On June 27, 2018, Health Canada disclosed the Regulations to Support Coming Into Force of the Cannabis Act (Regulations), in advance of its publication in the Canada Gazette on July 11, 2018. The Cannabis Act (Act) along with the Regulations will come into effect on October 17, 2018, allowing a transition period for provincial governments and other stakeholders to complete their preparations for legalized recreational cannabis.1
The Regulations, which are 218 pages in length in addition to a number of ancillary regulations and documents, absorb the provisions of the Access to Medical Cannabis for Medical Purposes (ACMPR), with certain amendments in an effort to create consistency between the medical and recreational adult-use cannabis regimes.
Highlights of the Regulations for cannabis sector stakeholders include details regarding (1) types of licenses available for commercial cannabis activities; (2) security clearance requirements for license holders; (3) packaging and labelling requirements; (4) promotion and marketing; (5) physical security requirements for licensed cannabis facilities; and (6) the limited introduction of black market cannabis-starting materials into the legal system.
1. Classes of licenses
As anticipated from the preliminary regulatory guidance issued in March 2018 by Health Canada, under sections 8 and 11 through 29 of the Regulations, commercial activities involving cannabis will be subject to the following classes of specific licenses: (a) cultivation (including subclasses of (i) micro-cultivation; (ii) standard cultivation; and (iii) nursery cultivation); (b) processing (including subclasses of (i) micro-processing; and (ii) standard processing); (c) analytical testing; (d) sale (including a subclass of sale for medical purposes); (e) research; and (f) cannabis drugs.2
The Regulations provide limited detail on the application process. Health Canada has indicated that it will launch an online licensing system that will presumably set out in detail the technical requirements for each type of application, and will permit online submission and tracking of license applications.
2. Security clearances
In the lead-up to the passage of the Act, there was considerable debate about the necessity for security screening and clearance for persons involved with the commercial production and distribution of legal cannabis. Section 50 of the Regulations extends the security clearance requirement to include the following broader range of persons who directly or indirectly control or influence the operations of a license holder:
- the license applicant or holder itself;
- a licensee's "responsible person", "head of security", "master grower", "quality assurance person", or their alternates (each as defined in the regulations);
- if the licensee is a partnership, each partner;
- the directors and officers of a licensee and its parent company;
- the directors and officers of any corporation that is a partner in a partnership which exercises or is in a position to exercise direct control over the licensee; and
- any individual who exercises, or is in a position to exercise, direct control over the corporation.
The Regulations also address security clearance eligibility and provide a broad discretion to the Minister to grant or refuse security clearances. Security clearances will be granted on a case-by-case basis, according to the "level of risk posed by the applicant," which the government has said is part of its effort to block organized crime from gaining influence in the market. Notably, previous non-violent criminal convictions, including in relation to offences involving cannabis, will not automatically exclude individuals from obtaining the required clearance in this risk-based approach.
As a corollary point, section 241 of the Regulations requires licensees to maintain a record (and disclose it to the Minister on an annual basis) containing detailed information of "key investors" of a license holder. A "key investor" is a person who exercises direct or indirect control over the license holder by virtue of having provided money, goods or services directly or indirectly to the license holder, or holds an ownership interest, or other right or interest in respect of the holder or its business. This register must include information about each instance where a key investor provides any benefit (including money, goods or services) directly or indirectly to the license holder. This disclosure obligation presumably enables the Minister to exercise his or her power under section 67 of the Act to require additional security clearances, including from key investors, or to consider whether the involvement of a key investor poses a risk justifying suspension or revocation of a license.
3. Packaging and labelling
Sections 108 to 122 of the Regulations establish the framework for the packaging of cannabis products. The packaging requirements include restrictions on the appearance of the immediate packaging, the location of any branding or imaging, the use of colour, the finish and texture of any cannabis container, the use of scents or sounds, and the covering of any packaging.3 Labelling requirements call for Health Canada warnings on all cannabis products, as well as the brand name, plant lot numbers, the class of cannabis, recommended storage conditions, the packaging date and a warning with respect to keeping the products out of the reach of children. The Health Canada warnings must be rotated to ensure each warning is displayed an equal number of times.4 Health Canada has also provided a list of various warnings to be applied to specified types of cannabis products that are reminiscent of labels found on tobacco products.
4. Promotion and marketing
Anyone who anticipated that the broad restrictions on promotion and marketing of cannabis, and cannabis accessories and services in the Act might be softened by the Regulations is likely to be disappointed. To the contrary, in furtherance of section 43 of the Act, the Regulations impose obligations on license holders to retain for two years and provide to the Minister upon request, (a) the amount of money spent on retail and business-to-business promotion, (b) descriptions of the promotional activities, and samples or copies of any promotional materials. This ability to demand detailed promotional data from licensees is likely to be a powerful tool in the hands of regulators seeking to enforce the promotion and marketing prohibitions in the Act.
Indeed, Health Canada appears to be sending a message to existing licensed producers under the ACMPR in advance of the coming-into-force date, since the regulator has already asked several licensed producers to take down or modify online and public promotions of recreational brands.
5. Physical security for commercial cannabis facilities
Sections 62 to 73 of the Regulations set out physical security requirements for licensed facilities for standard cultivation, standard processing, sale and cannabis drugs. These include security cameras, an intrusion detection system, 24-hour monitoring by personnel, record keeping for attempted or successful unauthorized trespassing, and restriction of access to only those persons that are required to be present due to occupational duties. The Directive On Physical Security Requirements For Controlled Substances (Licensed Dealers Security Requirements For The Storage Of Controlled Substances) (Directive) sets out the minimum physical security requirements for the storage of cannabis and cannabis products. The requirements vary based on the location and maximum inventory of a licensee.
In line with Health Canada's previous indications, and reflecting the lower quantities of cannabis product permitted on-site, the security requirements for micro-cultivation, micro-processing, nursery, analytical testing and research facilities are significantly less onerous, essentially requiring barriers and processes to prevent unauthorized access to the site.
An exemption from several of the new security requirements allows compliant ACMPR producers, as well as prospective licensees who have established security measures set out in the Directive when the Regulations come into force, to choose whether to observe the storage rules set out in the Directive or the storage area requirements of the Regulations.5
6. Alternative procurement of starting materials
Under section 10(1) of the Regulations, a holder of a license to possess cannabis may only obtain cannabis from prescribed persons (e.g., license holders under the ACMPR). The effect of this is to limit access to starting materials (seeds and plants) to existing strains of cannabis. However, the Regulations also create a carve-out to this requirement to allow new applicants for cultivation licenses to obtain cannabis plants and seeds from currently unlicensed growers, as long as these are identified to Health Canada in connection with the license application.
This exception appears to open the door for new license applicants to obtain some of those black market genetics to improve the diversity of their cannabis products, or to provide new sources of genetic supply to the industry more generally. This reflects Health Canada's comments earlier this year about creating an "amnesty" for cannabis genetics currently only available in the black market. The precise details of this "amnesty" and its limits, if any, will require further guidance from Health Canada.
Dentons' analysis
The net effect of the Act and Regulations is to put in place a highly-regulated, technical and complex regime for the production and distribution of legal cannabis in Canada. This comes as little surprise given that Canada is only the second country in the world to legalize cannabis for recreational purposes, and the Federal Government has been compelled to strike a delicate balance in order to manage the concerns and expectations of provincial governments and the myriad of other Canadian stakeholders.
As with any regulatory regime, the devil for the regulated industry will be in the implementation. While the regulatory burden on industry participants will be significant, Health Canada appears to be committed to providing transparency and guidance to the industry, somewhat in contrast to the comparatively opaque and ad hoc approach to the first three medical cannabis regimes. We anticipate an early release of various guidance documents and additional public information to assist both existing license holders and persons interested in entering the cannabis industry.
The authors also gratefully acknowledge the contributions of Ellery O'Hara for this insight.
Footnote
1 Regulations to Support Coming Into Force of the Cannabis Act, 2018.
2 Regulations to Support Coming Into Force of the Cannabis Act, 2018, s. 8.
3 Regulations to Support Coming Into Force of the Cannabis Act, 2018, ss. 108-120.
4 Regulations to Support Coming Into Force of the Cannabis Act, 2018, s. 124.
5 Regulations to Support Coming Into Force of the Cannabis Act, 2018, s. 78.
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