Through a formal response, the Canadian DSA voices concerns that proposed fees will have an adverse impact on direct sellers
By: David Bland
In a significant development that could impact the accessibility and cost of natural health products (NHPs) across Canada, the country’s national health department, Health Canada, has announced a proposed fee aimed at offsetting regulatory costs. Responsible for overseeing various aspects of health standards and wellness policy to ensure public safety, Health Canada unveiled the plan on May 3, revealing its intention to levy a fee on manufacturers and distributors of natural health products as part of an effort to enhance oversight and ensure product safety. The department closed public comments and consultations on the proposal on Aug. 10, 2023, and is working toward an implementation date of April 1, 2025.
While proponents argue that the fee could bolster consumer confidence and quality control, critics express concerns about potential cost burdens on small and medium-sized businesses and how that could impact consumers who rely on these products. Opponents to the new fee also warn that Canadian consumers may order more non-compliant health products from outside Canada.
NHP Framework to Mirror Fees for Human Drugs and Medical Devices
According to Health Canada, the strategy of introducing fees, recognized as cost recovery, has been used for select health products since the 1990s, while natural health products in Canada have been regulated by the governmental department since 2004. By embracing cost recovery fees, Health Canada seeks to fund its operations without being solely dependent on public funding from taxpayers.
In a bid to establish consistency across various health product categories, Health Canada is putting forth a fee framework for natural health products akin to that which was enacted on April 1, 2020, for human drugs and medical devices. The proposed structure encompasses three distinct categories:
- 100% coverage of overall expenses for site licenses (SLs). This fee aims to provide financial backing for activities including new site license applications, site license renewal, and post-market compliance and enforcement efforts. In cases where a site undertakes multiple regulated activities, a single fee will be applied based on the most costly activity conducted at that particular site.
- 75% coverage of overall expenses linked to pre-market evaluation (EVAL). This fee is based on the time it takes Health Canada to review a product submission package, not including the time spent conducting the initial screening.
- 67% coverage of overall expenses associated with the right to sell (RTS) NHPs. This fee gives companies the exclusive right to sell their natural health products in Canada.
Small Business Mitigation
In an effort to lessen the impact of the new fees on small businesses, Health Canada is proposing a small business fee reduction. Defined as a company with fewer than 100 employees or between $30,000 and $5 million in gross annual revenue, including affiliates, small businesses will be eligible for the following fee mitigations.
- 100% reduction for first-ever NHP EVAL submission
- 50% reduction for all subsequent EVAL submissions
- 25% reduction for SL and RTS fees
Canadian DSA Makes Formal Submission Outlining Concerns
The Direct Sellers Association of Canada (DSA) submitted a formal response to Health Canada in August, outlining its concerns regarding the proposed fees for NHPs. In a bid to engage in the regulatory discourse, the DSA’s submission highlights potential challenges and implications that the proposed fee structure could pose to the Canadian direct selling industry and its stakeholders.
The Association’s submission highlighted seven issues that its leaders believe merit consideration before the fee schedule for NHPs is finalized.
- Consumer Choice and Affordability
The DSA leaders believe that the cost recovery plan could lead to reduced product variety and the cancellation of new NHP formulations, affecting both Canadians and the economy amid inflation concerns. A majority of respondents to a NHP survey conducted by the DSA say they predict higher retail prices for Canadian consumers due to proposed cost increases.
Meanwhile, Health Canada is conducting a separate consultation titled “Consultation on Improving Access to Drugs and Other Health Products in Canada,” aimed at addressing shortages and enhancing consumer access.
The Association’s leadership suggests in its submission that the new Consultation appears inconsistent with the cost recovery proposal’s recommendations and impacts, citing as an example that around 30% of surveyed direct sellers’ NHP offerings are niche products that are crucial for consumer health despite low revenue. DSA Canada members foresee these products being removed with cost-recovery fees, impacting consumers’ access to vital NHPs.
- Economic Impacts
The DSA’s report reminds Health Canada that the economic impact of NHPs sold through direct selling in Canada, valued at $2.5 billion annually, encompasses consumer spending, taxes, investments and employment. This impact is multiplied by entrepreneurial opportunities for independent sales consultants. The Association argues that the cost recovery proposal poses a risk to these impacts in both direct selling and the broader NHP industry.
The Canadian DSA also noted the absence of acknowledgment regarding the negative economic consequences of the proposal. The lack of a formal economic impact study during the planning and consultation period is seen as disappointing and fiscally irresponsible by the DSA.
Furthermore, the Association anticipates that the new fees will result in job losses, not only for NHP companies, but also for regulators, as fewer products are submitted for approval and companies reduce operations in Canada, thus reducing the number of staff needed to facilitate the fees.
- Inhibiting Innovation
The DSA notes that innovation is vital for the direct selling industry, especially for smaller businesses, to differentiate and cater to evolving consumer needs. Bringing innovative products to market is risky, as success is uncertain.
However, the Association warns that the proposed plan would substantially increase costs for introducing new products, particularly in Class III or Class III Novel categories. Since many NHP formulations lack patent protection, the motivation to develop and market innovative NHP products will decline due to higher costs. The absence of refunds for unapproved product license applications further weakens this incentive.
“If Canada is not seen as a supporter of innovation, companies will invest their time and expertise in other countries, where they see a better chance of a positive return on investment,” the DSA says in its submission.
- Fee Structure
The DSA also reminds regulators that, industry-wide, the incorporation of cost recovery charges within Health Canada’s Self-Care Framework is generally acknowledged. Most businesses are willing to pay for high-quality, transparent, timely, and customer-centric services.
Furthermore, the Association states that its members express readiness to adopt a fee-for-service approach if charges are reasonable and substantial service standard enhancements accompany them. This would establish certainty and predictability for both their domestic and global operations.
The Association highlights three distinct fees and types of fees from the proposal that present challenges for direct selling firms.
Firstly, a $58,332 charge for a Class III novel application is overly restrictive, especially considering Health Canada’s lack of clear definition for such products. Moreover, the proposed review time standard for these products is longer—300 days compared to the current 210 days, contradicting reasonableness, timeliness, and service standard improvement.
Secondly, the DSA states that importer site license costs exceeding $20,000 could deter companies exploring entry into the Canadian market. This could also adversely affect businesses striving to uphold their own high standards.
Finally, the Association pushes back against the annual right-to-sell fee of $542, suggesting that this fee will create obstacles for businesses with extensive product ranges or those catering to niche markets. This approach may result in the removal of significant products, leading to diminished investments and employment prospects.
- Fee Calculations
Health Canada’s fee structure calculations include charges allocated for funding prospective costs to support future NHP regulatory infrastructure. The Canadian DSA asserts that fees related to prospective costs might be regarded as a tax, obligating current market participants to finance future regulatory infrastructure. Health Canada lacks the authority to impose taxes without Parliamentary approval.
Should these charges not be deemed as taxes, the existing statutory authority for cost recovery strictly limits charges to actual costs. The Association maintains that prospective costs inherently surpass actual costs, thus remaining beyond Health Canada’s authority and not constituting reasonable cost recovery.
Furthermore, charging for prospective costs could potentially clash with Canada’s obligations under the CUSMA Trade Agreement. CUSMA restricts allowable fees for certain activities, such as “conformity assessments,” to recovering approximate costs for completed services, excluding prospective or uncompleted services.
- Entrepreneurial Impact
The DSA points out that there are over 1.1 million active independent sales consultants (ISCs) in Canada’s direct selling sector. These ISCs, with 84% identifying as women, rely on the additional income from part-time direct selling endeavors to support themselves and their families. Annually, they generate $1.57 billion in personal revenue, aiding mortgage payments, children’s activities, and financial stability.
Around 45% of current ISCs in direct selling earn income from selling NHPs. However, the DSA argues that Health Canada’s proposal could negatively impact ISCs by reducing product options, stifling innovation, and causing companies to exit the Canadian market.
- Personal Use (Not-For-Resale) Exemption
Raising a point of particular importance to direct sellers, the DSA asserts that the Health Canada proposal poses the risk of burdening small and medium-sized businesses with unaffordable fees, causing larger businesses to reconsider their operations in Canada due to the added expenses.
One potential strategy for international companies is shipping from non-Canadian warehouses to consumers using Canada’s personal use exemption. This exemption allows Canadian consumers to order up to 90 days of non-compliant products from outside Canada. Some non-resident and non-DSA Canada member direct sellers already employ this approach, while others use it temporarily or partially to navigate licensing delays.
The DSA, along with industry responders, expresses concern that the proposal could lead to increased orders of non-compliant products from outside Canada and international companies adopting this method for Canadian business. This could disadvantage businesses fully committed to Canadian regulations.
These shifts could elevate consumer risk by promoting consumption of unregulated products, reduce investments and tax revenues in Canada, and diminish income prospects for direct selling independent sales consultants. This is because products under the personal use exemption cannot be marketed or generate commission revenue in Canada.
Proposal’s Potential Impact on Direct Selling in Canada
The Health Canada proposal has wide-ranging implications for the direct selling industry, especially for the significant number of active independent sales consultants who play a significant role in Canada’s economic landscape.
The proposal’s potential to impact businesses of varying sizes, alter market dynamics, and influence international operations could reshape the industry’s trajectory and the future landscape of the direct selling sector in Canada.