By Victor Liu and Steve Inglis Goodmans LLP
In 1923, Canada became one of the first countries to ban cannabis, a substance virtually unknown to the general public. Ninety-five years later, Canada has become the second country in the world and first in the G7 economy to fully legalize recreational cannabis. The journey to legalization was fraught with obstacles, protests and court challenges. However, a societal shift regarding medical and recreational cannabis use catalyzed government action. With Prime Minister Justin Trudeau leading the change, the Cannabis Act came into force on October 17, 2018, legalizing the recreational use of cannabis throughout the country.
While the legalization of cannabis is not without controversy, including health and safety concerns, as well as ideological and political objections, it has undoubtedly created immense excitement for the tremendous commercial opportunities and intriguing legal considerations.
Legal access to dried cannabis was first allowed in Canada in 1999 through discretionary exemptions granted by the Minister of Health for medical or scientific purposes or in the public interest. As a result of various legal challenges to the limited and discretionary nature of the exemptive regime, the Ontario Court of Appeal in 2000 confirmed the right of an individual to possess cannabis for medical purposes.1 This led to successive attempts by the federal government to set up a legal system for medical cannabis access and court challenges, briefly outlined as follows:
- In July 2001, the first program for medical cannabis access, called the Marijuana Medical Access Regulations (MMAR), was implemented. Under the MMAR, patients could obtain authorization to possess dried cannabis for their personal use, providing they had the support of a medical practitioner. Approved individuals were also permitted to grow cannabis themselves, designate an individual to grow it for them or purchase products through Health Canada.
- Notwithstanding the greater access provided by the MMAR, stakeholder challenges continued. In addition, the MMAR’s permitted “personal grow” system led to abuses where grow operations sprung up, feeding the black market. In July 2013, Health Canada developed a new set of regulations, the Marijuana for Medical Purposes Regulations (MMPR). The MMPR altered the supply and distribution of cannabis for medical purposes by establishing a regulatory framework for licensing producers who would grow, distribute and sell dried cannabis to individuals with a medical need. This regime permitted healthcare practitioners to sign a medical document, enabling the patient to purchase up to their prescribed recommended amount directly from a producer licensed under the MMPR.
- In 2015, a unanimous Supreme Court of Canada held that restricting legal access only to dried forms of cannabis was arbitrary and contradicted its purpose of protecting the health and safety of Canadians.2
- In 2016, the Federal Court of Canada declared the MMPR as a whole invalid for violating the Canadian Charter of Rights and Freedoms as the restrictive regime did not provide individuals with reasonable access to cannabis for medical purposes.3
- Given six months to enact a Charter-compliant regime, the federal Liberal government enacted the Access to Cannabis for Medical Purposes Regulations (ACMPR). Under the ACMPR, in addition to the option to purchase from licensed producers, individuals who have been authorized by their healthcare practitioner to access cannabis for medical purposes and are registered under the ACMPR, can produce a limited amount of cannabis for their own medical purposes, or designate someone to produce it for them.
The evolution of the medical cannabis system coincided with a growing societal shift regarding recreational cannabis use. In his election platform for the 2015 Canadian federal election, Justin Trudeau and the Liberal Party of Canada pledged to legalize recreational cannabis while restricting access to minors and keeping proceeds out of the hands of criminals who have fed the black market for cannabis. In April 2017, the Trudeau government tabled the Cannabis Act, paving the way to legalization of recreational cannabis use in Canada. After much speculation and debate, the Cannabis Act was approved by the Senate on June 19, 2018, received Royal Assent on June 21, 2018, and came into force on October 17, 2018.
FEDERAL CANNABIS ACT
With the stated primary goals of displacing the illegal cannabis market and restricting youth access to cannabis, the federal Cannabis Act and its accompanying regulations establish minimum requirements and rules for the regulatory framework, including age and possession requirements; adults 18 years or older in Canada will be legally permitted to engage in the following activities:4
- Purchase fresh or dried cannabis, cannabis oil, or plants and seeds from a licensed retailer5;
- Possess up to 30 grams of dried legal cannabis in public6; Share up to 30 grams of legal cannabis products with other adults;
- Cultivate up to four plants per household for personal use; and
- Alter cannabis at home to prepare different types of cannabis products (e.g., edibles like food and drinks) for personal use, so long as organic solvents are not used to create concentrated products.
The federal Cannabis Act also introduced new criminal law offences to prevent access to youth, as well as new penalties for the illegal sale, production or possession of cannabis over the prescribed limits.
The federal Cannabis Act also sets out requirements and a licensing framework for the cultivation, production and distribution of cannabis and establishes industry-wide rules, such as the types of cannabis products available for sale, packaging and labelling requirements, restrictions on promotion activities and tracking requirements for cannabis. Certain key requirements are summarized below.
1. Federal Licence Options
The federal government, through Health Canada, is responsible for providing regulatory oversight to the cannabis industry. Businesses are required to obtain licences under the Cannabis Act to be permitted to operate in the industry. The Cannabis Act and Cannabis Regulations provide different licence categories, including: (1) Cultivation; (2) Processing; (3) Analytical Testing; (4) Research; (5) Sale; and (6) Cannabis Drugs. Dependent upon the class and sub-class of the licence, regulatory requirements will vary relating to production, security, location, personnel, reporting practices and compliance with the Cannabis Tracking System, some of which are further detailed below. For the applicable class of licence, supplemental activities, such as trimming and milling, transportation and storage, would also be included as permitted activities.
For certain classes of licences, further sub-classes exist. For example, the cultivation licence has three sub-classes: (1) standard; (2) micro-cultivation (craft licences); and (3) nursery cultivation. The standard cultivation licence authorizes the act of growing and harvesting cannabis (dried, fresh, plants and seeds) and their sale to other licensees. The micro-cultivation licence authorizes the same activities, but restricts the size of the operation to no more than 200 square metres. In contrast, the nursery cultivation licences permit the production of cannabis plants and seeds, but not dried cannabis, fresh cannabis or cannabis oil, and further subjects the nursery licensee to a production size restriction of 50 square meters.
Similarly, processing licences, which permit the production of cannabis products (such as oil) and the packaging and labelling of such products for sale to other licensees, also differentiate between standard processing licences and micro-processing licences, with the latter limiting production to no more than 600 kilograms of dried cannabis per year.
Analytical testing and research licences permit laboratories to test cannabis products. The analytical testing licence derives from the requirement in the Cannabis Regulations to test each batch of cannabis that will become a retail cannabis product. The scope of testing includes examining for solvent residues, cannabinoid quantities, and microbial and chemical contaminants exceeding the accepted thresholds in the Food and Drugs Act. In contrast, the research licence permits a broader scope of research. This licence authorizes activities such as possession, production, transportation and sale strictly for research purposes only.
Sale licences differentiate between sales for medical purposes to medical registered persons and sales to adults, with the former essentially mirroring the federal medical regime under the ACMPR and the latter essentially limited to provinces and territories that have not implemented local distribution and retail sale regimes.
The cannabis drug licence permits pharmacists, hospitals and other medical professionals to possess, handle and distribute drugs that contain cannabis as an active pharmaceutical ingredient. Drugs containing cannabis will also be regulated by the Food and Drugs Act (FDA) and the Food and Drugs Regulations (FDR). With that being said, an applicant for a cannabis drug licence must obtain a drug establishment licence under the FDR to be eligible to apply. To minimize regulatory duplication, various requirements within the Cannabis Act and Cannabis Regulations will not apply to drugs containing cannabis or cannabis that is an active ingredient in a pharmaceutical. For example, the good production practices will not apply to drugs authorized under the FDA, as the drugs are already subject to extensive good manufacturing practices.
Importing and exporting cannabis will be closely monitored and subject to further review and approval by Health Canada. Health Canada indicated the regime is not intended to facilitate servicing the global demand of cannabis. As such, importation and exportation will only be permitted in limited circumstances. The Cannabis Act will permit cannabis to be imported or exported by licensees for medical or scientific purposes only. In addition to holding a licence, the entity wishing to import or export a product will be required to obtain a permit. Ultimately, the strict regulations will likely have a direct impact on the variety of products Canadian distributors will be permitted to stock.
The varying classes and sub-classes are subject to different levels of requirements and reporting and are intended to allow for the licensing of craft growers and processors, as well as for different activities and objectives. Importantly, the regulations do not impose a limit on how many licences an entity may hold. As such, it is foreseeable a company may hold various licences to diversify the scope of their business.
2. Transitional Provisions for Current ACMPR Licensees7
The Cannabis Regulations provide transitional provisions for current licensees under the ACMPR. Licences issued under the former ACMPR are automatically converted to valid licences under the Cannabis Act. The class of licence the ACMPR licence will convert to depends on which Cannabis Regulation class captures the previous authorization given. For example, a licence authorizing the production of fresh or dried marijuana will convert to a cultivation licence. The conversion may also include a subclass if the holder meets the requirements for that subclass.
National Cannabis Tracking System
The Cannabis Act and accompanying regulations established the Cannabis Tracking System (the “System”). The System seeks to scale the existing Medical Cannabis Tracking system to track, on a national basis, the cannabis supply chain and enforce regulations. The System will monitor the movement of cannabis beginning from where it is grown, to where it is processed, and ultimately to where it is sold. A key intention behind the System is to prevent legal cannabis from being diverted into the illegal market as well as illegal cannabis from infiltrating the legal market. Health Canada noted the System will only collect data that is necessary to track cannabis at a national level and personal information of individual consumers will not be collected.
The System functions by requiring federal licence holders and provincial and territorial bodies to report data via an online portal, on details such as the amount of cannabis sown, propagated and harvested, the amount of cannabis product obtained, returned, ordered, delivered, sold, lost/stolen and destroyed, as well as the amount of cannabis used at different stages of production (such as from flower or dried cannabis to oil) or for research and development. The data is to be reported on a monthly basis, which in turn will be published by Health Canada online.8 The System also requires licensees to maintain the underlying records and data for at least two years. Non-compliance with these requirements will be enforced with sanctions ranging from warning letters, to monetary penalties, to suspension or revocation of licences.
A key objective of the federal Cannabis Act – to prevent the conflation of the legal and illegal cannabis markets – is also reflected in the new security clearance requirements. Under the Cannabis Act, certain parties associated with various licensees are required to hold a valid security clearance issued by the federal Minister of Health, including:
- Individual licence holders;
- All directors and officers of the licensee, as well as of its parent entity;
- Any individual, director or officer of any licensee, who exercises, or is in a position to exercise, direct control over the licensee; and
- Any individual, director or officer of any licensee who is a partner in a partnership that exercises, or is in a position to exercise, direct control over the licensee.
In addition, individuals occupying “key positions” are required to obtain security clearance. Key positions include: the individual responsible for the licensed activities conducted by the licensee; the head of security; the head of quality assurance; the master grower; and their designated alternates. The Minister also has the authority to identify additional positions and individuals involved with the licensee who require clearance, and to conduct checks on clearance holders.
In considering a security clearance application, the Minister will assess on a case-by-case basis whether the applicant poses an unacceptable risk to public health or public safety, including the risk that cannabis will be diverted to an illicit market or activity. While it is the federal government’s stated goal to exclude all those who may be associated with organized crime, the regulations do not automatically bar individuals with a history of engaging in illicit cannabis or violence. Instead, the regulations provide the Minister with broad discretion to consider a number of factors when assessing the level of risk posed by an application, including the circumstances of any events or convictions relevant to the determination, the seriousness of those events or convictions, their number and frequency, the date of the most recent event or conviction and any sentence or other disposition. A further risk factor the Minister is entitled to consider is whether there are reasonable grounds to suspect the applicant could be induced to commit an act, or to aid or abet any person to commit an act, that might constitute a risk to public health or public safety. If the Minister refuses to grant security clearance, the applicant may appeal the decision within 20 days.
Within Canada’s constitutional division of powers between the federal, provincial and territorial governments, much of the products’ regulation rests with the provinces and territories, including the distribution and retail sale of cannabis. While most of the provincial and territorial legislation is similar, including with respect to raising the legal minimum age to 19 (from the federal Cannabis Act’s minimum of 18 years) and allowing home growing of cannabis, there are sufficient variations that a patchwork of different regulatory structures will apply across the country.
Perhaps the most significant difference is the choice to distribute recreational cannabis through a government or a privately-run system. While all jurisdictions will mandate a government monopoly on wholesale distribution (except Saskatchewan) and online sales (except Manitoba), Alberta, British Columbia, Saskatchewan, Manitoba and Newfoundland have opted to permit private operators to participate in the retail market while Québec, Nova Scotia and New Brunswick will control not just the wholesale distribution but also the retail and online distribution of cannabis through government-owned entities. Ontario, which initially opted for the governmental-owned retail option, has recently switched gears as a result of the change in government. On October 17, a few hours after the federal Cannabis Act became effective, Ontario passed its revamped cannabis legislation. Ontario’s new regime aims to create a private retail model and relaxes the use restrictions, essentially allowing cannabis to be consumed wherever tobacco smoking is permitted (other than certain exceptions like vehicles and boats). The new Ontario legislation will require retail operations to hold multiple licenses; one as an operator and separate licenses for each retail location. A separate license is also required for persons performing managerial functions at the stores. Other key attributes include a one-time opt-out option for municipalities and multiple layers of additional security clearance requirements, not just for directors, officers, key employees and owners, but also for other ‘interested persons’. Subject to regulations to be tabled under the legislation, Ontario’s new regime also aims to limit the participation of federally licensed producers, potentially to as few as one retail location. In addition, due to the late change in strategy, the Ontario government has announced that private retail will not commence until April 2019. As a result, recreational cannabis is currently only available to the Ontario public through online sales by the Ontario Cannabis Retail Corporation.
Given the compressed time frame to implement cannabis legalization and the multitude of interconnected issues and policies, some early missteps can be expected. In fact, in the first days of legalization, product shortages have been reported across the country, both online and in retail locations. In addition, with the federal government’s stated objectives of protecting children and displacing the illegal cannabis market, there are particular concerns that elements of the regulatory regime will hinder these objectives.
Fees / Taxes
The Government of Canada seeks to fully recover the costs of regulating the cannabis industry through fees and taxes to ensure that those benefiting from the new market will pay the costs for regulation. Since the federal government announced the legalization of recreational cannabis, it is well known the product will be taxed at approximately C$1 a gram or a 10% excise duty rate. The revenue from this tax will be predominantly distributed to the provinces. However, on July 12, 2018, Health Canada released its Consultation Document – Proposed Approach to Cost Recovery for the Regulation of Cannabis (the “Cost Proposal”). The fees proposed in the Cost Proposal are intended to enable the federal government to recoup the estimated C$553 million it will spend to implement, administer and enforce the legalized cannabis framework over five years. After a 30-day consultation period to solicit input on the Cost Proposal, the following fees came into force on October 17th, 2018, through the Cannabis Fees Order.
The Cannabis Fees Order establishes four fees: (1) the Application Screening Fee; (2) the Import/Export Permit Fee; (3) the Security Clearance Fee and (4) the Annual Regulatory Fee. (collectively, the “Cost Recovery Fees”). The Cost Recovery Fees apply to each type of licence in the Cannabis Act. However, the Cost Recovery Fees include certain discounts and exemptions for some of the fees to accommodate the different scale of operations and the stated policy objective to support small businesses. In addition, the proposed fees would not apply to licensed participants for industrial hemp, research, analytical testing or health and natural health products containing cannabis.
The most substantial fee for licence holders is likely the Annual Regulatory Fee, which is intended to recover the the aggregate costs of administering the cannabis regulatory program. Those holding a cultivation, processing or federal sales licence are required to pay the fee annually. The fee is based on a percentage of the licence holder’s revenue from the sale of cannabis less the amount purchased from another licence holder.9 Standard cultivation, standard processing and federal sales licence holders are subject to either a fee of 2.3% of cannabis revenue or $23,000, whichever is greater. Micro-cultivation, micro-processing and nursery licence holders are subject to either a fee of 1% of cannabis revenue of $1 million or less, or $2,500, whichever is greater. All revenue exceeding $1 million is subject to a fee of 2.3% of cannabis revenue. Those licence holders selling cannabis exclusively for medical purposes will not be subject to the annual regulatory fee.
Despite the justification for implementing the Cost Recovery Fees, they amount to an additional layer of taxes in addition to the already established 10% excise tax. The proposed fees may be too onerous on licence holders, drive up costs and potentially threaten the main objective of supplanting the illegal cannabis marketplace. In addition, the Cost Recovery Fees only cover costs of the federal government. As such, a nominal amount, if any, of the collected fees will be shared with the provincial/territorial or municipal governments, who have long voiced concern about shouldering the heavier costs burden of the recreational cannabis regime.
Black Market Integration
A further concern pertains to the ability of the legalized cannabis market to compete with the illicit market due to a lack of genetic variety. There are currently 132 licensed producers that exist throughout Canada. Out of these producers, less than 300 dried cannabis products are available in the medicinal market. Industry leaders have expressed frustration with Health Canada’s strict requirements regarding the acquisition of cannabis genetics. The requirements have resulted in producers largely acquiring new genetics from their competitors to diversify their product offerings.
The federal Cannabis Act seeks to address this problem by providing cultivators the opportunity to bring illicit cannabis into the legal market. In particular, the Act permits applicants for a cultivation licence a one-time exemption to bring in black market plants and seeds, as long as the illicit strains are declared to Health Canada. Once the declaration and licence is approved, the product will be deemed compliant with the law. Industry leaders expect this will significantly expand the variety of genetics available, effectively making the legal market more competitive with the black market.
In addition, concerns have surfaced regarding government operated structures, including the monopoly on wholesale distribution, and in a number of provinces, also on retail distribution. By default, a monopoly lacks competitive pressures; resulting in a lack of incentive to compete on prices and ensuring a wide variety of products are stocked. These concerns are warranted given the federal government’s intention to ensure the success of the legal market. If a sufficient diversity of products is not available, such as the wide variety of edibles and cannabis-infused products, consumers may have an incentive to return to the black market.
With recreational cannabis being a brand new industry, companies are racing to advance their brand recognition. However, the marketing regulations contained in the Cannabis Act and the Cannabis Regulations will make it difficult for companies to promote their product. The two sets of rules contain strict requirements concerning the marketing, packaging and labeling of cannabis and cannabis accessories. The Cannabis Act marketing provisions prohibit promotion to youth, false or misleading claims, sponsorship, testimonials or endorsements, using depictions of persons, characters or animals or engaging in lifestyle-type marketing. The use of foreign media will also be prohibited to prevent indirect marketing to Canadians. Further, licensed producers will also be required to provide plain packaging, mandatory health warnings, display a cannabis symbol, prescribe product information (brand and lot number) and expiry dates.
The Cannabis Act provides exceptions to the previously mentioned restrictions. The first exception is informational promotion. As such, producers are permitted to conduct direct marketing, in-store marketing or telemarketing, providing it is not directed at minors. The information permitted within in-store marketing is limited to a product’s availability and price. The second exception is the ‘swag’ exception, which permits companies to display brand elements (such as names, trademarks or logos) on products other than cannabis or cannabis accessories. For example, companies will be able to display their logo on clothing. Despite these exceptions, promotion towards youth is still prohibited.
Companies have been testing the waters pertaining to cannabis marketing in Canada. For example, several cannabis companies sponsored music festivals, perceivably in an attempt to build brand recognition prior to October 17, 2018. As a result, Health Canada issued a warning on July 13, 2018, expressing concern with the marketing of medical cannabis licensees. Ultimately, cannabis producers and marketers are attempting to find creative means to market their products. What remains to be seen is Health Canada’s level of enforcement now that these provisions have come into force.
With the recent launch of legalized recreational cannabis, Canada’s cannabis industry will continue to transform itself. Provincial and territorial governments are still in the process of establishing their regimes. As Canadians become comfortable with the reality of legal cannabis, it is likely the initially-restrictive regimes could be loosened. The federal government can be expected to adopt a more permissive approach to new forms of cannabis products such as edibles, concentrates and other derivatives, as well as new sources of seed materials to allow a greater variety of products and attribute. Similarly, provincial, territorial and local municipal governments may permit cannabis lounges and authorize licences for cannabis-related consumption events. Further, as the recreational market opens and returns begin to be assessed, investors will gain a fresh perspective on important metrics, such as the potential size of the market, the impact of legislation on the current illicit market, which producers can meet market demand and the costs of government regulation.
- R v Parker, 2000 CarswellOnt 2627.
- R. v. Smith, 2015 SCC 34.
- Allard v. Canada, 2016 FC 236.
- The federal minimum age to use cannabis is 18, which has been set in Alberta and Québec. All other provinces and territories have set the minimum age for use at 19.
- Edibles and concentrates will not be permitted initially but are anticipated to be permitted in October 2019.
- The limits are based on dried cannabis. For the purposes of the Cannabis Act, one (1) gram of dried cannabis is equal to 5 grams of fresh cannabis, 15 grams of edible product, 70 grams of liquid product, 0.25 grams of concentrates (solid or liquid) and 1 cannabis plant seed.
- Part 15 of the Cannabis Regulations.
- The reporting requirements depend on the type of entity distributing the product and the type of licence. If the entity holds a licence for cultivation, or processing or a licence for sale for medical purposes that authorizes the possession of cannabis, it must provide the Minister with the information no later than the 15th day of each month.
- After Health Canada received feedback on the Cost Proposal, they modified the design of the annual regulatory fee to use previous year’s revenue to calculate the fee rather than forecasted revenue. This is intended to moderate the financial impact in the early years of the emerging industry.