Category: Cannabis Industry

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Business Law Cannabis Industry

Canada Launches Review of Federal Cannabis Act

Cannabis representing a review of the federal cannabis act

The federal Cannabis Act came into force on October 17, 2018. The Cannabis Act required the Minister of Health to review the Act three years after it came into force. While the review is approximately one year overdue, it is now underway, giving the Minister 18 months from the review commencement to table the results in both Houses of Parliament. Bader Law will continue to monitor this legislative review and any potential changes to Canada’s cannabis regulation that result from it.

What is the Cannabis Act?

The Cannabis Act is the federal law that regulates the use, growing, buying, and selling of cannabis in Canada, as well as imposing penalties for non-compliance. The Cannabis Act is the legislation that made it legal to purchase, possess, and use cannabis and cannabis products under certain conditions. For instance, to buy, possess, or use cannabis, an individual must be of the age of majority, which may vary depending on the province or territory.

The Cannabis Regulations and Industrial Hemp Regulations both operate under the Cannabis Act. These regulations set out the rules and standards that apply to the production, distribution, sale, importation, and exportation of cannabis by federal license holders.

The Cannabis Act’s stated purposes are:

  • Protecting the health of young persons by restricting their access to cannabis and from inducements to cannabis;
  • Providing for the legal production of cannabis to reduce illegal activities;
  • Providing access to quality-controlled cannabis;
  • Enhancing public education about the risks of cannabis;
  • Deterring illegal cannabis-related activities through penalties and enforcement; and
  • Reducing the burden on the criminal justice system regarding cannabis-related offences.

Who will lead this review of the Cannabis Act?

The Minister of Health has announced that an independent expert panel will lead the legislative review of the Cannabis Act. The expert panel is composed of five members who were selected for their expertise in public health and justice, as well as experience engaging with Indigenous communities. These members are:

  • Morris Rosenberg. A lawyer by training, Mr. Rosenberg is the Chair of the Expert Panel and has held various high-level positions in the federal government, including Deputy Minister of Foreign Affairs, Deputy Minister of Health, Deputy Minister of Justice, and Deputy Attorney General of Canada. He retired from government in 2013 and spent four years as the President and CEO of the Pierre Elliott Trudeau Foundation.
  • Dr. Oyedeji Ayonrinde. Dr. Ayonrinde is an Associate Professor of Psychiatry and Psychology at Queen’s University and a Consultant Psychiatrist and Clinical Director at a community mental health centre. He has published peer-reviewed articles focusing on the risks of gestational cannabis use, cannabis and psychosis, and the risks of cannabinoid-based medicines.
  • Dr. Patricia J. Conrod. Dr. Conrod is a Professor of Psychiatry and Addiction at the University of Montreal and a registered clinical psychologist. She holds the Tier 1 Canada Research Chair in Preventative Mental Health and Addiction and co-leading the Canadian Institutes of Health Research Canadian Cannabis and Psychosis Research Team.
  • Lynda L. Levesque. Ms. Levesque is a criminal lawyer and a member of the Fisher River Cree Nation in Manitoba, Treaty Five territory.
  • Dr. Peter Selby. Dr. Selby is the Giblon Professor, Vice Chair of Research, and Head of the Mental Health and Addictions Division in the Department of Family Community Medicine at the University of Toronto, with cross-appointments to the Departments of Psychiatry and Public Health.

What is the mandate of the expert panel’s review of the Cannabis Act?

The expert panel’s work is governed by a Terms of Reference. The expert panel’s mandate is to assess the legislative regime, engage with stakeholders and provide expert advice to the Minister of Health and the Minister of Mental Health and Addiction regarding Canada’s progress toward achieving the objectives of the Cannabis Act.

What is the scope of the expert panel’s review of the Cannabis Act?

The expert panel has been tasked with identifying priority areas for action to improve the effectiveness of the Cannabis Act.

The Cannabis Act itself identifies several areas for the legislative review, which are:

  • The health of young persons and their cannabis consumption patterns;
  • The impact of cannabis on Indigenous persons and communities; and
  • The effect of the cultivation of cannabis plants in the context of housing.

The expert panel will review the three areas above, in addition to the following focus areas:

  • The economic, social, and environmental impacts of the Cannabis Act;
  • Development of access to regulated cannabis and cannabis products for adults;
  • Effectiveness of deterrents to criminal activities and progress in ousting the illegal cannabis market;
  • Effects of the Cannabis Act on access to cannabis and cannabis products for medical uses; and
  • Impacts on Indigenous peoples, racialized communities, and women, and in particular, to look at those who may have greater barriers to entry into the legal industry based on identity to socio-economic factors.

What is the process for the expert panel’s review of the Cannabis Act?

The expert panel will undertake two phases of work during its review. In the first phase, the expert panel will complete a factual assessment of the Cannabis Act’s performance and impact since it came into force in October 2018. The expert panel will gather information from stakeholder engagement, including the public and other levels of government, as well as engagement with Indigenous peoples and communities and other evidence-gathering activities.

Information will be collected through in-person sessions and online feedback. The expert panel will publish a report outlining critical outcomes from its consultations with stakeholders, Indigenous peoples and various communities.

The second phase will entail distilling advice and priorities, informed by the results of phase one and the Cannabis Act’s objectives, to the Minister of Health and Minister of Mental Health and Addiction. This may identify areas for improvement or amendments within the existing Cannabis Act and could lead to legislative reform in this area.

Contact the Mississauga Business Lawyers at Bader Law for Experienced Advice on Cannabis Business and Licensing Matters

Bader Law helps businesses navigate the complexities of the cannabis industry in Ontario. Our knowledgeable business lawyers assist clients in obtaining Retail Store Authorizations and ensuring ongoing compliance with the shifting changes in cannabis regulation. We create dynamic, creative legal solutions for cannabis and experienced operators. We also assist clients with corporate financing and information technology law, amongst other areas. Our firm proudly serves clients in Mississauga and throughout the Greater Toronto area. To schedule a consultation, call us at 289-652-9092 or reach out to us online.

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Business Law Cannabis Industry

2022 Canadian Cannabis Survey Shows Increased Social Acceptance and Use of Cannabis in Canada

Since its legalization, cannabis has been a hot topic across several industries. In the last year, we have published several blog posts discussing cannabis regulations and business disputes which have arisen in the cannabis industry. Last year, we reviewed the 2021 Canadian Cannabis Survey. As the 2022 Canadian Cannabis Survey was released on December 16, 2022, we compare the two years below and summarize some key data changes over the five years that the Canadian Cannabis Survey has been active.

What is the Canadian Cannabis Survey?

The Canadian Cannabis Survey has been conducted annually since 2017, which was one year before the Cannabis Act came into force. The Cannabis Act is the legislation that provides legal access to cannabis, and well as regulates its sale, production, and distribution. In addition to the federal Cannabis Act, there is also a web of provincial and municipal regulation that controls the cannabis industry.

The Canadian Cannabis Survey is intended to assess the impact of the Cannabis Act, and to examine Canadians attitudes toward cannabis, as well as patterns of cannabis usage. This includes gathering data about the quantity of cannabis consumed, where cannabis is purchased, the price of cannabis products, cannabis use for medical reasons, and issues related to public safety and cannabis use, such as impaired driving.

Key Themes of the 2022 Canadian Cannabis Survey

Health Canada’s summary of the 2022 Canadian Cannabis Survey presents six categories of results, which are:

  • Knowledge, attitudes, and opinions
  • Cannabis use and products used
  • Sources and purchasing
  • Driving and cannabis
  • Cannabis for medical purposes
  • 5-year comparison of survey data

Highlights from each category are provided below.

Knowledge, attitudes, and opinions on cannabis use: Canadians consider cannabis use to be more socially acceptable and less risky than tobacco and e-cigarettes

Canadians were asked about the social acceptability of cannabis use as compared to alcohol, tobacco, and e-cigarettes. The results demonstrated that alcohol is still considered the most socially acceptable of these options, with 62% of Canadians viewing it as socially acceptable for regular use, and 89% viewing alcohol as socially acceptable for occasional use.

Cannabis was considered more socially acceptable than tobacco and e-cigarettes. Social acceptability of eating or vaping cannabis for non-medical purposes also increased slightly (to 48% for regular use and 64% for occasional use for vaping and 52% for regular use and 69% for occasional use for eating), as compared to the 2021 survey. Opinions on smoking cannabis remained constant (51% for regular use and 69% for occasional use).

When asked about the perceived risks of alcohol, tobacco, e-cigarettes, and cannabis, Canadians view using tobacco and e-cigarettes as having the highest risk (moderate or great risk). The majority of Canadians do not perceive the occasional use of cannabis or alcohol as risky, believing that it carries no risk or slight risk. However, Canadians perceive the regular use of cannabis as moderate or greatly risky (75% for vaping, 74% for smoking, and 64% for eating). This is consistent with 2021, except that Canadians’ perceptions of the riskiness of eating cannabis decreased (from 89% to 64%).

Cannabis use and products used: Cannabis use is increasing but the smoking of cannabis is decreasing

Non-medical cannabis use for Canadians 16 and older increased from 2021, from 27% up from 25%.

In terms of how Canadians are using cannabis, fewer Canadians are smoking cannabis, with a decrease from 74% in 2021 to 70% in 2022. However, smoking cannabis is still the most common form of consumption. Eating cannabis was unchanged (52%), and the number of Canadians vaping cannabis increased (to 31% from 28% in 2021).

Sources and purchasing of non-medical cannabis: more Canadians are purchasing cannabis from legal storefronts

One of the largest changes between 2021 and 2021 was the percentage of Canadians who obtain their cannabis from a legal storefront. In 2022, 61% of Canadians reported purchasing cannabis from a legal storefront, versus 53% in 2021. 48% of Canadians reported always purchasing cannabis from a legal source, an increase from 43% in 2021.

Driving and non-medical cannabis: almost a quarter of cannabis users drive within 2 hours of using cannabis

Consistent with 2021 data, 23% of Canadians who used cannabis in the last 12 months reported that they had driven within 2 hours of using cannabis. Most (84%) reported that the reason why they did so was because they did not feel impaired. However, 82% of Canadians do believe that cannabis use negatively impacts driving ability.

Cannabis for medical purposes: fewer Canadians are using cannabis for medical purposes, but more are doing so supported by documentation from a healthcare professional

13% of Canadians reported using cannabis for medical purposes, which was a slight decrease from 2021 (where 14% of Canadians reported using cannabis for medical purposes). However, 27% of these reported that their medical use was supported by documentation from a healthcare professional, compared to 22% in 2021.

Most medical users of cannabis reported using cannabis daily (31%), which was unchanged from 2021.

5-year trends indicate more cannabis use overall, but less money spent each month on cannabis

Health Canada has published a summary comparing the data gathered by the Canadian Cannabis Survey over the last 5 years related to non-medical cannabis use. Some key trends and changes identified are:

  • Cannabis use by Canadians in the 12 months before the survey has increased from 22% in 2018 to 27% in 2022. In Ontario specifically, this has increased from 24% in 2018 to 29% in 2022.
  • Smoking cannabis has declined, though it remains the most popular method of cannabis consumption (70% in 2022), compared to 89% of use in 2018. Eating/drinking cannabis has increased from 42% in 2018 to 56% in 2022. Vaping has also increased from 33% in 2018 to 36% in 2021.
  • The perceived risk of smoking and vaping cannabis has increased from 2018 to 2022 (72% to 74% and 70% to 75%, respectively).
  • Average monthly spending on cannabis has decreased from $73 in 2018 to $65 in 2022.

Contact Mississauga Business Lawyers for Experienced Advice on Cannabis Business and Licensing Matters

Bader Law helps businesses navigate the complexities of the cannabis industry in Ontario. Our knowledgeable business lawyers assist clients in obtaining Retail Store Authorizations and ensuring ongoing compliance with the shifting changes in cannabis regulation. We create dynamic, creative legal solutions for cannabisand experienced operators. We also represent clients with corporate financing and information technology law, amongst other areas. Our firm proudly serves clients in Mississauga and throughout the Greater Toronto area. To schedule a consultation, call us at 289-652-9092 or reach out online.

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Cannabis Industry Commercial Litigation Shareholder Agreements & Disputes

Leave Granted for Action Against Cannabis Manufacturer

In a new business, it is nearly inevitable that mistakes will be made. As it relates to reporting, mere calculation errors happen all the time. However, when a company is operating as a reporting issuer, these errors can potentially lead to losses for its shareholders. It is important when operating any business to ensure that all documents being released to stakeholders accurately reflect the company’s position. If the documents are incorrect it may lead to shareholder disputes.

Class action involved a cannabis corporation that performed several exchange transactions with third party

The dispute in Badesha v Cronos Group Inc revolved around the eligibility of shareholders to bring an action based on misrepresentations against Cronos Group Inc. The shareholder who brought the action, Badesha, alleged that Cronos’s public filings in 2019 contained nearly 7,500 separate misrepresentations. When the alleged misrepresentations occurred, the price of Cronos’s shares dropped.

Cronos focuses on “the cultivation, manufacturing and marketing of cannabis and cannabis-derived products for medical and recreational purposes.” Its products are sold in Canada and in countries abroad where cannabis is legal. In March 2019, Cronos had two transactions with a third party where Cronos supplied cannabis dry flower in exchange for cannabis resin. Cronos reported revenue for these two exchange transactions at the end of Q1, ending March 31, 2019, as well as Q2, on August 8, 2019.

In September 2019, another exchange transaction took place between Cronos and a third party. Once again, the cannabis company reported the revenue from these transactions for Q3 on November 12, 2019.

Cannabis corporation updated its financial statements to exclude millions from previously reported revenue

In February 2020, Cronos announced that it had to delay its 2019 Q4 financial statements. In a press release in March 2020, it was stated that “Cronos was unable to complete the report on time due to several bulk resin purchases and sales of products through the wholesale channel and the appropriateness of revenue from those transactions.” Cronos’s share price subsequently dropped 8.10%. The same month, another press release was issued stating that the unaudited financial statements from Q1, Q2, and Q3 from 2019 were to be reissued and restated. After this disclosure, the share price dropped an additional 8.40%, and then a further 13.46% days later.

The company sought to reduce the reported revenue for Q1 and Q3 by $2.5 million and $5.1 million, respectively. By the end of March 2020, Cronos had released restated documents for Q1, Q2, and Q3 of 2019. In its 2019 Management Discussion and Analysis, it explained the weaknesses within its internal controls with regard to financial reporting. This document also outlined measures the company intended to adopt to remedy the identified shortcomings. After this disclosure, the share price dropped yet again by 10.24%.

Shareholder alleges cannabis corporation felt pressure to inflate revenues

One of Cronos’s shareholders filed a statement of claim to bring a class action on behalf of all shareholders who held shares during the relevant period. The key shareholder, Badesha, alleged that Cronos “orchestrated a scheme to inflate its reported revenue figures” due to pressure to show increased revenue and sustainable growth. 

In the quest for inflating revenues, Badesha’s claim alleged that Cronos failed to account for the inventory transferred in the transactions when reporting revenue for 2019 Q1 and 2019 Q3. The claim attributed these failings to a series of nearly 7,500 misrepresentations made by the company.

The motion judge denied leave to proceed with the claim

At the initial hearing before the motion judge, Badesha’s claim was denied for two reasons. First, Badesha had not shown that each alleged misrepresentation was a material contributor to the decrease in share price. Instead, the motion judge attributed the drop to the COVID-19 pandemic. Second, the motion judge held that there was no cause of action because none of the alleged misrepresentations were made by the individual defendants.

The appeal of this decision was heard by the Ontario Court of Appeal. Unlike the motion judge, the Ontario Court of Appeal found that there was a “reasonable possibility of success” in Badesha’s claim.

The motion judge erred in dismissing the claim based on technical grounds

The Court of Appeal considered the test for obtaining leave under the Securities Act. Under the Act, any person or company who acquires or gets rid of an issuer of shares in a specified time period after a misrepresentation occurs, has a right of action. 

In the case where multiple misrepresentations are similar, they can all be treated as a single misrepresentation. Therefore, the Court found that the motion judge erred by requiring that every single alleged misrepresentation (nearly 7,500) needs to be explicitly held to have contributed to the drop in share price.

Whether the misrepresentations were to be treated as separate misrepresentations or as a single misrepresentation was not a decision of the motion judge to make. Rather, it is an issue for trial. However, the motion judge should have conducted its analysis as if the claim were based on a single misrepresentation as well. 

The Court of Appeal explained, “The…test is about weeding out unmeritorious claims. It is not about dismissing potentially valid claims on technical grounds.” The Court then applied the test to determine whether leave could be granted to move forward with the action.

The motion judge’s assessment was tainted by his error

The Court of Appeal determined that if the motion judge assessed the claim properly, he would have determined that “there is a reasonable possibility that [Badesha] will succeed in the action.” Although there is a requirement for the Court of Appeal to show deference to the motion judge’s assessment, in this case, the assessment had been affected by the motion judge’s understanding of the claim, resulting in a flawed discussion about his view of the pleading. The determination did not touch on whether the evidence demonstrated that leave should be granted. 

The appeal was allowed and the Court of Appeal granted leave to proceed with the misrepresentation action under the Securities Act. The Ontario Superior Court of Justice will decide on the matter of whether the action qualifies as a class proceeding.

Contact the Bader Law in Mississauga for Support with Your Cannabis Enterprise 

Bader Law helps businesses navigate the complexities of the cannabis industry in Ontario. Our knowledgeable business lawyers assist clients in obtaining Retail Store Authorizations and ensuring ongoing compliance with the shifting changes in cannabis regulation. We create dynamic, creative legal solutions for cannabis newbies and experienced operators. We also represent clients with corporate financing and information technology law, amongst other areas. Our firm proudly serves clients in Mississauga and throughout the Greater Toronto area. To schedule a consultation, call us at 289-652-9092 or reach out online.

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Business Law Cannabis Industry

Municipal Regulation of Cannabis in Ontario

A critical consideration when creating a cannabis start-up is the intricate web of public health and safety laws governing the production, sale, and use of cannabis in Canada. While federal laws are often the first to come to mind, any parties involved in the cannabis business must also be aware that many municipal by-laws may apply to their operation.

Know the law before starting your cannabis business

Each province and territory in Canada has unique cannabis regulatory regimes, as cannabis is sold and distributed to consumers at this level of government. By contrast, the federal government regulates the production of cannabis and oversees the health and safety standards applicable to cannabis products.

However, there are also laws pertaining to cannabis production and retail at the municipal level. Municipal by-laws may constrain the use, sale or growth of cannabis. Before starting a cannabis business, it is critical to know the laws of the municipality in which you plan to operate.

Cannabis regulation in Ontario 

In Ontario, all owners and operators of cannabis retail stores fall within the Cannabis Licence Act and its regulations. They are also subject to the Alcohol and Gaming Commission of Ontario (AGCO) Registrar’s Standards. The Registrar’s Standards set out the rules for a broad range of matters within the cannabis industry in Ontario, including:

  • Background checks and licensing of cannabis operators and employees;
  • Changes to a cannabis retailer’s corporate structure;
  • Physical retail store requirements, including the storage and display of cannabis products;
  • The destruction and transportation of cannabis;
  • Advertising and promotion of cannabis products;
  • The responsible use of cannabis; 
  • Record-keeping requirements; and
  • Curbside pick-up and delivery requirements.

The role of Ontario municipalities in the cannabis industry

Ontario municipalities have the power to determine whether they want to prohibit or allow cannabis stores to operate in their community. The AGCO maintains a current list of municipalities prohibiting or allowing cannabis stores. Municipalities may also implement by-laws that restrict smoking and vaping cannabis.

Municipalities cannot create their own licensing system for the sale of cannabis, nor can they pass by-laws that distinguish land or building use for cannabis from any other kind of use. Otherwise, cannabis producers and retailers must follow all municipal by-laws applicable to their business operations.

An early example of municipal cannabis regulation in Ontario: Leamington v. DeGoey

One of the earliest litigation regarding municipal regulation of cannabis in Ontario was the case of Leamington v. DeGoey before the Ontario Superior Court of Justice in 2021. The applicant was the Municipality of Leamington, a municipality in Essex County, Ontario. The respondent in the case was Mr. DeGoey, who resided on a farm within the boundaries of Leamington.

In 2018, Mr. DeGoey erected plastic-covered greenhouses on his farmland to cultivate cannabis. Leamington brought the action because Mr. DeGoey’s operation was contrary to a handful of municipal by-laws.

In response, Mr. DeGoey brought a motion to stay the municipality’s application. He requested the order be put in place until the Normal Farm Practices Protection Board could determine his application to them. In that application, he argued that certain municipal by-laws did not apply to him as his cannabis facility was a “normal farm practice”, over which Leamington lacked any jurisdiction. Leamington brought its own motion to strike Mr. DeGoey’s motion to stay because he did not answer certain questions in a February 2020 examination for discovery.

Growers were federally licensed to cultivate cannabis

Mr. DeGoey’s cannabis facility, he claimed, was operating under the law. The greenhouses he had erected were being leased to four individuals with licences from Health Canada to grow cannabis. Each of those individuals had the same medical practitioner and licence authorizing the growth of 390 to 438 cannabis plants. They were also all authorized to grow cannabis on Mr. DeGeoy’s farm, and their production type permitted by all of their licenses was for “personal” use. As the Court spells out: 

“In other words, according to the licenses, it is anticipated that each individual will ingest between 390 and 438 cannabis plants in each growing cycle. I say that because the production of cannabis by each of those licences is, as said above, limited to their own use by the terms of that licence.”

Initially, Mr. DeGoey planned for the cannabis facility to be a “test” through 2019. If successful, he intended to obtain his own licence to cultivate medical cannabis and increase his charge for allowing cultivation on his farm. He did obtain his licence on March 3, 2020, from Health Canada, allowing him to grow a maximum of 495 indoor cannabis plants for personal use.

The municipality argued that the cannabis facility was not operating under the law

At issue was how the cannabis facility was classified under Leamington’s Municipal By-Law 35-18. That by-law regulates cannabis, including cannabis facilities licensed by Health Canada. Leamington submitted that Mr. DeGoey was illegally operating a “Part II Cannabis Facility”, instead of an “agricultural hobby farm”, which was what his land was designated as under the municipality’s zoning regulations.

In response, Mr. DeGoey asserted that section 6 of the Farming and Food Production and Protection Act of Ontario does not allow a municipality to interfere with his cannabis facility. Section 6 states that “no municipal by-law applies to restrict a normal farm practice carried on as part of an agricultural operation.” The same section provides that applications to resolve disputes related to normal farm practices should be filed with the Normal Farm Practices Protection Board.

What is a normal farm practice?

Although Mr. DeGoey’s position was that only the Normal Farm Practices Protection Board had jurisdiction to hear this case, the Board declined to hear his application until this hearing had been resolved.

The main issue before the Court was what constituted a “normal farm practice” under the Farming and Food Production and Protection Act. In this Act, “normal farm practice” is defined as a practice that:

  1. is conducted in a manner consistent with proper and acceptable customs and standards as established and followed by similar agricultural operations under similar circumstances; or
  2. makes use of innovative technology in a manner consistent with proper advanced farm management practices.

The cannabis cultivation facility found to have contravened municipal by-laws

Mr. DeGoey argued that under the Farming and Food Production and Protection Act, the Normal Farm Practices Protection Board can “declare that any and all of the provisions of a zoning by-law do not apply to the applicant, including, without limitation, land-use issues such as which uses will be allowed in what zones.” The Court disagreed, finding that Mr. DeGoey was conflating the term “land use” with “farm practices,” which are distinct. “Land use” determines what farm operations can occur in which zones, while “farm practice” refers to how farm operations are carried out. Moreover, the Farming and Food Production and Protection Act refers to both “farm uses” and “normal farm practices” distinctly. So, the Court concluded that the Normal Farm Practices Protection Board did have jurisdiction to consider the zoning by-laws as it relates specifically to disturbances and normal farm practices.

However, the Normal Farm Practices Protection Board did not have the power to give the relief sought by the municipality. The dispute between Leamington and Mr. DeGoey had nothing to do with disturbances or nuisances related to his cannabis cultivation. Instead, the issue centred on zoning provisions prohibiting agricultural hobby farms from engaging in cannabis cultivation. Therefore, the Court determined that it had jurisdiction over the dispute instead of the Normal Farm Practices Protection Board.

Ultimately, the Court found that Mr. DeGoey was clearly violating municipal by-laws, and his motion for a stay of proceedings was denied. The Normal Farm Practice Protection Board would hear the remaining issues when it resumed its review of Mr. DeGoey’s application.

Contact Bader Law in Mississauga for Reliable Advice on Cannabis Start-Ups

Bader Law helps businesses navigate the complexities of the cannabis industry in Ontario. Our knowledgeable business lawyers assist clients in obtaining Retail Store Authorizations and ensuring ongoing compliance with the shifting changes in cannabis regulation. We create dynamic, creative legal solutions for cannabis newbies and experienced operators. We also represent clients with corporate financing and information technology law, amongst other areas. Our firm proudly serves clients in Mississauga and throughout the Greater Toronto area. To schedule a consultation, call us at 289-652-9092 or reach out online.

Categories
Business Law Cannabis Industry

Ontario’s Anti-Competitive Cannabis Regime

It has been four years since the legalization of cannabis in Canada in October 2018. Although Canadians have largely adopted the formerly criminalized substance, not as many are familiar with exactly how the regulation of this industry works. 

The cannabis industry is unique compared to other newer industries that have emerged in Canada in recent years for several reasons. One of the aspects that makes the industry unique is that it is highly regulated, with some provinces like Ontario exercising a monopoly over licensing and production. This blog will explain why the cannabis industry, unlike others that engage in anti-competitive practices, is not investigated by the Competition Bureau of Canada.

Cannabis was legalized in Canada in October 2018

In 2018, a new regulated industry emerged in Canada when the federal government legalized the distribution and sale of recreational cannabis. The law came into effect on October 17, 2018.

In ending the prohibition on cannabis, the federal government explicitly intended to protect public health and safety. Another intention of legalization was to attempt to eradicate the black market. Canada is only the second country to have legalized the possession, consumption, and licensed sale of cannabis after Uruguay.

Each province and territory have their own unique cannabis regime

The federal Cannabis Act divides the regulation of the cannabis industry between the federal and provincial governments, much like the system in place for the sale and distribution of alcoholic beverages. The federal government is charged with regulating production and establishing health and safety standards for those products. The provinces and territories are charged with regulating distribution and sale.

Because provinces and territories are left on their own to distribute and sell recreational cannabis, the regulatory regimes vary across the provinces and territories. Quebec, for example, has opted for a government monopoly wherein the Société Québécoise is the sole body authorized for the retail sale of cannabis, in-store and online. By contrast, Alberta has undertaken a hybrid public-private retail system where the government monopoly is restricted to online sales. British Columbia has similarly adopted a hybrid model.

Ontario’s cannabis regime is a government monopoly

In Ontario, the provincial legislature initially planned for a government monopoly in which cannabis distribution would be merged into the regime for alcohol under the Liquor Control Board of Ontario (LCBO). A change in provincial government in 2018, months before the legalization of cannabis, led to a revamp of the planned scheme. Now, the Ontario Cannabis Store (OCS), a Crown corporation, is charged with overseeing and implementing online sales and private retailers. 

The OSC is established by the Ontario Cannabis Retail Corporation Act, 2017, which gives it the exclusive right to sell cannabis online or to licensed retail stores. The objectives of the OCS are defined in section 4 of the legislation, which reads:

4 The Corporation’s objects are,

  1. to buy, possess and sell cannabis and related products;
  2. to determine,
  1. the varieties, forms or types of cannabis and related product it sells, subject to the regulations, and
  2. the prices at which it sells them, subject to subsection 5 (5) and the regulations;
  1. to promote social responsibility in connection with cannabis; and
  2. to engage in such other activities as may be prescribed by regulation or assigned to the Corporation under this or any other Act.

The Ontario Cannabis Store is not permitted to sell to retail stores that have not obtained a licence under the Cannabis Licence Act, 2018. Licensing of cannabis under the Cannabis Licence Act is administered by the Alcohol and Gaming Commission of Ontario. While the Alcohol and Gaming Commission of Ontario is responsible for licensing all dispensaries operating in the province, municipalities and reserves also have the power to prohibit cannabis retail stores from being located within their boundaries.

What is competition law?

The main objective of competition law in Canada is to encourage economic development and expand opportunities for Canadian businesses to participate in world markets. The Competition Act contains provisions that help ensure that businesses can exist alongside each other and provide consumers with competitive prices and product choices.

The Competition Bureau is an independent law enforcement agency charged with ensuring that Canadian businesses and consumers can thrive in a competitive marketplace. It is responsible for enforcing the provisions of the Competition Act.

The Competition Act outlines business activities that may impede the operation of competitive markets. Such acts include “price-fixing cartels, anti-competitive mergers and dominant firms that abuse their market power, as well as misleading advertising and other deceptive marketing practices.” The Competition Bureau recommends action to the Competition Commissioner, who investigates. The Commissioner may refer criminal cases for prosecution to the Public Prosecution Service of Canada. In dealing with civil cases, the Commissioner may refer them to the Competition Tribunal.

Nearly one in five industries are regulated in Canada

Regulated industries make up over 20 percent of Canada’s gross domestic product. These industries include the retail sale of alcoholic beverages, financial services, telecommunications, agricultural supply management, and professional services. The Commissioner has intervened in a number of these industries, notably in telecommunications, energy, transportation, and financial services. However, many regulated industries remain intact for various public policy objectives.

Why doesn’t the Commissioner investigate the cannabis industry?

Governments impose regulations upon businesses in certain industries for various objectives. These regulations can negatively affect competition by imposing price limits, encouraging the creation of monopolies, or restricting access to certain markets. However, even though these regimes directly inhibit competition, government regulation is protected by the “regulated conduct” defence.

This defence protects entities acting with the power of a valid provincial or federal law. In other words, the defence applies when the state authorizes anti-competitive conduct. The Competition Bureau has said that it does not recognize the general application of the regulated conduct defence. However, it is not the Competition Bureau that makes these decisions, and the defence is often honoured in courts.

Despite regulation, the number of dispensaries in Ontario has increased rapidly

Although Ontario’s cannabis regime imposes monopolies around licensing and production, it is hard to suggest that the regime has stopped businesses from participating in the market. In the early days, the lottery system imposed by the Alcohol and Gaming Commission greatly limited the number of dispensaries operating in Ontario. However, by August 2021, Ontario had exceeded 1,000 stores compared to roughly two dozen in November 2019.

Contact Bader Law for help organizing your cannabis start-up

The business lawyers at Bader Law have decades of experience in establishing new legal identities for businesses throughout Mississauga and the Greater Toronto Area, be it a private corporation, a limited liability partnership, a sole proprietorship, or a corporation needing to make a private placement of securities. We also have experience advising and assisting cannabis start-ups with business structure and licensing matters. Contact us online or at (289) 652-9092.

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Cannabis Industry

Hopeful Entrants to Cannabis Industry Can Turn to Farmgate

In 2021, Ontario became the first province in Canada to permit farmgate cannabis retail, giving business owners and hopeful entrepreneurs a different option for entering the cannabis sector. This article provides an overview of what interested business owners should know about farmgate cannabis retail.

What is farmgate cannabis retail?

Farmgate cannabis retail is available to licensed cannabis producers who can combine their production site with a retail storefront. The model is most similar to vineyards, where wine is both produced and sold to customers in the same location.

Farmgate stores are licensed and regulated by the Alcohol and Gaming Commission of Ontario. Instead of the producer needing to deliver cannabis products to the Ontario Cannabis Store (which distributes products to retailers), farmgate stores allow producers to eliminate a step between the harvest of product and its sale to consumers. To be eligible to apply, the producer must already be federally licensed.

In May 2022, the Alcohol and Gaming Commission of Ontario authorized the province’s fourth farmgate location in Brampton. The other three are located in Simcoe, Toronto, and St. Thomas. The Alcohol and Gaming Commission has announced that as of July, 25 producers have applied for the first stage of the farmgate licensing process and 14 are on the second stage.

What are the stages of becoming a cannabis farmgate retailer?

Businesses interested in becoming farmgate operations must obtain two licences in addition to an authorization by the Alcohol and Gaming Commission. First, businesses need to obtain a licence from Health Canada permitting the sale of cannabis products to the Ontario Cannabis Store. Second, they must apply for the Retail Operator Licence under the Cannabis Licence Act and pay the corresponding fee. To apply for the licence, individuals (or directors and shareholders in a corporation) must be 19 years of age or older. The current fee for the Retail Operator Licence is $6,000.

After the application has been submitted, the next step is to apply for a Retail Store Authorization. The Retail Store Authorization will only be granted after the Retail Operator Licence is issued, although applications for both can be submitted at the same time. The current fee for a Retail Store Authorization is $4,000.

Once the Retail Operator Licence is obtained, the retail store operator will need to enter an agreement with the Ontario Cannabis Store to start acquiring product for resale. This product can add to the stock already being generated by the production site.

A final licence is required for most cannabis retailers before beginning operations

Every cannabis retail store in Ontario requires a Licensed Retail Manager. The Licensed Retail Manager is there to do the following, set out in section 5(1) of the Cannabis License Act:

5 (1) Subject to the regulations, an individual who wishes to perform one or more of the following functions in respect of a cannabis retail store may apply to the Registrar for a cannabis retail manager licence:

1.  Supervising or managing employees of a cannabis retail store.

2.  Overseeing or co-ordinating the sale or distribution of cannabis.

3.  Managing compliance issues in relation to the sale of cannabis.

4.  Having signing authority to purchase cannabis, enter into contracts or make offers of employment.

As with the application for the Retail Operator Licence, applicants for Licensed Retail Managers must be at least 19 years old. The current fee for this licence is $750.

Licensed Retail Managers are not required when the retail store operator is a sole proprietor or a partnership. In these instances, the retail store operator would perform the duties of Licensed Retail Manager.

Who can’t apply to operate a cannabis farmgate retail store?

Not everyone can become a cannabis farmgate retail store operator in Ontario. The Cannabis Licence Act sets out situations in which the issue of a retail operator licence is prohibited:

  1. There are reasonable grounds to believe that the applicant will not be financially responsible in the conduct of the applicant’s cannabis retail business, having regard to the financial history of:
  • the applicant;
  • persons interested in the applicant; and
  • if the applicant is a corporation, the directors, officers or shareholders of the applicant and persons interested in those directors, officers or shareholders.
  1. There are reasonable grounds to believe that the applicant will not carry on business in accordance with the law, or with integrity, honesty or in the public interest, having regard to the past or present conduct of any of the persons referred to above (under #1).
  2. A person referred to above has been convicted of or charged with an offence under the Cannabis Licence Act, the Cannabis Control Act, 2017, the Cannabis Act (Canada) or any applicable regulations made under any of those Acts.
  3. There are reasonable grounds to believe that the applicant is carrying on activities that are, or would be if the applicant were the holder of a retail operator licence, in contravention of or not in compliance with a provision of the Cannabis Licence Act, the Cannabis Control Act, 2017, the Cannabis Act (Canada) or any applicable regulations made under any of those Acts.
  4. The Registrar under the Cannabis Licence Act is not satisfied that the applicant will exercise sufficient control, either directly or indirectly, over the applicant’s cannabis retail business.
  5. The applicant or an employee or agent of the applicant makes a false statement or provides false information in the application.
  6. Any other circumstance that may be prescribed under the Cannabis Licence Act.

What restrictions are there on retail store authorizations?

As with the cannabis farmgate retail store process, the Cannabis Licence Act sets out restrictions on the issue of retail store authorizations:

  1. Except as otherwise provided by the Cannabis Licence Act regulations, the proposed cannabis retail store must be located on or within the site set out in the licence.
  2. The person and its affiliates, as defined by the regulations, may not between them hold more than one retail store authorization or such other number of retail store authorizations as may be prescribed.
  3. Any other restriction that may be prescribed under the Act.

Further rules around the eligibility of retail store authorization applicants are fleshed out in the legislation, although they are similar to those pertaining to retail operator licences.

Contact the Lawyers at Bader Law to Help Organize Your Cannabis Retail Business

Bader Law helps businesses navigate the complexities of the cannabis industry in Ontario. Our knowledgeable business lawyers assist clients in obtaining Retail Store Authorizations and ensuring ongoing compliance with the shifting changes in cannabis regulation. We create dynamic, creative legal solutions for cannabis newbies and experienced operators alike. We also represent clients with corporate financing and information technology law, amongst other areas. Our firm proudly serves clients in Mississauga and throughout the Greater Toronto area. To schedule a consultation, call us at 289-652-9092 or reach out online.

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Cannabis Industry

A Guide to Restrictions on Cannabis Delivery in Ontario

As we’ve written before, Canada’s cannabis industry is one of the first in the world and involves a complex set of federal and provincial restrictions for producers and sellers. Ontario’s regulation of cannabis retailers has continued to develop over the past few years, including the recent addition of rules governing cannabis delivery and curbside pick-up services. Businesses must be cognizant of these requirements to ensure their continued compliance with Ontario’s cannabis regulatory scheme.

Cannabis governance in Ontario

In Canada, the production of cannabis is regulated on a federal level, while retail sales are governed on a provincial level. In Ontario, cannabis retail store regulation falls under the purview of the Alcohol and Gaming Commission of Ontario under the Cannabis Licence Act, 2018 and Regulation 468/18. As part of its mandate, the Alcohol and Gaming Commission is responsible for licensing eligible retail store operators and managers through Retail Store Authorizations.

Delivery-only business model prohibited for cannabis retailers

Offering delivery and curbside pick-up service is a useful way for cannabis retailers to expand their service model. However, Ontario cannabis retailers are not permitted to operate entirely, or even predominantly, as a delivery business. Under rules introduced earlier this year by the Alcohol and Gaming Commission, retailers must still maintain a physical store. Retailers that operate more than one location are prohibited from creating a centralized hub for cannabis deliveries.

Setting up a retail location requires understanding and compliance with certain requirements, including minimum distances from schools, physical space limitations, and access considerations.

Prospective cannabis retailers should also be aware that not all Ontario municipalities permit cannabis stores to operate within their boundaries. The Alcohol and Gaming Commission maintains an up-to-date database and accompanying map of all Authorized Cannabis Retail Stores in Ontario, as well as a list of municipalities that prohibit cannabis retail operations.

Existing cannabis delivery rules enhanced

The Alcohol and Gaming Commission has confirmed that the restrictions imposed on cannabis delivery services during COVID-19 are still in effect and have been enhanced by additional requirements. These rules are intended to prevent retailers from transitioning to a delivery-only business model.

As of March 15, 2022, the rules for cannabis delivery in Ontario include the following:

  • Cannabis can only be delivered by the retail store location that has been authorized to do so (or its employees). Retailers cannot use third-party delivery services.
  • Delivery orders must be placed at a specific retail location (i.e. not a centralized “delivery hub”). The order can only originate from that store and must be fulfilled using products that are stored on-premises.
  • Cannabis cannot be removed from a store for delivery unless an order has been received. If the delivery is not complete, the cannabis must return to the same store that received the order, on the same day. It can only be removed from the store on the next day on which the delivery is attempted again.
  • Cannabis deliveries cannot be made after-hours – i.e., deliveries may only take place at a time when physical cannabis retail locations are open to the public.
  • Deliveries may only be made to a residence or private location within Ontario (e.g. a hotel room) and must be to the address specified in the particular order.
  • A person receiving a cannabis delivery must be at least 19 years old. If they appear to be under 25 years old, the licensed retailer (or employee) completing the delivery must confirm that the customer is at least 19 years old using proper identification.
  • Retailers must maintain records of all deliveries.

Requirements for cannabis retail websites and apps

The Alcohol and Gaming Commission has also created requirements for retailers using websites or phone apps to allow customers to place delivery or curbside pick-up orders, including the following:

  • Websites, apps, or other online platforms used for cannabis retail purposes must enable licensees to take reasonable measures to ensure that customers accessing the service are at least 19 years old.
  • Cannabis retail licensees must ensure their websites, apps, or other online platforms display the official Ontario cannabis retail seal. The retailer’s Retail Store Authorization information must also be readily available on all platforms, including:
    • The authorization number;
    • The authorization holder’s name;
    • The store’s operating name; and
    • The store’s address.

Experienced legal guidance crucial for ensuring regulatory compliance

To help cannabis retail operators navigate Ontario’s regulatory requirements, the Alcohol and Gaming Commission offers a Cannabis Retail Regulation Guide. The guide provides information about retail licencing and can help businesses apply for a Retail Store Authorization.

However, it is important to note that cannabis is a heavily-regulated industry and is subject to a number of ever-changing rules and restrictions. Retailers can face substantial liability for non-compliance with provincial and federal legal requirements. Having the assistance of a business lawyer who understands the cannabis industry helps companies minimize risk and maximize profitability.

Contact Bader Law for Experienced Advice on Cannabis Business Licensing & Compliance

Bader Law helps businesses navigate the complexities of the cannabis industry in Ontario. Our business lawyers assist clients in obtaining Retail Store Authorizations and ensuring ongoing compliance with the shifting changes in cannabis regulation. We create dynamic, creative legal solutions for cannabis newbies and experienced operators alike. Our firm proudly serves clients in Mississauga and throughout the Greater Toronto area. To schedule a consultation, call us at 289-652-9092 or reach out online.

Categories
Cannabis Industry

Cannabis Marketing In Ontario Is About To Get Harder For Licensed Producers

The Canadian legal cannabis industry, as one of the first legal industries in the world, is very complex to navigate and has a complex set of federal and provincial restrictions that are imposed on producers and sellers of legal cannabis. 

New guidance issued by the Alcohol and Gaming Commission of Ontario, which cannabis businesses operating in Ontario must comply with by June 30, 2022, will make marketing more difficult for Licensed Producers that sell into the Ontario cannabis retail network.

Cultivators, processors, and sellers of legal cannabis in Canada are regulated on a federal level and are issued licences to operated by Health Canada. These individuals and corporations are called Licensed Producers (“LPs)”. Health Canada licenses them to supply provincial and territorial cannabis retailers and directly supply registered medical cannabis patients. 

Despite the cannabis industry being regulated on a federal level, many aspects of the legal cannabis industry, including retail sales, are regulated on a provincial level. In Ontario, cannabis retail store regulation falls under the purview of the Alcohol and Gaming Commission of Ontario (“AGCO”) under the Cannabis Licence Act, 2018 and Regulation 468/18. 

Alcohol and Gaming Commission of Ontario

The AGCO’s stated mandate is the “safe, responsible and lawful sale of cannabis, consistent with the legislation enacted by the provincial government,” as well as ensuring that “the retail sale of cannabis in Ontario is carried out with honesty, integrity and in the public interest”.

More specifically, the AGCO:

  • licenses eligible Retail Store Operators and Managers
  • authorizes Cannabis Retail Stores
  • approves cannabis retail employee training programs
  • regulates the sale of cannabis in these stores

In order to support retail licencing, the AGCO has prepared a Cannabis Retail Regulation Guide available here as well as as a very useful Cannabis Retailer Licensing Journey Map available here both of which serve as a helpful guide for Ontario businesses and individuals interested in pursuing an application for a retail store licence. 

As part of its regulation of the sale of cannabis in retail stores, the AGCO regulates the interaction between LPs and retail stores. For instance, all licensed retail stores must source the cannabis they sell in their stores from the wholesale arm of the Ontario Cannabis Store. However, while retail stores cannot source their cannabis inventory directly from LPs, retail stores can, still interact with LPs. The recently issued Guidance clarifies what LPs can do in the context of marketing their products to retail store operators. 

The “Inducement” Guidance

The recently issued Guidance deals specifically with the matter of inducement. In the context of retail cannabis activities, inducement refers to the practice of: 

“entering into agreements for items, benefits, payments, or services with licensed producers (LPs) and their representatives with the purpose to promote or increase the sale of a particular product” by retail stores licensees or their employees”.

Essentially, the prohibition on inducement is intended to ensure that a LP does not directly influence a retail store to offer their products ahead of products produced by other LPs based on “material inducements”. Items, benefits or services of “nominal value” continue to be permitted. In the Guidance, the AGCO confirms that “nominal value items, benefits or services, unlike financial or material inducements, are those that are of inconsequential value”. 

Retail Stores Are Allowed To Accept Marketing Materials Of Nominal Value From Lps

The AGCO takes the position that “nominal value” is actually a contextual determination and is not dependent on the monetary value of the item, benefit or services being exchanged. In order to assist retail stores and LPs in determining whether an item, benefit or service is of a nominal value, the AGCO has provided the following contextual questions that should be asked by retail store operators before asking for or accepting an item, benefit or service from an LP: 

  • Are you likely to change your behaviour toward an LP or the LP’s product after receiving an item, benefit or service?
  • Is the item, benefit or service valued at an amount that defrays your operational costs?
  • How many items, benefits or services have been provided over a period of time?

The following are items that would generally be considered to have nominal value:

  • T-shirts
  • Hats
  • Lanyards
  • Inexpensive cannabis accessories
  • Gift bags of inexpensive items related to cannabis 

Cannabis Training and Education

Considering the importance placed on cannabis education in Ontario, the AGCO’s Guidance confirms that LPs can continue to provide services of nominal value related to cannabis education. For example, LPs can run training sessions at their own production facilities, and as part of those training sessions, LPs can serve modest meals and refreshments.  

As part of these training sessions, LPs can even offer samples of cannabis products directly related to the training sessions or seminars as long as the samples are of products that are available in Ontario and are offered infrequently.  

LPs continue to be able to offer retail stores educational training or seminars at the retail stores locations. 

Consumer Data Is Still Tricky

Unless retail store operators obtain direct consent from their clients, they are prohibited from sharing personal customer data by Canadian law. However, if they are able to obtain consent from certain customers, cannabis retailers are able to share that data with LPs and may enter into agreements with LPs for the sale of data for business intelligence purposes. 

However, as outlined in the Guidance, the AGCO expects that the fee for such data is set at “fair market value” and reminds the retailers and LPs that both are expected to follow applicable privacy laws and regulations.

Authorized Cannabis Retail Stores in Ontario

The AGCO maintains an up-to-date database and accompanying map of all Authorized Cannabis Retail Store in Ontario.

As evidenced by all the links and information shared above, the AGCO has tried to assist potential store proprietors in navigating the complexities of applying for and receiving a Retail Store Authorization for an Ontario storefront. However, individuals and companies considering entering the cannabis industry are still faced with understanding, interpreting, and navigating a very complex and heavily regulated industry. Whether you are a cannabis newbie, an established grower, or operate a company interested in entering the industry, our team at Bader Law can be a supportive partner on your journey into this emerging industry.

Contact Mississauga Business Lawyers For Experienced Advice on Cannabis Business and Licensing Matters

The business law team at Bader Law has decades of experience in establishing new legal identities for businesses throughout Mississauga and the Greater Toronto Area, be it as a private corporation, a limited liability partnership, a sole proprietorship, or a corporation needing to make a private placement of securities. Contact us online or at (289) 652-9092.

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Cannabis Industry

The Growing Canadian Legal Cannabis Market – Reviewing the Results of the 2021 Canadian Cannabis Survey

We have written about Cannabis in Canada several times in the past, mainly in the context of business disputes. In our latest article on this matter, we review the results of a recent survey conducted by Health Canada that shows that Canadians’ attitudes towards cannabis use are rapidly changing. These rapid changes in attitude signal that cannabis use is becoming more prevalent and more accepted. The implications of wider cannabis use, adoption, and changing attitudes will likely be felt across Canadian industries, especially the business sector.

Cannabis use in Canada – Health Canada’s Annual Canadian Cannabis Survey

The Cannabis Act is a national framework aimed at controlling the production, distribution, sale and possession of legal cannabis in Canada. The legislation and accompanying regulations came into force on October 17, 2018.

To better understand the impact, success, and struggles of the emerging Canadian Cannabis Industry, Health Canada has developed and implemented an annual Canadian Cannabis Survey (“CCS”). The survey has been conducted annually since 2017.

The CCS examines three main areas:

  1. patterns of use, such as the quantities of cannabis consumed and the use of cannabis for medical purposes;
  2. the cannabis market, such as sources of cannabis and pricing; and
  3. and issues of public safety, such as impaired driving

In 2021, the CCS was amended to consider the following additional questions:

  • exposure to the cannabis consumer information sheet
  • home growing of cannabis plants inside and outside the home
  • knowledge about potential harms from use of cannabis topicals
  • knowledge of when it is safe to drive after ingesting (eating/drinking) cannabis products
  • changes in cannabis use in the context of Coronavirus disease 2019 (COVID-19) pandemic

Highlights of 2021 Canadian Cannabis Survey

Below are some of the findings of the 2021 Survey that indicate that Cannabis is rapidly becoming an acceptable recreational activity for a growing percentage of Canadians:

  • 25 per cent of people reported having used cannabis in the past 12 months
  • People who had used cannabis in the past 12 months indicated typically spending close to $69 on cannabis products each month
  • 67 per cent of survey respondents confirmed that they believed that smoking cannabis for recreational purposes was somewhat acceptable or completely acceptable; 68 per cent said the same for ingesting edible cannabis products, and sixty-two percent 62 per cent believed that vaping was also acceptable; this is compared to only 49 percent that believed that tobacco use was acceptable
  • Smoking remains the most common method of consuming cannabis, but it has declined while vaporizing using a vape pen, drinking, and applying to skin have increased since 2020.
  • More than half of those who use cannabis choose to obtain it through a legal source. 53 per cent reported a legal storefront as their usual source, an increase from 41 per cent in 2020, whereas 11 per cent reported obtaining cannabis from a legal online source.

Good news for Canadian Cannabis Businesses – the legal cannabis market is growing and the grey market is shrinking

Of the information collected through the 2021 CCS, the most significant for the Canadian cannabis business is the fact that a majority of Canadian users now report using a legal storefront as their usual source of cannabis. This represents a significant 12 per cent increase in the number of Canadians that rely on legal stores to supply their cannabis needs and demonstrates that the legal industry is constantly growing and that there are still many opportunities to enter the industry and operate a thriving and growing cannabis business.

Cannabis in Ontario

In Ontario, Cannabis stores are licensed by and regulated by the Alcohol and Gaming Commission of Ontario (“AGCO”). The AGCO issues Retail Store Authorisations (RSAs) each month and is currently processing thirty RSAs a week.

Like many jurisdictions that were slow to roll out retail stores, Ontario has seen explosive growth in the number of Cannabis stores that have opened in the last year.

To date, the AGCO has received over 1630 RSA applications. It has issued 489 RSAs and 430 authorized cannabis retail stores are currently open in the province. There are currently over 940 active RSA applications still to be processed.

To assist potential store proprietors to navigate the complexities of applying for and receiving an RSA for an Ontario storefront, the AGCO has put together a Cannabis Retailer Licensing Journey Map.

However, individuals and companies considering entering the cannabis industry are still faced with understanding, interpreting, and navigating a very complex, and heavily regulated industry. Whether you are a cannabis newbie, an established grower, or operate a company interested in entering the industry, our team at Bader Law can be a supportive partner on your journey into this emerging industry.

Contact Mississauga Business Lawyers For Experienced Advice on Cannabis Business and Licensing Matters

The business law team at Bader Law has decades of experience in establishing new legal identities for businesses throughout Mississauga and the Greater Toronto Area, be it as a private corporation, a limited liability partnership, a sole proprietorship, or a corporation needing to make a private placement of securities. Contact us online or at (289)652-9092.

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Cannabis Industry

Ontario Court of Appeal Overturns Finding of Bad Faith in Commercial Cannabis Deal Gone Wrong

Earlier this year, we reviewed two recent Supreme Court of Canada decisions, the first of which clarified the scope of the duty of honesty in contractual performance, and the second which clarified the nature and scope of the duty to exercise contractual discretion in good faith.

 In a recent decision, the Ontario Court of Appeal considered both Supreme Court of Canada decisions in its ruling on a cannabis licensing and rental deal gone wrong. 

Companies Enter Into Cannabis Licensing and Rental Deal

The appellant corporation holds the Ontario rights to the “Tokyo Smoke” cannabis brand, which it licenses to various retail operators. 

The respondent company won a cannabis retail operator license in the allocation lottery held by the Alcohol and Gaming Commission of Ontario (“AGCO”) in August 2019.

In November 2019, the parties entered into a series of agreements for the operation of a Tokyo Smoke-branded cannabis store in Toronto. These agreements included a license agreement for the use of the Tokyo Smoke brand and a sublease whereby the respondent rented the retail premises from the appellant. 

Additionally, the appellant offered the respondent funding for start-up costs, including rent, and an inducement of approximately $2 million to open under the Tokyo Smoke banner (the “branding fee”). The branding fee would come due once the respondent had obtained its retail store authorization from the AGCO. 

The parties anticipated that the store would open in early June 2020.

Parties’ Deal Falls Through

However, two days before the store was supposed to open, a dispute arose as to the appellant’s obligation to fund the payment of the respondent’s rent for the month of opening. 

Faced with the appellant’s refusal to pay, the respondent advised the appellant that it would not be opening the store as planned. 

In the appellant’s view, this was a threat to cease carrying on business and accordingly constituted a breach of their agreement. Thus, the appellant terminated its relationship with the respondent and refused to pay the branding fee.

Parties Go to Court Over Failed Deal

Subsequently, the appellant brought an application seeking a declaration that the respondent had breached its various agreements, that the branding fee was not payable, and the respondent must therefore vacate the retail premises. 

In response, the respondent brought a counter-application seeking, among other things, payment of the branding fee and a declaration that the appellant had wrongfully terminated the license agreement and breached its duty of good faith in the performance and enforcement of contractual relations. 

Lower Court Finds Bad Faith Breach of Agreement 

The application judge dismissed the appellant’s application and granted the respondent’s application. She declared that the appellant had no valid reason to terminate the agreements, that it had acted in bad faith, and ordered it to pay the branding fee.

In part, the application judge found that the respondent’s communication to the effect that it would not be opening the store was not an event of default under the license agreement, describing it instead as “an emotional response to being given incorrect information at a critical time”. As a result, she concluded that the appellant’s termination of the license agreement was invalid. 

Additionally, she held that the appellant’s termination of the agreements was not done in good faith following testimony that the appellant had been looking for a way to end the relationship and had “pounced” on the respondent’s statement as a way to terminate the relationship and avoid paying the branding fee.

The appellant appealed the decision to the Ontario Court of Appeal.

Court of Appeal Overturns Finding of Bad Faith

On appeal, the appellant argued that, based on the following provision of the licensing agreement, it was entitled to end the agreement when the respondent threatened to cease carrying on business:

“26. The Licensor has the right, without liability, cost or penalty, to terminate this agreement with immediate effect on written notice to the Licensee if one or more of the following occurs.

(c) the Licensee ceases or threatens to cease to carry on business, or takes or threatens to take any action to liquidate its assets, or stops making payments in the usual course of business;”

However, the court found that the application judge had correctly decided that the respondent’s emotional frustration, viewed in context, did not meet the requirements of the parties’ termination clause. 

The court then turned the question of whether the appellant had breached its duty of good faith in contractual performance. The court began by noting that the application judge had not had the benefit of the above-mentioned Supreme Court of Canada decisions, as they had not yet been released.

The court therefore reviewed the application judge’s ruling with the benefit of the guidance provided by the two Supreme Court of Canada decisions. In the result, it found that that the application judge had erred in her conclusion of bad faith, stating:

“Put simply, in terminating the License Agreement, [the appellant] did not seek to undermine [the respondent]’s interests in bad faith. While [the appellant]’s notice of termination was, by definition, an attempt to put an end to the agreement, the termination right in question formed part of the parties’ bargain and reflected, among other things, the licensor’s legitimate interest in protecting its brand in circumstances that the parties expressly stipulated would give rise to a right of termination.”

As such, the court ruled that the application judge’s finding of bad faith had to be set aside.

Finally, the court dismissed the appellant’s ground of appeal relating to sublease.

In the result, the court therefore set aside the application judge’s finding of bad faith, but otherwise dismissed the appeal.

Contact Bader Law For Experienced Advice on Cannabis Business and Licensing Matters

Running a business involves an infinite number of both daily and long-term decisions, all of which will impact your venture. Choosing the appropriate legal structure will influence your success as it will affect your business from start-up options and share capital, to providing for future investment and profit-sharing. The way in which a business is structured will also have a significant effect on risk and liability.

Deciding how to structure your business is a task best undertaken with the guidance of an experienced corporate lawyer with noteworthy experience advising business owners on risk and liability.  At Bader Law, our business services lawyers have been advising clients who are looking to make the best choices about how to organize their business venture for several years.  We work hard to protect your financial and legal interests while ensuring your company operates successfully.

The business services our team offers include experience advising and assisting cannabis start-ups with business structure and licensing matters.

The business law team at Bader Law has decades of experience in establishing new legal identities for businesses throughout Mississauga and the Greater Toronto Area, be it as a private corporation, a limited liability partnership, a sole proprietorship, or a corporation needing to make a private placement of securities. Contact us online or at (289) 652-9092.