Canada: Ontario's New Cannabis Retail Regime

Last Updated: October 31 2018
Article by Eric Foster and James M. Wishart

The same day recreational cannabis became legal across Canada, Ontario passed Bill 36, An Act to enact a new Act and make amendments to various other Acts respecting the use and sale of cannabis and vapour products in Ontario (Bill 36 or Bill). Bill 36 significantly amends the current cannabis regulatory regime, which was first introduced by the previous Government of Ontario. The most notable changes are the creation of a new regulatory framework for the licensing of private cannabis retail stores and scrapping the former Government's plan to limit the smoking of cannabis to private property.

Bill 36 enacts the Cannabis Licence Act, 2018 (Act), which creates a licensing regime administered by the Alcohol and Gaming Commission of Ontario (AGCO). There are two types of licences and one type of authorization under the Act; (i) a retail operator licence; (ii) a cannabis retail manager licence; and (iii) a retail store authorization.

The retail operator licence and retail store authorizations

A person may apply to the AGCO for a retail operator licence if they are 19 years of age and meet certain eligibility criteria. The AGCO will refuse to issue a licence if it determines that an applicant is not financially responsible, is unlikely to follow the licencing rules, or is unlikely to act honestly or with integrity. The AGCO also has a broad discretion to consider the "public interest" in determining whether to issue a licence. If the applicant is a corporation, all directors, officers and shareholders of the applicant must also meet the eligibility criteria.

Applicants for or holders of a retail operator licence may apply to the AGCO for a retail store authorization. Eligibility criteria, similar to that required for a retail operator licence, must be met in order to be issued a retail store authorization in respect of a proposed cannabis retail store. In addition, each application is subject to public comment, which will presumably be taken into account by the AGCO as part of its approval process. A separate retail store authorization is required for each cannabis retail store location.

Retail store authorizations will not be issued for proposed locations that are within prescribed distances from schools or to applicants who fail to meet the eligibility criteria. If an applicant is refused a retail store authorization or a retail operator licence, they must wait two years before being eligible to apply again.

Other prohibitions under the Act include the provision of any material inducements to the holder of a licence or authorization under the Act for the purpose of increasing the sale of any particular type of cannabis. This is an interesting development (in line with prohibitions in several other provinces) because the federal Cannabis Act appears to expressly permit business-to-business promotion and inducements in relation to the sale of cannabis.

Restrictions on licensed producers

Holders of licences issued under the federal Cannabis Act or commercial production of cannabis (together with their "affiliates"), are restricted to holding a maximum of one retail store authorization, and only at a site that is federally licensed for cannabis production. Notably, the term "affiliate" has been left to be defined by the regulations under the Act, which have yet to be released.1 The pending definition of this term could have material implications for federally-licensed cannabis producers with hopes of entering the recreational retail market. However, it is clear that one objective of this restriction is to prevent or severely limit "seed to retail sale" vertical integration by producers. Should the Ontario Government opt for a broad definition of "affiliate," federally-licensed cannabis producers may explore alternative business models to scale a retail cannabis strategy, such as franchising stores to independent owner-operators.

Cannabis retail manager licence

Any individual, other than the holder of a retail operator licence, who wishes to perform one or more of the following functions in a cannabis retail store is required to apply for a cannabis retail manager licence: (i) supervising or managing employees; (ii) overseeing or coordinating the sale of cannabis; (iii) managing compliance issues in relation to the sale of cannabis; and (iv) having signing authority to purchase cannabis, enter into contracts or make offers of employment. Cannabis retail manager licence holders must be at least 19 years of age, cannot have been refused such licence in the past two years, and must meet strict eligibility criteria similar to that for the retail operator licence and retail store authorization.

What about the municipalities?

Municipalities have until January 22, 2019 to make an election to prohibit cannabis stores from being located within their municipality. A municipality that has made an election may lift the prohibition; however, the lifting of any such prohibition would be deemed final and may not be reversed.

Where a municipality has passed a resolution prohibiting the sale of cannabis in the municipality, no cannabis retail store authorizations may be issued with respect to that municipality. A similar model exists for reserves. A number of municipalities have already passed or indicated an intention to pass resolutions taking advantage of this "opt-out" provision, including the Town of East Gwillimbury, City of Markham, Town of Oakville and Town of Richmond Hill.

Where they elect not to opt out, municipalities are prohibited from passing any by-laws that provide for any additional licensing requirements respecting the sale of cannabis. They are also prohibited from passing by-laws that distinguish between a use of land or use of a building for the sale of cannabis, and a use of land or use of a building that does not involve the sale of cannabis. While this limits the freedom of municipalities to shape their own approach to cannabis retail, it does have the ancillary effect of placing the political risk of these decisions on the provincial government.

The relationship between the Ontario Cannabis Retail Corporation and cannabis retail stores

Under the new retail regime, the Ontario Cannabis Retail Corporation (OCRC) is now prohibited from operating any brick-and-mortar retail stores. However, OCRC is the exclusive supplier of cannabis online to recreational consumers and the exclusive distributor to holders of retail store authorizations under the Act.

Holders of retail store authorizations are only permitted to sell cannabis that was purchased from the OCRC and in the packaging in which it was purchased from the OCRC. The amount of cannabis sold to an individual (aged 19 or older) in a single visit may not be greater than the amount permitted under the Cannabis Act (Canada) to be possessed in a public place (30 grams).

Powers of the AGCO

The Act gives broad investigative power to the AGCO, including investigating or making inquiries into the character, financial history, and competency of applicants, holders, "persons interested in the applicant or holder" and any employees of cannabis retail stores. "Persons interested" include landlords, mortgagees, or any other person with an interest in the assets or property of the applicant or holder. Inspectors appointed by the AGCO are permitted to enter almost any place, and examine and make demands regarding anything considered relevant, including making seizures, taking photographs and inquiring into financial transactions. 

The AGCO has also been granted broad enforcement powers, including revoking or suspending licences, levying fines and even subjecting individuals to imprisonment. In addition, the AGCO has been granted rule-making power to establish standards and requirements regarding advertising and promotional activities, training related to cannabis, and security, so long as such standards or requirements have not already been established by the regulations.

Smoking and vaping permitted anywhere tobacco use permitted

Bill 36 also made amendments to the Smoke Free Ontario Act, 2017. The new amendments prohibit smoking or holding lighted cannabis in the same places that smoking or holding lighted tobacco is prohibited. This includes, for example, any public place, building or structure that is covered by a roof; enclosed workplaces; restaurant and bar patios; schools, school grounds or child care centres; indoor common areas in condominiums, apartments, universities or colleges; and sports or entertainment venues. Such prohibitions also apply to all forms of vaping. Thus, Ontario's prohibitions on cannabis smoking and vaping mirror those regarding tobacco. Accordingly, Ontarians are able to smoke or vape cannabis anywhere where they may smoke or vape tobacco. This is a sharp distinction from the former Government's plan to limit consuming cannabis to private property. 

The regulations

As of yet, no regulations have been enacted under the Act. However, the Act provides for regulations to be made with respect to a broad range of matters, including applications, the operation of cannabis retail stores, the types of cannabis that may and may not be sold at cannabis retail stores, cannabis retail store hours of operation, the minimum price that cannabis may be sold, the advertising of cannabis, and mandatory training courses.

For many of the matters listed above, little information has been made available regarding the Government's intended path forward. What is more, many rules will remain unknown until the AGCO exercises its authority to make the additional rules it is authorized to make. For now, Ontarians must wait patiently before they know many of the finer details of the regulatory regime for recreational cannabis in their province.

Rollout

The Ontario Government has indicated that it will begin accepting applications for retail licences and authorizations in December 2018, and expects to have the brick-and-mortar retail system in place by April 2019. Notably, there are no upper limits on the number of licences to be issued. Although, as a practical matter, the issuance of licences will certainly be controlled by the rate at which the AGCO is able to process and approve applications.

Dentons' analysis

Ontario's switch to a regulated retail model represents significant new business opportunities for entrepreneurs and existing stakeholders in the cannabis sector. It seems likely that the retail restrictions on federal cannabis production license holders surprised some licensed producers who were already making investments in anticipation of being able to participate more fully in the retail rollout. As always, the scope of potential creativity and innovation in terms of ownership structures or (for example) franchising schemes will be determined, in part, by the content of the regulations still to come, which will provide the details that are the "devil" of every regulatory regime. Dentons' leading Cannabis group will continue to work closely with existing and new industry stakeholders who intend to participate in the Ontario cannabis retail regime and provide frequent insights on these important developments. For more information on Bill 36 and the Ontario cannabis retail regime, please contact Eric Foster or James Wishart.

The authors gratefully acknowledge the contributions of Stuart Ruffolo.

Footnote

1 Subsection 1(4) of the Ontario Business Corporations Act defines "affiliate" as follows: For the purposes of this Act, one body corporate shall be deemed to be affiliated with another body corporate if, but only if, one of them is the subsidiary of the other or both are subsidiaries of the same body corporate or each of them is controlled by the same person.

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. www.dentons.com

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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