Legalisation of cannabis in Canada – a brief history

April 2018 | EXPERT BRIEFING | SECTOR ANALYSIS

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Canada will soon become only the second nation in the world to legalise cannabis recreationally, and the first advanced industrialised one to do so.

The medical origins

Legal access to dried cannabis was first allowed in Canada in 1999 through discretionary exemptions granted by the Minister of Health for medical or scientific purposes or in the public interest. Given the limited and discretionary nature of the exemption, including for medical purposes, court challenges were initiated. In a 2000 Ontario Court of Appeal decision, the right of an individual to possess cannabis for medical purposes was confirmed by the courts, leading the Canadian federal government to implement the first programme for medical cannabis access, called the Marijuana Medical Access Regulations (MMAR). Under the MMAR, Canadian patients could, with the support of a medical practitioner, obtain an authorisation to possess dried cannabis for their personal use. The MMAR also permitted approved persons to either grow cannabis themselves, have a designated person grow it for them or purchase products directly through Health Canada.

Dissatisfied with the MMAR regime, additional stakeholder challenges were launched and court decisions rendered, leading Health Canada to develop a new set of regulations, the Marijuana for Medical Purposes Regulations (MMPR). Unlike the MMAR, the MMPR altered the supply and distribution of cannabis for medical purposes by establishing a regulatory framework for licensing producers who would grow, distribute and sell cannabis to individuals with a medical need. Under the MMPR regime, healthcare practitioners were able to sign a medical document, essentially a prescription, enabling their patients to purchase up to their prescribed recommended amount related to their condition directly from a producer licensed under the MMPR.

Unsurprisingly, the MMPR regime continued to be challenged in the courts. In 2015, the Supreme Court of Canada, in a final appeal decision of a challenge pre-dating the MMAR and MMPR, held that restricting legal access only to dried forms of cannabis violates the Canadian Charter of Rights and Freedoms. In response, the federal Minister of Health granted discretionary exemptions, allowing producers licensed under the MMPR to produce and sell cannabis oil and fresh cannabis buds and leaves. Not long after in 2016, in a separate challenge, the Federal Court of Canada declared the MMPR as a whole invalid for violating the Canadian Charter of Rights and Freedoms as the restrictive MMPR regime did not provide individuals with reasonable access to cannabis for medical purposes. In response, the Canadian government implemented the Access to Cannabis for Medical Purposes Regulations (ACMPR) in August 2016. Under the ACMPR, in addition to the option to purchase from licensed producers, individuals who have been authorised by their healthcare practitioner to access cannabis for medical purposes and are registered under the ACMPR, are able to produce a limited amount of cannabis for their own medical purposes, or designate someone to produce it for them.

The recreational future

In his election platform for the 2015 Canadian federal election, now-prime minister Justin Trudeau and his Liberal Party of Canada criticised the prohibition and criminalisation of cannabis and pledged to legalise recreational cannabis while restricting access to minors and keeping proceeds out of the hands of criminals who have fed the black market for cannabis. Upon its election, and fulfilling this campaign promise, the Trudeau government introduced the Cannabis Act in April 2017, paving the way to the legalisation of the recreational use of cannabis in Canada.

The stated aim of the Cannabis Act is to protect the young and deter criminal involvement in the distribution of cannabis, by prescribing a licensing and permitting regime for the full cycle of producing, testing, distribution, sale, possession and disposal of cannabis. The Cannabis Act is intended to co-exist with the ACMPR, with producers licensed under the ACMPR being grandfathered for the corresponding production and distribution licence under the Cannabis Act.

In November 2017, the Canadian government released its proposed regulatory framework. Highlights include: (i) minimum age of 18 for access; (ii) 30 gram limit for individual possession; (iii) maximum number of four plants of up to one meter in height for personal harvest; (iv) multiple types of licences, including for research, testing, import and export, cultivation, processing and sale, as well as different types of licences for producers (‘micro-cultivation’, standard cultivation, nurseries and industrial hemp); (v) security clearances for parties connected to licensed operators, including major shareholders, directors and officers, as well as other ‘key positions’; (vi) a National Cannabis Tracking System to track cannabis from production to sale; (vii) permitting classes of products, including dried cannabis, oil, fresh cannabis, plants, plant seeds, edibles containing cannabis and cannabis concentrates (though edibles and concentrates will not be permitted initially); and (viii) restrictions on the packaging and labelling of cannabis products, including requirements for child and tamper-proofing, displaying health warnings, and detailing the product, the THC/CBD content and other information. Packages, labels and products will also not be permitted if they appeal to youth, and in the use of colours, graphics and other special characteristics of packaging will be limited.

Within Canada’s constitutional division of powers between the federal government and the provincial and territorial and local governments, the proposed federal Cannabis Act leaves much of the products’ regulation in the hands of the provinces and territories, including the distribution and retail sale of cannabis.

In anticipation of the proposed July 2018 implementation of the federal Cannabis Act and the legalisation of recreational cannabis, most of the provinces and territories have since introduced proposed legislation. One significant difference is that some jurisdictions (such as Alberta, British Columbia, Saskatchewan, Manitoba and Newfoundland) will permit private operators to participate in the retail market while others (such as Ontario, Quebec, Nova Scotia and New Brunswick) will control not just the wholesale distribution but also the retail and online distribution of cannabis through government-owned entities. In addition, with the exception of Saskatchewan and potentially Manitoba and Nunavut, of the provincial and territorial governments that have introduced proposed legislation, wholesale distribution of cannabis will be controlled through an existing governmental entity or a newly-created provincial governmental entity. Furthermore, most of the jurisdictions, at least initially, also intend to allow online sales only through government-run online channels.

The proposed federal Cannabis Act allows the provinces and territories to prescribe further restrictions and limits to an individual’s access to cannabis, above and beyond the minimums set out in the federal statute, such as the minimum age of 18, the ability to harvest for personal use, limitations on quantity, and so on. Some of the interesting deviations from or supplements to the federal legislation introduced by the proposed legislation thus far include: (i) most provinces and territories (other than, thus far, Québec and Alberta) have set the minimum age at 19, above the minimum of 18 prescribed by the federal statute; (ii) the proposed Alberta legislation will not permit outdoor cultivation of cannabis, requiring cannabis to be grown in an indoor grow room; (iii) unlike the other provinces and territories thus far, the proposed Nova Scotia model will allow cannabis to be sold in the same stores (run by the government) that sell alcohol; (iv) both Québec’s and Manitoba’s proposals include a total prohibition on the growing of cannabis at private residences; (v) New Brunswick’s proposal includes a unique requirement – cannabis must be kept locked in a room or container by the consumer; and (vi) most of the provinces and territories intend to impose a zero tolerance for the presence of cannabis in the system for young or novice drivers.

Existing dispensaries network

Another interesting development to watch will be the provincial and local government’s approach to the existing unlicensed retail distribution networks that exist. British Columbia in particular and Ontario to a lesser degree have a well-established and longstanding ‘grey’ market of unlicensed cannabis dispensaries.

In Ontario, the provincial government has taken a hardline approach. In introducing the proposed provincial statute, the Ontario government also confirmed its clear intention to dismantle the unlicensed cannabis network. In October 2017, the City of Toronto obtained an interlocutory injunction against a number of unlicensed cannabis dispensaries, prohibiting the operators from selling, storing or distributing cannabis. Of note, this decision granted a temporary injunction, not only against dispensary operators, but also against the landlords of the properties in which this business is conducted, directing landlords to stop the use of their properties for the illicit sale, storage or distribution of cannabis.

This is contrasted against the probable approach in British Columbia. While the British Columbia government has not formally announced its position in respect of the existing unlicensed cannabis dispensaries, it has proposed a retail model that allows private-owned retail locations and has, in public remarks, suggested there may be a path to bring existing unlicensed cannabis dispensaries into the new regulated regime for retail distribution of recreational cannabis.

What is next?

With the legalisation of recreational cannabis currently scheduled to come into effect in the coming months, Canada’s cannabis industry continues to transform itself to prepare for the recreational market. The provincial and territorial governments also remain hard at work to ensure their regimes are prepared for what is expected to be a high demand market for recreational cannabis. Given the compressed time frame and the multitude of interconnected issues and policies (including health and safety, crime and taxation, to name just a few), some early missteps can be expected, including supply and security issues in the initial period of legalisation. As Canadians become comfortable with the reality of legal cannabis, it is likely the initially-restrictive regimes could be loosened, including the federal government adopting a more permissive approach to new forms of cannabis products and the provincial governments permitting cannabis lounges and licences for cannabis-related consumption events.

Legalisation is also going to bring further clarity to the valuation of publicly-listed companies in Canada. As the recreational market opens and returns roll in, investors will gain a new perspective on important metrics, such as the potential size of the recreational market, the impact of legalisation on the current underground market for cannabis, the ability of licensed producers to build out capacity on plan and on budget, which licensed producers can meet market demand, and the costs of government regulation.

Victor Liu is a partner at Goodmans LLP. He can be contacted on +1 (416) 597 5141 or by email: vliu@goodmans.ca.

Victor Liu

Goodmans LLP