In 2015, Toronto Distillery Co., a small craft distiller of spirits such as gin and whisky, launched a court challenge to Ontario\u2019s regulatory regime for on-site sales of spirits by producers.<\/p>\n
Background<\/strong><\/p>\n In Ontario the sale and distribution of alcoholic beverages \u2013 including spirits \u2013 is tightly regulated and controlled by the Government pursuant to the Liquor Licence Act<\/em>, the Liquor Control Act<\/em>, and the Alcohol and Gaming Regulation and Public Protection Act, 1996<\/em>.\u00a0 In general, the sale of liquor is prohibited unless it is sold to the Liquor Control Board of Ontario (\u201cLCBO\u201d) for resale in its various retail locations.<\/p>\n The Alcohol and Gaming Commission of Ontario (\u201cAGCO\u201d) permits alcoholic beverage producers to apply for a Manufacturer\u2019s Retail Store Authorization, which allows the producer to sell its products on-site at the production facility. For producers of spirits, a condition of receiving authorization for a retail store is that the producer must enter into a contract with the LCBO that imposes certain requirements on the on-site sale process.<\/p>\n The contract requires that the manufacturer first \u201csell\u201d its products to the LCBO, but retain the \u201csold\u201d products on-premises for re-sale to the public, with the manufacturer acting as agent for the LCBO.<\/p>\n The effect of this arrangement is that the LCBO is able to ensure that the products sold on-premises by the manufacturer are subject to the same mark-up which the LCBO applies to products it sells in its own stores. The mark-up on each bottle is then remitted by the manufacturer to the LCBO.<\/p>\n The Challenge<\/strong><\/p>\n Toronto Distillery Co. applied for and received a Manufacturer\u2019s Retail Store Authorization in 2013. As a condition of the authorization, Toronto Distillery Co. entered into a contract with the LCBO, which applied a 139.7% mark-up on products sold on-premises at the production facility. In the summer of 2015, Toronto Distillery Co. launched a court challenge to the constitutionality of the LCBO mark-up.<\/p>\n Toronto Distillery Co. took the position that the mark-up was in fact a tax applied by the government, a tax which violates sections 53 and 90 of the Constitutional Act, 1867<\/em> because it was not authorized by Canada\u2019s parliament or Ontario\u2019s legislature.<\/p>\n The Supreme Court of Canada in Lawson v Interior Tree Fruit and Vegetable Committee of Direction<\/em>, [1931] SCR 357, set out the test for determining whether a levy is a tax:<\/p>\n In Toronto Distillery Company Ltd. v Ontario (Alcohol and Gaming Commission of Ontario)<\/em>, 2016 ONSC 2202<\/a>, the Court held that \u201cthere is no doubt\u201d that the LCBO mark-up fits within the Lawson<\/em> test, and therefore may be a tax. However, if a levy is in pith and substance a regulatory or proprietary charge, it will not be classified as a tax.<\/p>\n The Respondents argued that the LCBO mark-up is a proprietary charge applied on products it owns in a commercial context. The products were sold to the LCBO under the terms of the contract, and were kept on-site to be sold by the manufacturer as agent for the LCBO. The mark-up, the Respondents argued, is thus a lawful charge applied to its own property.<\/p>\n The Court accepted this position and held that the LCBO mark-up is a proprietary charge, not a tax.<\/p>\n Change coming anyway?<\/strong><\/p>\n\n