The Current Landscape in Ontario
October 17th, 2018 marked a historic moment for Canada as the federal Cannabis Act came into effect, legalizing recreational cannabis across the nation. However, until at least April 2019, Ontarians will only be able to purchase recreational cannabis online from the provincial government’s Ontario Cannabis Store website. Under the previous Wynne government, the province intended to own and operate cannabis retail stores, however, this plan changed in mid-August 2018 when the Ford government announced that Ontario would not be in the business of “running physical cannabis stores” and instead would offer licences to private retailers. The new government intends for privately-owned retail stores to be up and running by April 1st, 2019.
On October 17th, 2018, the Ontario government’s provincial cannabis legislation also came into effect, as Bill 36 (Cannabis Statute Law Amendment Act, 2018) passed its third and final reading and received Royal Assent. Among other things, Bill 36 amends the Ontario Cannabis Act, 2017 and enacts the Cannabis Licence Act, 2018 (the “Retail Licence Act”), which sets out a statutory framework for obtaining a licence to own, operate and manage a retail cannabis store in Ontario.
Required Licences and Authorizations
Under the Retail Licence Act, the Alcohol and Gaming Commission of Ontario (the “AGCO”) has been designated as the regulator for the privately-run retail cannabis stores. Within the coming months, the AGCO will open the application process for those interested in owning, operating and managing retail cannabis stores in Ontario. Potential applicants will be able to apply for a retail operator licence, cannabis retail manager licence and a retail store authorization. To own and operate a retail cannabis store in Ontario, potential applicants are required to obtain a retail operator licence and a retail store authorization. As described in greater detail below, a cannabis retail manager licence is not required unless certain circumstances apply.
For each licence and authorization, individual applicants must be at least 19 years of age, or in the case of a corporate applicant, all of the corporation’s directors, officers and shareholders must be at least 19 years old. In issuing a licence or a retail store authorization, the AGCO may specify that any conditions which have been consented to by the applicant will be attached to the licence or authorization. Therefore, the conditions governing each licence and authorization may differ among applicants.
Retail Operator Licence and Retail Store Authorization
To operate retail stores potential store owners will be required to apply for and obtain a retail operator licence and a retail store authorization for each location that they plan to operate. There is no prescribed limit on the number of retail store authorizations that will be available for issuance in Ontario. The Retail Licence Act sets out a number of eligibility requirements for a retail operator licence and a retail store authorization to be issued to an applicant. In addition, it is expected that the regulations, when released, may set out further eligibility requirements to be considered. In particular, for a retail operator licence to be issued, the AGCO must be satisfied that the applicant will exercise “sufficient” direct or indirect control over the retail business.
Interested parties may be able to apply for a retail operator licence and a retail store authorization concurrently, however, a retail store authorization will only be issued to a holder of a retail operator licence. To be eligible for a retail store authorization, the AGCO must be satisfied that the applicant does not employ or intend to employ a person to perform certain tasks, described below, unless he or she also holds a cannabis retail manager licence.
It is expected that the regulations, when released, may further limit where retail stores may be situated. The AGCO will refuse to issue a retail store authorization where the proposed store is not an appropriate distance from schools or other prescribed land uses. As well, any municipality in Ontario may pass a resolution by January 22nd, 2019 to prohibit cannabis retail stores from being located and operated in such municipality. If a municipality passes such a resolution it will be permitted to lift the prohibition in the future. However, if stores are not prohibited in a given municipality by this deadline, the municipality may not thereafter impose such a prohibition.
In a setback to licenced producers (“LPs”) looking to enter the retail market, LPs will only be permitted to operate one retail location in Ontario, which must be located on or within the production site set out in the LP’s licence. The Retail Licence Act extends this restriction to also include any “affiliate” of the LP, as such term will be defined in the regulations. Despite this uncertainty, since many other pieces of legislation define what an “affiliate” typically means, we can make an educated guess as to what, at a minimum, can be expected. In that regard, a common definition of an “affiliate” is contained in the Securities Act (Ontario), which deems a company to be an affiliate of another company if: (i) one of the companies is a subsidiary of the other; (ii) if both companies are subsidiaries of the same company; or (iii) if each of the companies is controlled by the same person or company. It is also possible that the definition of “affiliate” may stipulate the percentage of ownership that a LP may hold in the retailer, as was done in British Columbia.
Cannabis Retail Manager Licence
As previously mentioned, any individual who does not hold a retail operator licence will be required to apply for a cannabis retail manager licence if he or she wishes to perform any of the following functions:
- Supervising or managing employees of a cannabis retail store;
- Overseeing or coordinating the sale of cannabis;
- Managing compliance issues in relation to the sale of cannabis; or
- Having signing authority to purchase cannabis, enter into contracts or make offers of employments.
The Retail Licence Act sets out several eligibility requirements for the issuance of a cannabis retail manager licence. In addition, the legislation specifically provides that an applicant will not be prevented from obtaining such a licence if he or she had been convicted of a prescribed offence under the federal Controlled Drugs and Substances Act in relation to cannabis, which is in keeping with the policy of the Cannabis Act to bring certain illicit participants into the legal and regulated system.
Sale of cannabis in retail stores
The Retail Licence Act sets out a few key provisions pertaining to cannabis sales at a retail level. First, retail stores will only be permitted to sell cannabis purchased directly from the Ontario Cannabis Retail Corporation (“OCRC”) and when sold to the public, are required to sell the cannabis in the same packaging in which it was received from the OCRC. Second, all cannabis must be sold using a tracking/inventory management system to record sales. Third, all ordering and payments must be completed at the store and no online sales will be permitted. This is not necessarily a surprise given that the ability to process online orders may have the potential to interfere or compete with the provincial government’s online cannabis monopoly.
What Is Still Unknown?
The Retail Licence Act has brought some clarity as to licensing requirements for private retail, but much of the mystery remains as to what information applicants will be required to provide in their applications. However, given that a number of other provinces including Alberta, Manitoba, British Columbia and Newfoundland and Labrador have implemented privately-owned retail cannabis models, we have considered the existing retail licence requirements in those jurisdictions to gain a sense of what one could expect to see for those interested in applying for licence(s) or a retail store authorization in Ontario.
What Information is Likely to be Required?
Based on the guidance offered by reviewing application requirements in the jurisdictions listed above, we expect the applications will include, at a minimum, the following categories:
- Location and store requirements;
- Financial disclosure;
- Background checks; and
- Business plans.
Location and store requirements
Applicants will almost certainly be required to exercise legal control over proposed store locations prior to submitting an application, whether that be through ownership, lease, conditional agreement of purchase and sale or an executed offer to lease. Applicants will need to be mindful of location restrictions, such as the minimum distance from schools and liquor stores, which we expect to be set by the province in the regulations. Applicants will need to also demonstrate compliance with fire safety and zoning laws prior to being issued a retail store authorization.
Applicants should also be prepared to provide floor and site plans, as well as exterior photos showing that the location meets all legal requirements. As one would expect, safety and security of the customer, product and store are fundamental to owning and operating a retail cannabis store. Therefore, applicants must be ready to show that there are adequate safety and prevention measures in place to store cannabis, prevent theft, and restrict minors from entering the stores.
Financial disclosure will likely be a key component of the application process. The Retail Licence Act allows the province to investigate people who have an interest in the applicant or licence holder, which in certain circumstances could extend to landlords, mortgagees and other secured lenders of the applicant. Applicants should be prepared to disclose significant financial information, including financial plans and budgets, financing arrangements, demonstrate that there is and will be adequate funding and working capital to operate the store, as well as the financial capacity to respond to unexpected issues that may arise during operation. For instance, in Manitoba, applicants were required to demonstrate the ability to cover six months of operating costs for each proposed store. Applicants should also be prepared to provide detailed estimates for required capital and operating costs and provide their rationale behind such estimates and costs.
Background checks of key personnel
Personal, financial and criminal background checks will almost certainly be required for key personnel associated with the applicant. The purpose of such background checks is to determine whether an applicant or holder of a licence or authorization meets the requirements for a licence, authorization, or renewal, as the case may be. Those who may be subject to background checks include applicants, directors, shareholders, associates, key employees, landlord, mortgagees and secured lenders. For example, Alberta’s application guide states that checks are required for anyone who exercises control or influence over the daily operations or decision-making, such as hiring and terminating employees.
Applicants may be required to provide a business plan containing sales and marketing information, including expected promotional and advertising activities. The business plan may also need to include a section on educating consumers about the responsible use of cannabis, which is currently a requirement for applications in Manitoba. In addition, applicants will likely need to ensure that their application demonstrates their knowledge or experience of the cannabis industry, owning and operating a retail store, and operating in a highly regulated environment.
Given the government’s stated intention to have brick and mortar stores operational by April 1st, 2019, we expect the regulations and details of the application process itself to be released in the very near future. Even without this clarity, many potential retailers are already taking active steps to position themselves favourably to ensure that they will successfully obtain the required licence(s) and authorization.