Weed Prefer You Handle It: Recreational cannabis and federalism challenges

The legalization of recreational cannabis has raised many interesting and familiar issues related to federalism which have been exacerbated by the timeline imposed by the federal government and the regulatory challenges facing the provinces and territories. This "rush to regulation" has led to interesting and widely disparate outcomes which will become increasingly evident after October 17, 2018.

As eloquently put by the Supreme Court of Canada in R v Comeau:

  Federalism refers to how states come together to achieve shared outcomes, while simultaneously pursuing their unique interest. The principle of federalism recognizes the "autonomy of provincial governments to develop their societies within their respective spheres of jurisdiction".

In effect, federalism emphasizes balance between the various levels of government and their respective abilities to achieve their goals under ss. 91 and 92 of the Constitution Act, 1867.  However, Canada is no stranger to the challenges routinely posed by federalism including those that have arisen in relation to legalization.
It initially seemed that the federal government wanted to pursue a cooperative approach when creating its cannabis framework. Prime Minister Trudeau's 2015 mandate letter to the Minister of Justice directed the Honourable Jody Wilson-Raybould to work with the Ministers of Public Safety and Emergency Preparedness and Health to create a joint process that would lead to the legalization and regulation of cannabis in Canada. This approach suggested that the federal government planned to develop its cannabis framework through the lens of cooperative federalism, which reflects "the realities of an increasingly complex society that requires the enactment of coordinated federal and provincial legislative schemes to better deal with the local needs of unity and diversity."   

In June 2016, the Task Force on Cannabis Legalization and Regulation (Task Force) was formed to design the new legislative and regulatory framework. The Task Force was instrumental in developing many of the principles codified in the federal Cannabis Act, which creates an expansive regime for the licensure of various cannabis-related activities and regulates the possession, distribution and promotion of cannabis, among many other things. What the Cannabis Act does not do in any great detail is regulate the retail sale or use of recreational cannabis. This was foisted upon the provinces and territories to deal with.

Unlike many other circumstances involving questions relating to federalism, the dispute between the federal government and its provincial/territorial counterparts was over who would be responsible for the burden of implementation rather than the usual fight over who has authority to regulate. As a result, no coordinated legislative scheme ever resulted. Instead, widely varying regulatory approaches were developed that do not always accord with the federal government's goal of accessible and competitive recreational cannabis. A brief overview of the approaches in two provinces, Alberta and Ontario, demonstrates the varying consequences of this lack of intergovernmental coordination.
The Alberta government took a proactive approach to address the gap in regulation with one of the earliest legislative frameworks which closely follows its requirements for the sale of liquor. The Alberta government will be responsible for online sales while retail locations will be operated by private industry which is required to purchase cannabis from the Alberta Gaming and Liquor Commission. This model provides for broad consumer access serviced by highly regulated private licensees as well as a public retailer.

Comparatively, the Ontario government had planned to sell recreational cannabis through a subsidiary of the Liquor Control Board of Ontario both in-store and online. By the end of 2018, it intended to open 40 Ontario Cannabis Store locations which would have eventually been expanded to 150 by 2020. This model changed after a new provincial government was sworn in which favored allowing private retail to operate in Ontario. While a popular idea that will incentivize private sector investment, one effect of the transition is that it will limit access to recreational cannabis in Ontario until the new regime is put in place.

Unlike the issues related to the implementation of the various regulatory regimes, one area where tensions quickly arose between the federal government and its provincial/territorial counterparts was with respect to the allocation of the proceeds of the excise tax. The excise tax imposed on cannabis is calculated on a per product basis and will either be $1.00 per gram or ten percent of the product's price, whichever is greater, subject to limited exceptions. The intent of the excise tax was to establish and maintain a coordinated approach that avoids mismatched and overlapping taxation, which would in turn make recreational cannabis uncompetitive with that available illicitly.

The federal government initially proposed an even split of the tax's proceeds. However, there was strong push back from the provinces/territories as they saw themselves as being saddled with the primary responsibility for developing, implementing and enforcing an entirely new legislative framework for a brand new industry. Under mounting pressure, the federal government revised the proposed allocation so that it will now only keep one quarter of the revenue from the excise tax (with a cap of $100 million per year). The participating provinces/territories will receive the rest of the proceeds.

The lone province which has refused to sign off on this tax sharing arrangement is Manitoba. Instead of receiving a portion of the excise tax proceeds, Manitoba has indicated that it will apply markups of $0.75 per gram on recreational cannabis plus an additional nine per cent.  All licensed retailers will also be required to contribute six percent of their annual revenues attributable to recreational cannabis sales to a "social responsibility fee" effective January 1, 2019. Additionally, while Manitoba will not apply the provincial sales tax (PST) on non-medical cannabis sales, it will continue to apply the PST to the sale of medical cannabis. It is unclear whether, after October 17, 2018, the federal government will pressure Manitoba to reduce the tax burden it intends to pose on the sale of cannabis in order to establish a more consistent taxation regime across Canada.

As is evident from the foregoing, most of the issues that have arisen to date are the result of the ambitious timeline imposed by the federal government and the resulting rush to regulation. As the date of legalization passes and the respective governments become more comfortable with their own frameworks, most will likely be resolved through the typical legislative processes. In the interim, they highlight the unusual challenges related to federalism that could only arise with the birth of a new industry.

Chris Nyberg is an associate at Blake, Cassels & Graydon LLP in Toronto. His practice focuses on regulatory, commercial and financing issues affecting the Canadian cannabis and hemp industries.

Alyssa Moses is an articling student at Blake, Cassels & Graydon LLP in Toronto.