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Apr 23, 2019

2019 Ontario Budget Hints at Continued Phased Approach for Cannabis Retail

By Jeremy D. Burke and Gobind Ahuja

The 2019 Ontario Budget (the “Budget”) provides a revealing glimpse into the Ontario government’s plans for the province’s cannabis retail sector.

CONTINUED PHASING APPROACH

As discussed in a previous update and as most readers will know, the Ford government decided in December 2018 to change course on cannabis retail in Ontario. Rather than its initial plan to permit an unlimited number of cannabis retail stores, and to have them open by April 1, 2019, the government amended the regulation under the Cannabis Licence Act, 2018 to permit only 25 brick-and-mortar retail cannabis stores province-wide. 

This came as a painful surprise to all would-be retail industry participants, in particular the many who had already secured retail premises in reliance on the government’s original legislation. However, that 25 Retail Store Authorization limit is currently set to automatically expire on December 13, 2019, at which point – absent further changes to the regulation – the market would open up as originally intended – allowing any eligible operator to open up to 75 stores.

Needless to say, those seeking to start a cannabis retail business in Ontario have been eagerly waiting to learn where the future of Ontario cannabis retail lies. Given challenges in roll-outs of both the federal and provincial cannabis regulatory regimes, it will not surprise many that the Ontario government has now foreshadowed a continuation of its phasing approach to the licensing of cannabis retail stores in the province.

In particular, though the Budget does not include the details of any phasing plan, the language in the document appears intended to signal that some type of phased approach should be expected. The Budget references both “future allocations of retail store authorizations” and also specifies that once “the federal government has provided for enough reliable supply, [the Ontario government] will issue further retail store authorizations.”

Since Ontario’s Progressive Conservative government has blamed phasing squarely on a “national supply shortage” of cannabis caused entirely by the federal Liberal government, the extent of any continuing cannabis supply issues (however caused) will presumably correlate closely with the timing and size of such future allocations of retail store authorizations.

With respect to reported supply shortages, Health Canada reports that, as at the end of February, finished inventories of cannabis products (i.e., cannabis packaged and ready for sale to consumers) held by BOTH federal licence holders and provincial distributors/retailers were several times higher than monthly sales of cannabis products nationwide. So it’s conceivable that whatever federal and/or provincial supply chain issues are leading to a lack of supply in certain parts of the country will be sorted in relatively short order. And then phasing of licences should be unnecessary and the Alcohol and Gaming Commission of Ontario ("AGCO") will face the unenviable task of processing an open market onslaught of cannabis retail licence applicants.

LICENSING PRE-QUALIFICATION PROCESS

The Budget also indicates that the government plans to develop a pre-qualifying process for would-be applicants for AGCO retail cannabis licences. This pre-qualification mechanism would reduce the amount of (or at least defer) work required to be done by the AGCO for each potential applicant – a useful outcome once the above-mentioned open market onslaught commences. And depending on specifics, a pre-qualifying process could also benefit ineligible individuals who may be eliminated from the process before having to pay the current non-refundable $10,000 in application fees.

As outlined in the Budget, the suggested “pre‐qualification criteria” may include:

  • The payment of a fee or obtaining a standby letter of credit;
  • Financial information, including information about corporate structure and affiliates;
  • Criminal and other background checks; and
  • Information confirming lease or ownership interests in potential retail store locations.

Unfortunately for all those who had secured retail premises prior to December 2018, but didn’t win the lottery, the government appears to only now be realizing the merits of requiring would-be applicants to demonstrate a right to occupy a premises early in the process. However, the pendulum may be swinging too far in the other direction if a person will be obligated to secure retail premises even before they have pre-qualified to submit a full application – unless perhaps pre-qualification will be the mechanism used to avoid the need for any further lotteries. In any event, hopefully now the government will have the time it needs to ensure that its next steps in facilitating the formation of Ontario’s cannabis retail industry are well planned and implemented.

For further information, please contact Jeremy Burke or another member of the Aird & Berlis Cannabis Group.

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