Marijuana firms are warning that Ottawa’s move to impose an additional $100-million in taxes ostensibly to recoup regulatory costs – on top of hundreds of millions in government revenue expected from excise taxes − will hurt their ability to undercut the cannabis black market.

Health Canada, which recently announced a proposed “annual regulatory fee” of 2.3 per cent on the gross revenues of big cannabis producers, is facing industry pushback on the levy in the runup to the Oct. 17 legalization of the recreational market in this country.

The fee would be in addition to the $1-a-gram excise tax on cannabis that has already been announced and will go mainly to the provinces. Health Canada is giving companies and other interested parties 30 days to comment on the plan.

According to the federal agency, the proposed fees would allow the federal government to meet all of its costs by 2020, except in terms of law enforcement.

However, in an interview with The Globe and Mail, a spokesman for a coalition of many of Canada’s biggest cannabis producers said the new fee would be premature and hurt the nascent industry as it tries to compete with well-established illegal producers.

“We don’t believe it’s appropriate at this time to enact this new policy, until we have a few years under our belts and we have some hard data to be able to track our success in moving toward our goal of suppressing the black market,” said Allan Rewak, executive director of the Cannabis Canada Council.

The root system from a cannabis cutting is photographed at the CannTrust Niagara Greenhouse Facility during the grand opening event in Fenwick, Ont., on June 26, 2018.

Mr. Rewak, who said the council was concerned and surprised by the proposal, underlined that it could adversely affect the business models of many industry players. “Obviously, the industry wants to pay its fair share and contribute,” he said. “But the timing is intensely problematic, as many of our members have signed multiyear supply deals that didn’t factor in this additional and very, very significant cost.”

Mr. Rewak said a formal submission will be made in the coming weeks to Health Canada to oppose the planned fee structure, or at least to defer its implementation. Known as C3, the council represents companies such as Canopy Growth Corp., Aurora Cannabis Inc. and Tilray Inc.

Deepak Anand, a consultant in the cannabis industry, said the exemption of the fee on companies that only grow cannabis for medical purposes stands to have unintended consequences.

“I fear that this will cause larger licensed producers with multiple sites to allocate all medical production and sales to a specific site, which may as a result reduce the strain and product selection available to medical patients,” he said.

The proposed annual regulatory fee would aim to cover the overall costs of evaluating and approving new production licences, inspecting facilities and other regulatory enforcement activities. The money would be used to cover expenditures that will be borne by Health Canada, the Canada Border Services Agency and Public Safety Canada.

In addition to the annual regulatory fee, Health Canada is planning to impose smaller fees to screen licence applications (up to $3,300 per application) and to conduct security screening of employees ($1,650 per employee). Those are not opposed by C3.

“Cost recovery is a standard practice across the Government of Canada to support program delivery. The proposed fees have been designed to enable a diverse and competitive legal industry made up of large and small players, to facilitate research and development, and to maintain access to cannabis for medical purposes,” Health Minister Ginette Petitpas Taylor said in a statement.

Health Canada it is planning to approve about 200 new production licences every year. There are currently 112 licensed producers in Canada, with hundreds more awaiting approval.

As part of its plan, Ottawa will start granting a new category of licences that cover microcultivation and microprocessing. The small-scale producers could grow cannabis in production facilities of less than 200 square metres, or process less than 600 kilograms of dried cannabis a year.

The 2.3-per-cent annual regulatory fee would apply to large producers, while microcultivators and microprocessors with gross revenue under $1-million would pay a fee of 1 per cent.