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Government-run pot stores coming

Powered By Law Times NewsBusiness & Legal Issues||Written By Shannon Kari
Government-run pot stores coming
Mary Ellen Bench says the locations of government-operated stores that sell marijuana will be up to the province, but that should not be an issue for municipalities.

The Ontario government is promising to open 40 government-run cannabis stores in more than a dozen municipalities once federal legislation is enacted later this year to permit the sale of the product for recreational use.

That number is scheduled to rise to 80 stores and online sales by the summer of 2019, increasing to 150 stand-alone government operations in the following year.

Even then, the retail options will be a fraction of the existing network of LCBO and Beer Store outlets in Ontario to sell a product that a recent study for the federal government estimated could generate nearly two-thirds of the existing annual revenues for beer and wine.

For municipalities in Ontario, the decision to have the retail operations run by the provincial government has generally been well received. But there are concerns over the added costs involved in ensuring compliance with the new provincial laws, including enforcement against any illegal retail outlets that try to remain open. To help cover these costs, municipalities are asking for a share of the tax revenue that will be generated once recreational use is legalized.

The locations of the government-operated stores will be up to the province, but that should not be an issue for municipalities, says Mary Ellen Bench, city solicitor for the City of Mississauga.

“We don’t see it as any different than an LCBO. For zoning purposes, it will be the same,” she says.

“Our biggest challenge is going to be funding enforcement by police and bylaw officers,” says Bench.

The federal government has announced money to go to the provinces for enforcement training of police and bylaw officers, including $161 million for Ontario. What is still in discussion, though, is how much of that funding may be turned over to municipalities, notes Bench.

The provinces will also receive 75 per cent of the revenue from an excise tax of at least $1 per gram of marijuana sold or 10 per cent of the retail price. As well, there will be HST revenue from cannabis sales. No amount has been set aside for municipalities as of yet.

In contrast, in the United States, where municipalities have more taxing power, the city of Denver imposes a tax rate of 7 per cent, in addition to state taxes, on the sale of marijuana for recreational use.

Lynn Dollin, president of the Association of Municipalities of Ontario, stated in a speech to a legislative committee late last fall that policing costs alone are estimated to increase by a total of $10 million annually in the initial 14 municipalities where a government outlet will open this year. She called on the province to be obligated to pay these costs.

The extent of the black market after the government stores are open is hard to predict, says Bench.

“I am not expecting it to get any worse,” she suggests. However, many dispensaries provided edible marijuana products, which will not be available in government stores until 2019.

There are also potential issues with home production, where individuals will be permitted to grow up to four plants or grow edibles. As well, there is the increasing popularity of a marijuana concentrate known as “shatter” that is much more potent. The process requires the use of a solvent to extract the cannabinoids, which could be a potential fire hazard, Bench says.

The province has indicated there will be four store locations located in the Greater Toronto Area and Hamilton. In Toronto alone, there were more than 100 dispensaries operating in the fall of 2016 before a police crackdown, according to city statistics.

The size of the consumer market coupled with the relatively small number of government stores that will open initially means that there are still likely to be illegal operations selling cannabis, says Benjamin Kates, a civil litigator at Stockwoods LLP, who has previously acted for dispensaries.

“I don’t think they will be operating as openly as they have recently. But they will continue to fill whatever gaps there are. If the government’s plan is to succeed, it needs to get rid of the black market,” says Kates.

The investigation of dispensaries in Mississauga is based on a formal agreement of co-operation between the city and police. The new framework, though, could mean increased responsibilities for bylaw officers in terms of ensuring individuals comply with the laws on where marijuana can be consumed.

The province’s new legislation permits individuals to smoke marijuana only inside a private residence, with some exemptions for authorized medical users.

“It will be treated very much like [tobacco] smoking,” says Bench.

At the same time, there are limits on what municipalities can do in terms of enforcing rules such as where cannabis can be consumed.

“Most bylaw enforcement is complaint-based. We won’t have teams of inspectors out there,” says Bench.

The one area where the law might not still be entirely settled is the sale of cannabis to authorized medical users, says Kates.

Under the current medical marijuana scheme, authorized users must obtain cannabis by mail from licensed producers.

“In the realm of legal challenges, I think it is still on the table,” says Kates regarding whether medical dispensaries have a right to operate in municipalities.