Canada Becomes the World’s Second Nation to Legalize Cannabis

By: Sam Mendez, Strategic Legal Counsel at Cultiva Law

Canada made headlines last week when the Canadian Senate voted 52-29 to pass Bill C-45, permitting personal use and commercial production of cannabis. Prime Minister Justin Trudeau made clear he would legalize cannabis should he be elected Prime Minister during his campaign platform while running for the position in 2015, so the vote last week did not come as a shock to political and industry insiders. Nevertheless, Canada’s passage of cannabis legalization at a national level is no less momentous, as it joins Uruguay as the only countries in the world in which cannabis is legal on a national level.

Some of the primary changes Canadians can expect immediately upon C-45’s implementation are as follows:

• It is no longer a crime to possess small amounts of cannabis for adults;
• Individuals may possess up to 30 grams of cannabis;
• Individuals can grow up to four plants for personal use (known as homegrow, allowed in every U.S. state where cannabis is legal except for Washington state); and
• Only adults may legally possess cannabis. The Senate Bill sets a minimum age of 18 years, and empowers provinces to raise that age as they see fit (nearly every province raised the minimum age to 19, the minimum drinking age in most of Canada).

However, cannabis retailers will not immediately open and begin operating. Instead, the earliest date the Bill permits retail stores to open and operate is October 17, 2018, and sales beginning on that date will be restricted to cannabis flower only. Other products, such as concentrates and edibles will not be immediately available because additional regulations (e.g. food safety) will have to be written and voted or signed into law. Lawmakers are expected to complete this process with respect to products such as concentrates and edibles within 12 months of C-45’s implementation.

       I.   Canadian Regulation of Cannabis

The Canadian government explicitly states that C-45 will function in a similar way as Canadian laws allowing––and restricting––tobacco. Cannabis policies derived from tobacco law include issues such as prohibiting access to minors, smoking in public places, and advertising. More specific regulations will be written once the bill is implemented, but industry professionals can already predict with clarity what the procedure and substance of these yet-unwritten laws will eventually include. For example, because future Canadian laws regarding cannabis advertising will reflect existing laws applicable to tobacco advertising in Canada, we predict such advertisement will be permitted, but that there will be strict and explicit language prohibiting advertisements which are appealing to youth, utilize sponsorships or endorsements, or provide false or misleading information.

Under C-45, the federal government will allow individual Canadian provinces to further regulate cannabis; the relevant legal language apparently permits provinces to issue outright bans on cannabis within their borders. The Canadian government’s FAQ page states, “The proposed Cannabis Act provides that provinces and territories may, acting on their own authorities, set additional restrictions and local requirements related to cannabis beyond what are present in the proposed Act, such as setting zoning restrictions for cannabis-related businesses and outlining specific restrictions on where and how cannabis can be cultivated.” While this text does not explicitly state that outright bans are allowed, through this text the federal government is effectively delegating zoning controls and “additional restrictions” to local governments. Industry experts expect there to be at least some provincial outright prohibitions in place; they are not uncommon. For example, there are outright bans on cannabis in 77 different Washington localities. Consider, there are still hundreds of counties prohibiting alcohol, holdovers from Prohibition — which ended 75 years ago.

Unlike local bans in the United States, Canada will still permit purchases from federally licensed producers. The FAQ states, “Adults will be allowed to “purchase fresh or dried cannabis, cannabis oil, plants and seeds for cultivation from either a provincially or territorially regulated retailer, or where this option is not available, directly from a federally licensed producer.” This language is in stark contrast to Washington law, which allows individuals to purchase cannabis only at state-licensed retail outlets. Will Canadians throughout the country be allowed to purchase cannabis direct from producers nationwide, or only in provinces where cannabis is not permitted to be sold at retail due to restrictive local regulations? Will customers be able to make purchases online? What about delivery? Numerous questions remain unanswered.

Laws on vertical integration––that is, whether a single company can produce, process, and selling product at retail (currently prohibited in Washington)––will be delegated to provinces.

The FAQ also states that cannabis could be allowed at places like cafes, bars, and music festivals, the regulation of which will be left to local governments.

       II.   Taxes

Cannabis––presumably flower––will be taxed at $1 per gram or 10% of the final retail price, whichever is higher. It is unclear how edibles and concentrates will later be taxed once permitted for sale and purchase under federal law. A 10% rate is far lower than most U.S. states, which tend to hover around 15%, and is also significantly lower than Washington’s rate of 37%.

Taxes will be shared among federal and local governments.

       III.   Conflict with International Convention

Does C-45 violate international conventions? It probably does.

The Single Convention on Narcotic Drugs (SCND), passed by the United Nations in 1961, “seeks to limit the possession, use, trade in, distribution, import, export, manufacture and production of drugs exclusively to medical and scientific purposes.” Cannabis was one of the many substances controlled under this Convention. The SCND paved the way for many other countries to pass their own laws controlling substances, including the United States’ Controlled Substances Act.

Canada legalizing cannabis is in direct contravention of this Convention. Not surprisingly, the Canadian government’s FAQ page is intriguingly coy in answering the question: “Does this proposal put Canada in breach of international conventions?” Rather than answer yes or no, the text states:

The Government of Canada takes its international obligations very seriously. Throughout the legislative process, we will continue to communicate our overall objectives for strictly regulating and restricting access to cannabis to the international community, which includes protecting our society from the adverse consequences of illegal drug use and combating international drug trafficking. The Government of Canada will also continue to engage in constructive dialogue with our international partners.

It is fair to say if Canada was comfortable or confident in answering “no” to the question of whether the passage of C-45 breaches the SCND, it would have. That is what makes cannabis law so fascinating and so volatile at this point in time: States are flouting federal law in the U.S., and Canada is flouting international conventions. We are experiencing true legal, economic, and social change from the bottom up as relevant to the cannabis plant––not the top down; nothing more truly indicates the will of the people.

We doubt Canada will face any repercussions for violating the SCND; it is more likely that more countries will follow their lead.

However, the progress experienced in Canada last week in no way lessens laws and penalties applicable to marijuana transport activity––either here in the U.S. or across the border. The Canadian government’s FAQ makes clear it remains (very) illegal to import or export cannabis, or to possess cannabis when crossing international borders. Be careful. If you buy cannabis in Canada, do not––under any circumstances––attempt to take it out of the country.

      IV.   Looking Forward

Many questions remain with respect to exactly how regulatory rollout will work, especially with regard to issues such as delivery, cafes and bars, and other topics which will continue to be discussed in the coming years. There has been speculation that Canada will experience initial an product shortage, and then overproduction––much like we have seen in Washington and Oregon. We have handled a number of clients in Washington state that have taken on investment(s) from Canadian individuals and companies. Will these trends subside with C-45’s passage? It may, given the investment potential now open for the taking in Canada. But Canada remains a relatively small country in terms of population. Canada’s market potential is large, but it is dwarfed but its southern neighbor both in population and also economy. As a result of these considerations, it is difficult to predict how Canadian cannabis legalization will affect Canadian investment in American cannabis companies.

C-45’s passage is certainly cause for celebration for legalization supporters and cannabis advocates, but policy issues will continue to arise and develop throughout the coming years, if not generations. Washington has grappled with a wide range of issues including but not limited to pesticide regulation, overproduction, and enforcement––all issues which arose post-legalization.

In sum, the story is far from over in Canada. In fact, it is just beginning.