The Government of Ontario Reveals Proposal for Regulatory Structure for the Sale and Distribution of Recreational Cannabis

During the past couple of days, the Government of Ontario has announced a long-awaited decision regarding the anticipated expansion of the market for the legal use of cannabis. Until the implementation of amendments of the current federal legislation, the market for the legal use of cannabis in Canada has been limited to medical use. The market has anticipated the expansion of the cannabis market to include the recreational use of cannabis. Evidence of the anticipated expansion of the market for cannabis is the ever-increasing number and market capitalization of the public entities with a focus in the cannabis industry.

In April 2017, the federal government introduced Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts (the “Proposed Cannabis Act”). If passed as currently proposed, the bill will legalize recreational cannabis by July 1, 2018. The Proposed Cannabis Act establishes a framework for a regulatory regime for production, sale and possession of recreational cannabis and leaves the provinces and territories to determine how cannabis may be distributed and sold.

Until Friday, September 8, 2017, industry participants have been trying to anticipate how and where recreational cannabis will be sold. Given the fast approaching implementation date, industry participants have been increasingly concerned that a provincial regime may not be possible by the implementation date. The Government of Ontario initially suggested that their preferred model would be to have recreational cannabis sold through the existing distribution system operated by the Liquor Control Board of Ontario (the “LCBO”). However, it was subsequently understood this was unlikely in light of the federal Task Force on Cannabis Legalization and Regulation’s disapproval of co-locating the sale of cannabis and alcohol.

The Government of Ontario announced Friday that it proposes to, among other things:

• sell recreational cannabis through a subsidiary of the LCBO, which will be overseen by the LCBO;
• open 150 standalone stores by 2020, including 80 by July 1, 2019;
• sales will be via a behind-the-counter type of retail environment similar to how tobacco is currently sold, including with respect to minimum age requirements of purchasers; and
• provide an online order service for provincial sales.

We understand that some market participants are disappointed that the proposed crown retail distribution model doesn’t permit a competitive retail market and limits private sector involvement to production and ancillary goods and services. Further, it remains to be seen if the limited bricks-and-mortar retail plan, as proposed, will be extensive enough to fully displace the illicit market, a key goal of the Task Force on Cannabis Legalization and Regulation.

While the government insight and certainty is welcomed, the proposal is still at a very early stage and more specific insight will hopefully follow shortly. In particular, details as to pricing and taxation are eagerly anticipated. As such, until then, industry participants continue to grapple with what the recreational cannabis market may look like.