COVID-19: Impact on the Canadian Cannabis Sector

| 23 minutes

The impacts of COVID-19 have been far-reaching, affecting businesses across all sectors. The Canadian cannabis industry, which has seen rapid legislative and regulatory evolution over the past several years, has also been forced to adapt and adjust to a series of emergency orders issued in response to the pandemic by both federal and provincial governments. In this article, we explore the impacts of the COVID-19 pandemic on cannabis producers and retailers, and the associated legislative responses of federal and provincial regulators.

For up-to-date information on how to navigate your business through COVID-19 and McCarthy Tétrault’s perspective on the legal issues it presents, please visit our firm’s dedicated COVID-19 hub here

  1. Cannabis as an Essential Business

One of the critical issues for industry participants in the early stages of the COVID-19 pandemic has been whether cannabis producers and retailers would be permitted to continue to operate by being deemed an essential service by their respective provincial regulators.

  • Ontario. Ontario’s initial emergency order requiring all non-essential businesses to close had deemed both cannabis producers and retailers as essential businesses, and both were allowed to continue operations subject to implementation of social distancing measures. However, on April 3, a revised list of essential businesses removed cannabis retailers from the essential services list, which would have required cannabis retailers to close and left the Ontario Cannabis Store (the “OCS”) online portal as the sole legal channel for purchasing cannabis in the province. The Alcohol and Gaming Commission of Ontario (“AGCO”) provided some relief from this measure on April 7, when it released guidance which would temporarily allow for curbside pick-up and delivery from cannabis retailers between 9:00am and 11:00pm, subject to certain restrictions, including the following:
    • Click and Collect. Curbside pick-up is only available to customers that have ordered and paid for their products in advance, by phone or online, and must be picked up by the individual who placed the order. The pick-up area for collecting the products must an outdoor area in close proximity to the store, and must be monitored by the store’s surveillance cameras.
    • Delivery. Retailers are not permitted to engage a third-party for the purposes of delivery, unless the delivery driver is accompanied by the authorization holder or employee, who must be in possession of the cannabis product at all times. Only the licence holder or their direct employees are permitted to be involved in the sale and/or delivery of cannabis and must hold a certification from CannSell. Retailers are permitted to charge a fee for the delivery service.
  • Quebec. Quebecers continue to be able to purchase cannabis Monday through Saturday from provincially run stores (the Société Québécoise du Cannabis) until May 4, at which time the list of non-priority services and activities will be re-evaluated by the provincial government. Online orders are still being processed, but Canada Post delivery agents will no longer be doing door-to-door delivery and will instead leave a notice at customers’ residences indicating where they can pick up their items.
  • Alberta. Cannabis retail outlets were included on the Alberta government’s list of essential services and remain open, subject to the enforcement of social distancing measures. However, Alberta is not permitting cannabis retailers from making deliveries directly to customers. For customers looking for delivery options, the sole legal venue in Alberta remains the government-run website, Alberta Cannabis.
  • British Columbia. Cannabis retailers and producers in British Columbia remain on the government’s list of essential services and online sales remain available through the government’s online retailer, BC Cannabis Stores.
  1. Access to Financial Assistance

The federal government has announced a series of measures to make financial support available for Canadian businesses.

For example, the Business Development Bank of Canada (“BDC”) announced on April 6 that access to credit facilities offered through BDC’s business credit availability program (“BCAP”). This program initially excluded cannabis businesses, stand-alone nightclubs, bars, lounges, casinos, billiard halls, as well as businesses who were either in business for less than 12 months or had not yet generated any revenue, but was subsequently revised to be available to all businesses after receiving feedback from industry stakeholders and various provincial and federal MPs.

Under BCAP, $65 billion in direct lending is being made available to qualifying businesses through three programs that include the Canada Emergency Business Account (“CEBA”), the Export Development Canada Loan Guarantee for small and medium-sized businesses, and the BDC co-lending program for smaller and medium-sized businesses. A full description of each program under BCAP is available on the government of Canada’s website here.

In particular, under CEBA, cannabis businesses that paid between $20,000 to $1.5 million in total payroll in 2019 may qualify for interest-free loans of up to $40,000 to help cover operating costs if they can demonstrate that they are a small business that has reduced revenue as a result of COVID-19. There is currently $25 billion ear-marked under this federal program.

Canadian LPs are also being directed to Farm Credit Canada where an additional $5 billion in lending capacity has been made available to farmers who are facing cash flow issues and processors impacted by lost sales.

For an overview of the economic programs made available by the BDC to Canadian businesses during COVID-19, visit our firm’s dedicated COVID-19 economic relief measures page here.

  1. Administrative Changes for Health Canada

Amid the various economic concerns facing Canada’s federally licensed cannabis producers, there have also been changes to the regulatory framework in which LPs operate and are expected to comply. Cannabis producers recently received guidance from Health Canada regarding new temporary measures that are being adopted in response to the challenges posed by COVID-19.

Effective until May 1, 2020, Health Canada advised that it will be temporarily adjusting its approach to the administration and enforcement of the Cannabis Act and its regulations. The cannabis licensing program will now be focusing its resources on licence amendments to existing licences and security clearance applications, measures that license holders identified as their top priorities. As a result, licence applications for new facilities will likely be further delayed.

Where a licence holder does not have a sufficient number of security-cleared individuals due to self-isolation or illness, Health Canada is temporarily allowing cannabis producers to designate an appropriate alternate to assume security-cleared roles (responsible persons, master growers, and heads of security) based on a licensed producer’s own internal risk assessment, provided they notify Health Canada of the change(s). The licence holder must ensure that all requirements of the Cannabis Act and its regulations related to Good Production Practices, physical security and record keeping continue to be met when designating alternate key personnel.

Inspections will continue in accordance with the program’s risk-based approach, but sales inspections requiring onsite verifications will be postponed. Any sales inspections planned in the coming weeks will be rescheduled, and any inspections that do proceed will be focused on activities that represent the highest risk to public health and safety.

Lastly, cannabis producers are asked to make all efforts to submit a completed monthly cannabis tracking system report on schedule (i.e. the 15th of every month), while the deadline for the 2019 annual promotions report has been extended until June 30, 2020 for licence holders unable to report by March 31, 2020.

  1. General Considerations

In addition to regulatory developments specifically relating to the cannabis sector, industry participants should be aware of legal considerations that are impacting businesses more generally, including:

  • Considerations for Directors. As the situation surrounding COVID-19 continues to evolve, directors should remain cognizant of their duties and responsibilities as corporations face a range of challenges, including liquidity issues. For more information, visit the firm’s page here.
  • Due Process in Fast-paced Decision Making. In times of crisis such as the current COVID-19 outbreak, businesses are required to make important decisions with very significant implications and consequences at an accelerated pace. Members of boards of directors and senior management must remain alert to their fiduciary duties as they make decisions—a “COVID-19 defense” will likely not be available to shield them from liability. For more information, click here.
  • Force Majeure and Frustration of Commercial Arrangements. With disruption to supply chains, international travel, and business operations, many individuals and businesses may be unable to fulfil their existing contractual obligations. Click here for an overview of the impact on COVID-19 on contractual obligations, and an overview of “Force Majeure” clauses and the doctrine of frustration.
  • Regulatory Relief. On March 23 the Canadian Securities Administrators published temporary blanket relief for market participants, granting a 45-day extension for certain periodic regulatory filings as a result of COVID-19. In addition, the Toronto Stock Exchange issued a staff notice on March 23 in which it announced temporary blanket relief on certain provisions of the TSX Company Manual.

We will continue to keep cannabis industry stakeholders appraised of any major developments in the coming weeks as they relate to COVID-19.

More information about the firm’s national cannabis practice can be accessed here.

The McCarthy Tétrault Cannabis Law Group is a full-service national practice with deep experience working with licensed producers, licensed retail stores and applicants for both such licences around the country. We would be pleased to discuss your or your organization’s next steps with you.

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