Toronto Distillery Co. v. The Liquor Control Board of Ontario

In January of this year the Toronto Distillery Company (the “Distillery”) brought an application in the Ontario Superior Court of Justice for a declaration that the levy imposed by the Liquor Control Board of Ontario (the “LCBO”) on the sale of its products at its on-site retail store is unconstitutional. The Distillery’s position is that the “levy” the LCBO charges on all of its products is in substance a “tax” and only the Parliament of Canada or the Legislature of Ontario has the authority to impose taxes.

The Court’s reasons for judgement can be found here.

The Facts

The Distillery, founded in 2012, is a small craft distillery located in the Junction neighbourhood of Toronto. The Distillery operates “within organic channels” and was the first new distillery to be licensed in Toronto since 1933.

Put simply, the Distillery takes issue with its relationship with the LCBO. In order to obtain a manufacturer’s and retail store licence from the Alcohol and Gaming Commission of Ontario (the “AGCO”) it was required to enter into a contract with the LCBO. The contract between the Distillery and the LCBO required that all of the spirits the Distillery manufactured would first be sold to the LCBO (though the spirits being sold on site would not physically leave the premises), and all sales the Distillery made of its own products at its on-site retail store must be made as agent for the LCBO – who had sole discretion over the mark-up that the Distillery had to remit back to it. Although the Distillery was entitled to receive a 13% commission for its role as acting as the LCBO’s agent – the mark-up on the product was fixed by the LCBO at 139.7%.

When the Distillery’s products are sold through LCBO stores that 139.7% mark-up pays for warehousing costs, marketing efforts and staffing costs incurred by the LCBO.  When the same product is sold directly by its manufacturer the LCBO takes the same cut – but does none of the work. Taking the position that this statutorily-imposed mark-up was not only unfair, but also unconstitutional, the Distillery stopped remitting the mandated mark-up on its products to the LCBO in 2014. As you can imagine it was not long before the LCBO insisted on their cut.

The AGCO and the LCBO were united before the Court in their position: the mark-up imposed by the LCBO on the Distillery’s products is not a “tax” but a proprietary charge on liquor owned by the LCBO.

The Constitutional and Statutory Framework

Canada’s constitution mandates that only Parliament and the provincial legislatures have the ability to impose taxes.

As a general rule, the sale and manufacture of liquor in Ontario is prohibited – subject to limited exceptions contained in Ontario’s Liquor Licence Act and Liquor Control Act.  At the federal level the importation and transportation of liquor is prohibited unless it is owned by the government of Canada or a provincial government agency, or other exemptions contained in the Importation of Intoxicating Liquors Act apply.

Collectively these three statutes provide the LCBO with a monopoly over the sale, transportation, delivery and storage of liquor in Ontario.

To manufacture or retail liquor in the province of Ontario, as the Distillery decided to do in 2012, a licence must be obtained from the provincial government that is subject to stringent conditions.

Is the LCBO Mark-Up a Tax or Proprietary Charge?

The central question before the Court was whether the LCBO mandated mark-up on the Distillery’s products at its on-site retail store is a “tax”, as argued by the Distillery (and potentially improper and unenforceable), or a “proprietary charge”, as claimed by the LCBO (and thus proper and enforceable).

In concluding that the mark-up was not a tax, but rather a proprietary charge, the Court found that proprietary charges are those levied by provinces in the exercise of proprietary rights over its public property. A province may levy fees, rents or royalties as the price for the private exploitation of provincially owned natural resources as well as other goods and services the province supplies in a commercial way such as information booklets, electricity, rail travel – and liquor.

The Contractual Relationship

One of the key components of the Distillery’s agreement with the province of Ontario is that once its spirits are produced they are sold immediately to the LCBO. The fact that the product remains on the Distillery’s premise after distillation does not change the fact that the spirits have become the property of the LCBO. Once the spirits are the LCBO’s property, the mark-up is not a true tax but rather a fee for a product supplied by the province in a commercial manner.

The Distillery asserted that absent the LCBO contract the spirits are solely the property of the Distillery and the LCBO has no proprietary right over them. While that is true, the Court held that the existence of the contract cannot be “absented” from the equation – the Distillery is only permitted to operate because of its contractual relationship with the LCBO.

The Court concluded by observing that the Distillery voluntarily entered into a commercial relationship with the LCBO with full knowledge of the mark-up regime.  At this point in the narrative it’s worth mentioning that the founders of the Distillery, Messrs. Benoir and Razaqpur are both lawyers.

Conclusion

2016 has already been a significant year for liquor law in Canada, with both Gerard Comeau and the Toronto Distillery Company challenging the constitutionality of their respective province’s liquor licensing and control regimes.

Although the Distillery was not successful at the trial court level, the matter is far from over. The Distillery has appealed the Court’s decision and oral arguments before the Ontario Court of Appeal will be heard on December 15, 2016. Alcohol & Advocacy will be monitoring the situation closely.

*Alcohol & Advocacy publishes articles for information purposes only. They are not a substitute for legal advice, and persons requiring such advice should consult legal counsel.

Alcohol & Advocacy

Dan Coles
Retired bartender. Young lawyer. From the East, living in the West. Interested in British Columbia's producers and purveyors of wine, beer and spirits.