Canada’s liquor control and licensing regimes remain under siege; for how much longer provincial governments will be able to enforce their antiquated monopolies over the import and sale of alcohol is anyone’s guess, but the forthcoming Supreme Court of Canada decision in R. v. Comeau is expected to go a long way in answering this increasing controversial question.
While Comeau will be decided along Constitutional rather than regulatory lines, for administrative law practitioners the field of liquor control and licensing remains a rich source of beverage for thought.
For brewers and distillers, especially those of the “craft” or “micro” ilk, how their products and tasting rooms are treated and taxed remains a controversial and in some respects unsettled issue across the Canadian provinces. Headlines including an administrative decision made under the Agreement on Internal Trade that found Alberta’s mark-ups on out-of-Province beer to be in violation of Canada’s internal free-trade agreement (now under appeal), the Ontario’s Court of Appeal’s decision in Toronto Distillery Company Ltd. v. Ontario (Alcohol and Gaming Commission of Ontario) and more recently a decision from the Supreme Court of Nova Scotia in Unfiltered Brewing Inc. v. Nova Scotia Liquor Corporation put for finer point on these overarching concerns.
Though these examples arise from different adjudicative bodies, located in different provinces, decided under different policies, at the heart of each matter was the same issue: the administrators of provincial liquor control and licensing regimes have not been able to keep pace with a rapidly changing industry that now includes more small operators, offering innovative products and selling them outside of the traditional channels. Though Toronto Distilling was unsuccessful in its court challenge, and as we shall see so was Unfiltered Brewing for similar reasons, it’s only a matter of time before legislators and policy makers respond appropriately to the realities of the “new normal” of Canadian craft beer and spirits.
The decision in Unfiltered Brewing Inc. vs. Nova Scotia Liquor Corporation concerns the validity of a retail mark-up collected by Nova Scotia’s provincial liquor regulator on beer sold (or even given away) by Unfiltered Brewing, at its premises on North Street in Halifax.
The Nova Scotia Liquor Corporation (like its counterparts across the country) oversees the receipt, distribution, and control of alcohol in the province. Unfiltered Brewing is a microbrewery that sells its beer to the public under a permit from the NSLC. Although Unfiltered’s beer is not sold at NSLC stores, NSLC policy deems microbreweries’ beer to have been purchased first by the NSLC then sold to customers.
As a condition of the permit allowing Unfiltered to sell its own beer on-site, the NSLC requires Unfiltered to remit a monthly “retail sales mark-up allocation” (“RSMA”) on beer it sells, samples, or gives away. Unfiltered says the RSMA is in pith and substance a tax and therefore ultra vires the NSLC. The NSLC says that it can lawfully impose mark-ups and charges such as the RSMA and that this mandatory remittance is not a tax and is valid either as a “regulatory charge” (meaning a levy or fee that is not a tax) or a “proprietary charge” (a fee arising from the contract between Unfiltered and NSLC). On January 23, 2018 the court issued its reasons. They can be read in full here.
Tax or Regulatory Charge?
It was not seriously contested that only legislatures (and not liquor boards) have the power to establish taxes. This leads necessarily into the thick of the controversy between Unfiltered and the NSLC: how is tax distinguished from other charges and levies of money imposed by public authorities? Fortunately Unfiltered is not the first business to challenge the legitimacy of government fees and charges, and the Supreme court of Canada long ago established a four-part test in case called Lawson to assist judges grappling with this very issues.
Justice McDougall, after applying the four-part Lawson test, concluded that the RSMA met the criteria for a tax: it is enforceable by law, made under the authority of the legislature, levied by a public body, and the profits are deposited into the provinces general revenue fund. If the analysis stopped there, Unfiltered may have been successful in having the RSMA declared ultra vires and unenforceable. However, since Lawson the Supreme Court of Canada in a case called Westbank added a fifth factor to the Lawson analysis: whether the levy in question is connected to a regulatory scheme. In Unfiltered v NSLC the heavy lifting was performed at this stage of the analysis.
A charge will be considered “regulatory” if there is a valid relationship between the charge and the related regulatory scheme. This analysis requires that the court first consider whether there is in existence a “regulatory regime” and secondly, whether the charge or levy at issue is relevant to that regime.
The court found that Nova Scotia’s Liquor Control and Licensing Act and the Regulations constitute a complete, complex and detailed code of regulation. However, the RSMA itself exists to raise revenue for the provincial treasury, rather than pay regulatory costs (e.g reinvestment back into a liquor related programs or defraying regulatory costs) or to affect individual behavior under the regulatory regime. In short, the court was not satisfied that there was a valid relationship between the RSMA and the regulatory regime it was purported to support, and therefore the RSMA was not held to be a valid regulatory charge.
Tax or Proprietary Charge?
The NSLC submitted that should the court not find the RSMA to be a valid regulatory charge, then it was saved as being a proprietary charge by way of the “deeming provision” in the NSLC’s Manufacturer’s Policy which states that all liquor sold in a manufacturer’s retail store “shall be deemed to have been first purchased from the NSLC.”
Professor Hogg describes a valid proprietary charge as one levied by a province in the exercise of rights over its public property. The levies can come in the form of licence fees, rents or royalties as the price members of the public must pay for their private or personal use of a provincially-owned resource. In this case, so the NSLC argued, that resource happened to be Unfiltered’s beer.
Unfiltered’s position is that there is no commercial relationship between it and the NSLC, only a regulatory one – it receives nothing but regulatory approval from the NSLC in return for payment of the RSMA. Unlike beer sold out of the NSLC stores where the NSLC pays for and takes delivery of the beer, nothing of that sort occurs with Unfiltered’s products. The Toronto Distillery Co. unsuccessfully advanced the same argument in their dispute with the Ontario regulator.
Moreover, Unfiltered denied that all the elements of a contract exist between it and the NSLC, namely consideration, and that if the court was able to find contract between it and the NSLC it was the product of “practical compulsion.” Interestingly, the court found that while no formal written contract existed between the parties, there nevertheless existed an agreement by Unfiltered to comply with the terms of NSLC’s permits in exchange for being able to sell and produce beer. The fact that Unfiltered cannot sell its beer in the province without agreeing to these terms was of no consequence to this analysis.
The court concluded that in pith and substance the RSMA is a proprietary charge within the authority of the NSLC pursuant to its statutory mandate and dismissed Unfiltered application to rule the remittance scheme invalid.
There is something that does not sit quite right about the court’s reasoning in Unfiltered v. NSLC. Whereas the Toronto Distillery Co. at least had a written contract with specific terms and conditions in place between it and the Liquor Control Board of Ontario, no such formal agreement existed between Unfiltered and the NSLC. Instead the court found “elements of a contract” gleaned from Unfiltered’s agreement to comply with the existing regulatory regime, despite a finding that the amount of the RSMA is not prescribed in the Act or Regulations nor is it in the policy or permit application. This feels like a stretch of the law of contract taking for granted that Unfiltered, by agreeing to abide by the terms of the regulatory regime, must also be taken to agree to the terms of an ill-defined contractual relationship as well.
Unfiltered have filed an appeal of this decision.