Canada: Health Canada Revamps Cannabis Licensing Process

Last Updated: May 21 2019
Article by Eric Foster, James M. Wishart, Scott Rozansky and Shea Coulson

On May 8, 2019, Health Canada, the body responsible for administering federal cannabis licences, announced a major change in the application process for granting licences to cultivate or process cannabis, or to sell cannabis for medical purposes. The changes took effect immediately and are likely to have significant impact on parties who are already in the application queue and anyone contemplating an application for a federal cannabis licence.

The new application process

Applicants for licences to cultivate cannabis, process cannabis, or sell cannabis for medical purposes are now required to have a fully-built site that meets all of the requirements of the Cannabis Regulations at the time they submit their application, in addition to fulfilling the other application criteria. Aside from this change, the other application requirements have remained the same.   

Under the previous regime, applicants were able to obtain a Confirmation of Readiness (COR) letter from Health Canada with minimal capital investment and prior to commencing the building of the proposed site. A COR officially notifies the applicant that the application has been reviewed and all criteria have been met "on paper", including the security clearance of all applicable personnel. Many applicants used the receipt of a COR as an indication to investors that they were a candidate for investment and as a trigger to commence building their licensed site.

Now, applicants must submit—along with their paper application—an "evidence package" demonstrating that their proposed facility (for cultivation, processing and/or sale) meets the licensing criteria. Put otherwise, applicants must front-load their largest capital investment before even submitting their application, and face the risk that their application might not ultimately be approved by Health Canada.  

In an effort to mitigate this risk and provide more guidance on facility construction, Health Canada has amended the Cannabis Licensing Application Guide, and released a Physical Security Measures Guide for Cannabis and a Good Production Practices Guide for Cannabis to include some additional detail and advice on how to meet mandatory facility criteria. 

The rationale

According to Health Canada, over the past three years, more than 70 percent of applicants who successfully navigated the paper-based review (leading to a COR) have failed to provide evidence of a fully-compliant cannabis facility. As such, Health Canada has advised that "a significant amount of resources are being used to review applications from entities that are not ready to begin operations, contributing to wait times for more mature applications and an inefficient allocation of resources."

As more applicants seek to enter the legal market, Health Canada has instituted these changes to help shorten the time it takes for applicants to gain access to the market, thereby fostering the efficient operation of Canada's legal cannabis market.

What about existing applicants?

There are currently more than 700 applicants in the queue for cultivation, processing or medical sale licences that may be impacted by the changes to the licensing process. Health Canada has stated that it will complete a "high level review" of the applications currently in the queue. The applications that pass this review will be sent a letter indicating there are no concerns with what has been proposed in the application. Health Canada will review the application in detail once the applicant has completed the construction of a facility compliant with the Cannabis Regulations, and submitted its evidence package. Health Canada has confirmed that compliant applications will be reviewed in priority order, based on the original application date.   

Shortly following its announcement, Health Canada has begun to send update letters to applicants who are deemed by Health Canada to have undergone the undefined "high level review. These  letters state that "Based on the information assessed, Health Canada has no critical concerns with the application at this time." It remains to be seen whether these letters provide the recipients or their investors with sufficient comfort to proceed with the buildout of their facilities.

Dentons Canada's insight 

Health Canada has suggested that its revamped process is consistent with the licensing approach in other regulated sectors, including pharmaceuticals, and will hopefully bring increased efficiency and reduced wait times to the licensing process. However, it remains unknown how these changes will ultimately impact the overall timing for the issuance of licenses and, perhaps most importantly, the types of applicant that will ultimately be successful in obtaining such licenses. 

It has been well documented that many of the 700-plus applicants currently in the queue are already finding it challenging to obtain the necessary capital to complete their proposed site. Moreover, the revamped process will likely act as a barrier to entry for certain new applicants who could previously commence the application process (and utilize Health Canada resources) without having any funding in place. As such, the changes, on their face, seem to benefit those applicants who are already well-capitalized, which may include existing Licensed Producers. In this regard, existing Licensed Producers might also benefit from their prior experience of how to build a compliant site in a cost-effective manner, whereas new market participants will be relying exclusively on Health Canada publications and guidance, or licensing consultants to complete their sites.

On this latter point, we note that in its communications in respect of this modified approach, Health Canada has publicly committed to support small entrepreneurs and First Nations to take advantage of opportunities in the cannabis industry. It remains to be seen what effect the current application process changes will have on Health Canada's ability to meet that commitment.

Indeed, there is little doubt that many hopeful market entrants, with or without applications in process, are currently re-evaluating their options. It is reasonable to expect that such applicants may have to scale down their initial plans, and complete an initial phase that is smaller and has different economics than what they had originally planned. In this regard, half-serious proposals for 100-square-foot "phase 1" cultivation facilities are already appearing in industry forums. To the extent this strategy takes off in any form, Health Canada may face a new backlog in the form of applications for licence amendments some time in the future.

The authors gratefully acknowledge the contributions of Stuart Ruffolo.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

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