Canada: Can A License Issued By Health Canada For Producing Or Dealing Cannabis Be Assigned As Security?

Last Updated: January 9 2018
Article by John J. Salmas, Kori Williams and Alessandro Bozzelli

This article was co-authored by  Caitlin Choi, an articling student in the Toronto office.

Introduction

The last year has been filled with sensational headlines relating to the spectacular growth and rise to prominence of Licensed Producers (as defined below) in response to the federal government's plan to legalize recreational cannabis use by July 2018. In order to meet the expected demand by the recreational market, which some have estimated could be worth more than CA$22.6 billion, Licensed Producers have been raising capital to build growing capacity.

The primary source of financing for Licensed Producers has been equity investors, such as investment banks, venture capital firms and private equity funds, among others. There has, however, been a noticeable absence of debt financing being provided to Licensed Producers, particularly from larger institutions and banks. One reason for this is the legal uncertainty surrounding whether Health Canada licences for producing and dealing cannabis (Cannabis Licences) can be assigned as security for a loan. As one marijuana sector analyst stated earlier this year, "One of the most significant components of a [cannabis] company's valuation is its licence."1 Given the significant value that can be placed on Cannabis Licences, the ability to collateralize such licence affects a Licensed Producer's ability to secure credit.

This article briefly discusses the legal issues that arise surrounding the law in Ontario with respect to the assignability of licences and its application to Cannabis Licences. Despite the perceived ambiguity in this area, Cannabis Licences are, in principle, personal property and, therefore, assignable under the Personal Property Security Act (Ontario) ( PPSA).

Background

Health Canada issues two types of licences for the cannabis industry. Under the Access to Cannabis for Medical Purposes Regulations (ACMPR), licences are issued to producers of cannabis (Licensed Producers) who can, among other things, possess, produce, sell, deliver and destroy cannabis, subject to applicable regulations. Under the Narcotics Control Regulations (NCR), licences are issued to dealers of cannabis (Licensed Dealers) who can, among other things, produce, make, assemble, sell, provide and transport cannabis, subject to applicable regulations.

Statutory interpretation

There is no language in the ACMPR or the NCR that expressly restricts or prohibits the assignment of Cannabis Licences. The question then is whether Cannabis Licences are "personal property" pursuant to the PPSA, the governing statute for secured lending transactions in Ontario. If they are, Cannabis Licences may be treated as collateral for securing loans.

In Ontario, as in most other provinces, the definition of "personal property" does not expressly include licences of any kind. Under the PPSA, the definition of personal property consists of tangible items and "intangibles". The definition of "intangible", unhelpfully, inherently requires an understanding of the limits of personal property. The PPSA defines "intangible" as "all personal property, including choses in action, that is not goods, chattel paper, documents of title, instruments, money or investment property".

Recently, there has been a movement to include licences in the definition of personal property in the PPSA. In 2015, the Ministry of Government and Consumer Services (the Ministry) convened a panel to create a report advising the Ministry on how to modernize business laws in Ontario. The panel released its report in June 2015 with the recommendation that, among others, licences and quotas be included in the definition of "intangible" in the PPSA.2 This has been an issue at an administrative level for some time. In 1998, the Canadian Bar Association Ontario Branch recommended that amendments be made to the PPSA to include licences in the definition of "intangible". It stressed that this would not fetter the government's discretion to regulate because the discretion followed the licences into the hands of any assignee3 – an argument which the Supreme Court of Canada revived in Saulnier (Receiver of) v. Saulnier.4

Common Law analysis

In Saulnier, the Supreme Court of Canada (SCC) held that a fishing licence is property for the purposes of the Bankruptcy and Insolvency Act and the Personal Property Security Act (Nova Scotia) ( NSPPSA).

The appellants, a bankrupt fisherman and his wholly-owned company, tried to argue that their fishing licences were not "personal property" pursuant to the NSPPSA. The appellant did not want its licences to transfer to the respondent bank which held a general security agreement, in its favour, executed by the appellant. The licences in question were issued pursuant to the federal Fishery (General) Regulations (Fishing Regulations). They were estimated to be worth up to half a million dollars or more.

The appellant took the position that the licences were merely a "privilege" to do that which would otherwise be illegal – not a property right. The SCC rejected that argument and instead found that the licences were, in fact, privileges, coupled with a proprietary interest in any fish caught, pursuant to the fishing effort. The SCC determined that this type of licence bore some analogy to a common law profit a prendre, which is "undeniably a property right", in the words of the SCC.5 As such, the licences were sufficiently property-like to be considered intangible property within the meaning of the NSPPSA.

It is important to note that, the SCC's analysis was grounded in interpreting the meaning of "property" within the context of the legislation. The SCC concluded that the property aspect of the licences was sufficient to satisfy the definition of "intangible", given the broad language of the NSPPSA and the fact that it is intended to facilitate financings and the protection of creditors should a borrower default. The SCC noted that commercial licences can have significant implications for borrowers in obtaining loans, and lenders in recovering what they are owed.

Implications

Cannabis Licences are not a profit a prendre. They do not involve a right of entry to access a public resource, coupled with a property right in the products subsequently gathered. However, the SCC itself recognized that this would not be the case with statutory licences. While using the analogy to prove a property-like quality in the licence in Saulnier, it acknowledged that even the fishing licences were not truly "property" under the common law. Rather, it was a question of degree, given the commercial nature and language of the statute, as to how property-like the bundle of rights of a licence was.  

Cannabis Licences do involve the right to obtain a beneficial interest to the earnings gathered under the licence. They are essential to the value of the property created under the licence, namely the cannabis and cannabis products. Without the Cannabis Licences, neither a Licensed Producer nor Licensed Dealer are able to legally possess those goods, let alone sell them for a profit. As such, there is a property right element to Cannabis Licences that would not be true of licences that merely provide the right to do something which is otherwise illegal.

Given the highly-regulated nature of the cannabis industry, if Cannabis Licences are not assignable as security, a cannabis company's inventory would be of limited value to a creditor. The equipment of a cannabis company can also be highly specialized, and without the right to possess and handle the products, the equipment would have no value as well.

The federal government has expended significant effort in creating a statutory framework for the legalization of cannabis. If it was the government's intent to curtail the assignment of a Cannabis Licence (either because of sensitivities surrounding the Cannabis Licence itself or an attempt to limit the forms of financings available to Licensed Producers or Licensed Dealers), it could have easily done so with anti-assignment provisions within the ACMPR.

Footnotes

1 Sunny Freeman, "Why smaller banks take bigger slice of the growing medical marijuana business", Financial Post, January 30, 2017.

2 Ministry of Government and Consumer Services, "The Priority Findings and Recommendations Report" (Queen's Printer for Ontario, 2015), p. 10.

3 Canadian Bar Association – Ontario, Submission to the Minister of Consumer and Commercial Relations Concerning the Personal Property Security Act (October 21, 1988), p. 7.

4 Saulnier v Saulnier, 2008 SCC 58 at para 50 [Saulnier].

5 A profit a prendre is an ancient common law right that enables one to enter onto the land of another to extract some part of the natural produce. Similarly, the fishing licence allows access to a public resource as well as a right to the profits from whatever fish the holder is able to "harvest". 

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