licensed — was common among the longer-running “legacy” cannabis sellers, many of whom had been activists for years before legalization in 2018.

Robb said he doesn’t know if the “new breed” of illegal retailers popping up in the years since legalization pay taxes, but he doubts it.

“It’s a different group of people, it’s not the activists … It seems to be fly-by-night operators,” Robb said. “Those that are popping up, I think that’s a Vancouver-centred phenomenon.”

Illegal cannabis store Herbs on West Broadway in Vancouver. PHOTO BY JASON PAYNE /PNG

‘A soft approach’

Postmedia sent requests for comment this week to four of Vancouver’s unlicensed cannabis retailers, including Herbs and Canna Clinic, but no one replied by deadline.

There is no way to know how much, if any, taxes are paid by unlicensed retailers. The province says it does not know.

In an emailed statement, a representative of the Ministry of Public Safety said: “Unfortunately, there is no way for government to estimate how much illegal stores are making just as there is no way to accurately estimate how much taxation revenue is being lost to illegal operations.”

But in this fall’s financial forecast, the B.C. government slashed its expectations in half for the year’s share of the federal cannabis excise tax, from its earlier $50 million estimate down to $25 million, citing “fewer than expected licensed retail establishments.”

Donnelly Group president Jeff Donnelly provided numbers he said were typical of a licensed retail cannabis location. A 1,500-square-foot legal cannabis retailer in Vancouver might do around $3 million in sales annually and would pay about $1.01 million a year in taxes to various levels of government, including income taxes, PST, GST and others.

“Opening an illegal cannabis store on West 4th Avenue is akin to opening a bootleg moonshine store,” said Donnelly, whose company also owns more than a dozen bars and pubs. “The moonshine store would be closed by the COV and VPD within an hour of opening. … Illegal cannabis stores are being opened all over Vancouver with no enforcement.”

StatsCan reports B.C. has both the highest proportion of cannabis consumers buying illegal product, and the lowest percentage — 16 per cent of B.C. cannabis consumers — sticking only to the legal market.

The B.C. Liberals’ public safety critic, Prince George-MacKenzie MLA Mike Morris, said the B.C. NDP “hasn’t handled this file properly from the start.”

“I don’t know why the NDP has taken a soft approach with illegal outlets,” Morris said. “They have an opportunity in front of them” to collect millions in tax revenue, he said, “and they’re squandering that opportunity.”

The provincial government would not make anyone available for an interview to discuss the CSU’s enforcement record.

Unlicensed storefronts aren’t the only place illicit pot is sold. As The Vancouver Sun‘s Kim Bolan reported last year, dozens of websites sell cannabis offering door-to-door delivery in an hour or less, even though such deliveries are illegal.

David Brown, a cannabis policy adviser for StratCann and former senior policy adviser with Health Canada’s cannabis branch, said: “We are seeing a new breed of illegal retailers who don’t necessarily operate by what were the standards of the old sort of activist dispensaries pre-legalization, and I think are likely just looking to take advantage of the gaps in the market right now.”

The Vancouver Police Department, too, has for years consistently said cannabis is not a priority and now it is in the CSU’s jurisdiction.

“We continue to focus our drug-enforcement energy on manufacturers and distributors of harmful opiates such as heroin and fentanyl, which continue to claim far too many lives,” said VPD spokesman Sgt. Steve Addison. The VPD sometimes assists the CSU with seizures or arrests, he said, but the CSU “takes the lead” on illegal cannabis sales.