The State of the Business of Cannabis in Canada, 2018

2017 has been an exciting year for cannabis in Canada.

When the Liberal Party won a parliamentary majority in the 2015 federal election, their platform included an exciting promise for Canadians: they intended to legalize marijuana in Canada. Advocates for medicinal cannabis, de-criminalization, and recreational use were optimistic that their goals were finally in sight.  These groups did not have to wait long, as the government finally announced, on 4/20 no less, that it was committed to introducing legalization legislation in 2017. This announcement set up a rush of speculation and investment, but true to its word the government did not release any other substantive details over the course of the year, leaving the industry to guess.  

In April 2017, the government of Canada delivered on its promise from the previous year and announced that it intended to legalize cannabis by July 1st, 2018.  This announcement set off a rush of activity as politicians, organizations, advocates, and businesses sprung into action in order to have a say on the regulatory framework being assembled, and get ready for the market to open up. Given the steady stream of information on proposed policy, business trends, and market movements, attempting to parse through them all would be akin to trying to drink from a fire hydrant. So as the end of the year approaches, Momentum Law summarizes everything you need to know about Cannabis and the law as we enter the final months before legalization.

Bill C-45, The Cannabis Act

Introduced on April 13, 2017, Bill C-45 is the Canadian government’s cannabis legalization bill. The Federal Act represents a landmark change for Canada, as it is the first G20 nation to decriminalize and regulate the production and consumption of cannabis products by the public.

The core of the bill will legalize the possession and use of cannabis products by adults in Canada. Adults will be able to purchase cannabis products from authorized producers and distributors, subject to additional provincial regulations, or they will be able to grow up to 4 cannabis plants per household. Following some amendments by the House of Commons committee process size limits for plants grown at home were removed, and the bill will allow the sale of edibles containing cannabis and concentrates within a year of the Act coming into force.

Where cannabis will be sold, whether it be in brick and mortar stores or online with delivery by mail, will be left up to each province to legislate as they see fit. Similarly, where cannabis can be consumed has been generally left up to the provinces. Federal rules that prohibit smoking will apply to cannabis (for example smoking will not be allowed in federal workplaces or airports), but outside of those restrictions, the provinces will be able to determine where people will be permitted to smoke recreationally.

The Act does place restrictions on advertising of cannabis products. The Act currently explicitly prohibits advertising and packaging directed at youth, which has testimonials or endorsements, which depicts a person, character or animal, as well as lifestyle advertising. These restrictions are similar to limits currently in place for tobacco products, which has raised questions about whether there will be a way to effectively brand or differentiate cannabis products once the market has a range of offerings. At this time there are no additional details on permitted or recommended advertising models from the government. The Coalition for Responsible Cannabis Branding has released a report of proposed guidelines for cannabis advertising and marketing. The report outlines a strategy for allowing businesses to promote their product brand and differentiate from their competitors while still protecting consumers from false health claims, depictions of irresponsible consumption, or advertising targeting underage persons.

Finally, there will be an excise tax on the sale of cannabis products, but the taxation rate is expected to be relatively low to ensure that legal cannabis is competitively priced against the black market. While the federal government has not officially set the tax for cannabis and related products, current discussions suggest a tax of $1 on sales up to $10 and a 10% tax on sales above that total. The result is a 10% tax on products which the federal government says will make legal cannabis products competitive and discourage consumers from going to the black market. This tax will also apply to medicinal cannabis which is currently only subject to standard sales tax (HST in Ontario), but the government has said that this is necessary to prevent people from seeking out medicinal cannabis because of a price difference. The provinces and the federal government spent the latter half of the year negotiating how the revenues from this tax will be split, as the federal government  suggested an equal divide, while some of the provinces  demanded a greater portion of the revenue on the grounds that their policing costs will increase to deal with cannabis-inebriated drivers, and other related issues. With only a few weeks left in the year the federal government announced that the provinces and territories would get approximately 75 cents of every dollar collected in excise tax levied on cannabis for the first two years. The federal portion of tax revenues will be capped at $100 million a year, based on a projected $400 million a year in total tax revenue. This promises more revenue for the provinces, which may in turn be put towards the cost of regulating and supporting the new industry. 

Bill C-45 was passed in the House of Commons at the end of November and is currently in the Senate.

Criminal Offences

Until Bill C-45 comes into force there will continue to be criminal penalties for possession and consumption of cannabis by anyone who does not have a medical prescription, and for the unauthorized sale and distribution of cannabis, including in physical stores such as “dispensaries” or “Compassion clubs.”

Once the bill comes into effect the minimum age requirement to legally purchase, possess, and consume cannabis will be 18 years of age, though each province will be able to set requirements above this threshold. It will also be legal to personally possess up to 30 grams and 4 cannabis plants per household. However, possessing more than this amount or trafficking in cannabis or cannabis products without proper authorization will incur criminal penalties. There will also be strict criminal penalties for selling or distributing cannabis products to minors.

Licensed Producers Under The ACMPR

A process for private companies to seek legal approval to produce and sell cannabis products was introduced in 2013 under the Marihuana for Medical Purposes Regulations (MMPR). This process was updated to the Access to Cannabis for Medical Purposes Regulations (ACMPR) as of August 2016, which allows for individuals to grow cannabis in order to meet their own medicinal needs, in addition to the larger commercial producers. The ACMPR framework sets out a multi-step process for commercial producers to apply and receive a license to cultivate, eventually a license to sell, upon complying with the relevant security and quality requirements.

There was a total of 42 licensed producers of cannabis under the ACMPR in Canada when the government introduced Bill C-45 on April 13. Following that announcement, Health Canada added staff and resources as well as new streamlined review procedures with the objective of speeding up the licensing process in order to get ready for legalization. Industry participants have since reported that these changes have made a noticeable improvement in the process. As of December 22nd, 2017, there are 82 licensed producers across Canada, representing a doubling in the total number of licensed producers this year.

Bill 174 – Governing the Sale and Consumption of Cannabis in Ontario

On November 1, 2017 Ontario was the first province to reveal its plan for regulating the sale and consumption of cannabis in the form of Bill 174, the Cannabis, Smoke-Free Ontario and Road Safety Statute Law Amendment Act, 2017. The bill as currently proposed will also repeal the Smoke-Free Ontario Act and the Electronic Cigarettes Act, 2015 and replaces them with the Smoke-Free Ontario Act, 2017, and makes amendments to the Highway Traffic Act regarding driving with alcohol or drugs present in the body and other matters.

Under this and the related legislation changes to be enacted private businesses will be prohibited from selling cannabis to the public. Penalties for illegally selling cannabis products will include fines of up to $250,000 for private individuals, and up to $1,000,000 for corporations. Police will also have the ability to close and bar entry to premises that engage in the illegal sale of cannabis products for up to 2 years, which will create a strong disincentive for landlords to provide space for these activities. The model has been controversial with advocates and activists who wanted to see private businesses, including current stores operating illegally, be able to sell cannabis products from store fronts throughout the province.

Instead, the provincial government will establish the Ontario Cannabis Retail Corporation (OCRC) as a new crown corporation which will have the exclusive right to sell cannabis in the province and will be overseen by the Liquor Control Board of Ontario (the LCBO).  The OCRC will open new stand-alone cannabis retail stores where cannabis and cannabis products will be available for purchase, and will additionally provide a system where consumers can purchase products online for delivery direct to their homes. The government has announced the first 14 locations in the province, and has further committed to the following timeline for expansion:

·       40 locations to be open by July, 2018;

·       80 locations to be open by July 1, 2019; and

·       150 locations to be open by 2020.

Ontario’s proposed legislation will also impose greater minimum restrictions around cannabis consumption and advertising. Under the legislative framework there will be a minimum age of 19 to consume cannabis or cannabis products. Consumption will not be allowed in public spaces, workplaces, vehicles, and other locations which have yet to be identified. Advertising of cannabis and related products will also be restricted similar to tobacco products, so that product advertisements or placements will be prohibited in places of entertainment, including bars and restaurants. The packaging and labeling of these products will also be subject to restrictions, though the details are still pending.

Market Movement

In addition to the regulatory revelations, the year has been marked by big moves in the industry and financial markets:

·       Significant amounts of financial capital have been flowing into cannabis companies this year as investors speculate that the market will return significant profits once legalization occurs, and have sought to get in early. This trend has been so noticeable that some in the industry have dubbed the influx of investment the “Green Rush.”

·       The creation and growth of new cannabis businesses in Canada is projected to create thousands of jobs in an industry that is already valued at $23 billion. Analysts project that legalization will give Canada a head start and a business advantage internationally as other countries also legalize and enter the market.

·       Canadian Marijuana Index, which tracks stocks of major legal cannabis companies, is set to end the year having doubled the price of its stock from January. (Data current to December 22, 2017).

·       The stock prices of Canadian cannabis industry leaders like Canopy Growth Corp., Aurora Cannabis Inc. and Aphria Inc. have also seen significant growth in value as investors rush in following each major announcement.

·       Constellation Brands, the international Fortune 500 Company and owner/producer of Corona, acquired a 9.9% interest in Canopy Growth Corporation for approximately $200 million. This move has also created speculation that the international company may be exploring a market for cannabis-infused beverages.

·       Even as all of this investment has flowed into the industry to fund the establishment of new companies and the expansion of facilities and output, industry analysts and news agencies have been projecting a supply shortage for when legalization occurs. This prediction is worrisome for Canadians who are hoping to purchase cannabis products when the time comes, especially if they want to have access to a variety of competitive options, but it also means that any business producing cannabis can confidently expect to sell their product regardless of where it falls in the market offerings.

·       Chuck Rifici, co-founder of Tweed Marijuana Inc. (now known as Canopy Growth Corp), has introduced an innovative financial model to the industry with his team at Wheaton Income (formerly Cannabis Wheaton Income Corp.). The company is a first of its kind financial ‘streaming company’ for Canadian cannabis producers. Their model is taken from the mining industry where investment companies pay cash up front to finance mining and extraction operations in exchange for a portion of the future profits or physical output of the venture.  

·       We would also be remiss if we did not flag the acquisition of Ottawa locals RockGarden Medicinals by Cannabis Wheaton. This family-founded licensed producer first filed an application with Health Canada in early 2014 and received authorization to cultivate this summer. Their hard work and talented team clearly impressed some members of the industry  and Momentum law is very happy to have helped them complete the transaction and get them ready for the next stage of their development. Good luck RockGarden and Wheaton!

How Momentum Can Help:

·       Momentum works with ACMPR Applicants all throughout the process, from start up to License and beyond. We help your company “Grow”!

·       Momentum works with companies examining their workplace policies to adjust for the coming legalization.