Ontario is The First Province to Reveal Plan for Sale of Recreational Cannabis

September 11, 2017

On September 8, 2017, Ontario announced its framework to govern the lawful sale and use and of recreational cannabis. This framework involves a retail distribution system of 150 stand-alone cannabis stores as well as an online ordering service to be managed and operated by a subsidiary of the LCBO. Ontario’s announcement follows legislation introduced in April by the federal government to legalize recreational cannabis by July 1, 2018. The plan makes Ontario the first Canadian province to publicly announce a regulatory regime for the distribution of recreational cannabis within its borders.

Key Details of the Proposed Cannabis Regime

Ontario's proposed distribution model for the sale of recreational cannabis involves a progressive establishment of a network of retail stores, beginning with 80 stores to be opened by July 1, 2019 with the goal of opening 150 locations by the end of 2020. Overseeing the operation will be the LCBO, through a subsidiary. However, alcohol and cannabis will not be sold together. Rather, these new retail stores will be dedicated solely to the sale of cannabis. According to Ontario’s Ministry of the Attorney General (the “Ministry”), the hope is to leverage the operational and institutional experience and capabilities of the LCBO and its employees and to apply similar principles and policies to the sale of cannabis.

Under the Ministry’s plan, online distribution will also be made available across the province beginning in July 2018. Similar to the online sale of alcohol, online sales of cannabis will require ID checks and signatures upon delivery.

Ontario’s regime, set to be enshrined in legislation being introduced this Fall, also contemplates a proposed minimum age of 19 (the same as alcohol and tobacco) for the use, purchase, and, possession of recreational cannabis. Notably, this proposed minimum age is higher than the federal minimum age under the Cannabis Act, currently set at 18 years old. Under Ontario’s regime, the use of recreational cannabis will be limited to private residences; cannabis use in public places will be prohibited.

Unanswered Questions

Finance Minister Charles Sousa has provided no details about expected cannabis revenues. Decisions with respect to key matters such as pricing and taxation will be finalized at a later date, likely following the release by the federal government of the regulations intended to govern the operation of the Cannabis Act. Further, the locations of the 150 cannabis stores across the province have not yet been determined and are expected to be carefully curated in order to ensure sufficient distance from schools where children and under aged adolescents could have access to the product.

Consequences of the Regime: Dispensaries and other local operations

According to Ontario’s Attorney General, Yasir Naqvi, one of the primary goals of Ontario’s plan is to combat the sale of illegal and unregulated cannabis. This means that illicit cannabis dispensaries, which have been subject to police crackdowns, will continue to not be legal retailers in Ontario. In its press release, the Ministry stated that the province will pursue “a coordinated and proactive enforcement strategy, working with municipalities, local police services, the OPP and the federal government to help shut down these illegal operations.” However, other than devoting additional funds to enforcement efforts, details of an enforcement strategy were not disclosed.

What does this mean for Licensed Producers?

The Cannabis Act appears to contemplate the co-existence of both the medicinal and recreational markets, and the majority of licensed producers appear to be interested in supplying, at least partially, to the recreational market. Given that the province intends to create a monopoly on the sale of cannabis, licensed producers will be faced with the prospect of negotiating with a single body, the price, quantity and quality of the product that will be available for recreational consumption. Unless the province intends on acquiring producer licenses in order to unilaterally supply the recreational market, the province will have the upper hand in such negotiations. If the LCBO is any example, the province will likely impose significant downstream obligations and potentially, discounts on products purchased from Canadian Licensed Producers.

Moreover, the limitations of selling cannabis products on a "black-out" market (similar to tobacco), places significant limitation on a licensed producer's ability to engender brand awareness and loyalty, even when they succeed in having their products sold by the provincially run cannabis retail locations. More importantly, such treatment of cannabis products may reinforce negative perceptions and stereotypes surrounding the use of cannabis by Canadians.

Early Criticism

Responses to the Ministry’s proposal have been mixed. Some critics question whether the proposal will be effective in combatting the illegal market, given the limited number of retail outlets set to open across Ontario. For context, there are currently 660 LCBO stores serving communities across Ontario, whereas there will only be 150 cannabis stores serving the province. Other critics have expressed concerns about the significant costs of legalization. For example, shortly after the Ministry’s announcement, the Cannabis Canada Association released a statement urging the province to permit private retail sales alongside government-controlled stores to allow for a competitive model that reduces taxpayer burden of upfront capital expenditure.

It remains to be seen whether other Canadian provinces will follow Ontario’s lead in enacting a similar regime for the regulation of recreational cannabis. If other Canadian jurisdictions permit more liberal retail operations we might anticipate more ‘cross border’ shopping by Ontario residents, particularly if the price is lower elsewhere because of more robust competition.

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