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,
- to buy, possess and sell cannabis and related products;
- to determine,
- the varieties, forms or types of cannabis and related product it sells, subject to the regulations, and
- the prices at which it sells them, subject to subsection 5 (5) and the regulations;
- to promote social responsibility in connection with cannabis; and
- 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.