Toronto Distillery Company unsuccessful at Court of Appeal

It’s fitting that after a year of significant liquor law announcements, reforms, and court cases coming from across the country, the Ontario Court of Appeal would release a liquor law decision just before the start of the New Year. While the result was unfortunate for the Toronto Distillery Company, and affirms a common practice used by liquor control boards to extract tax revenue from small producers, it does provide food for thought for liquor lawyers from coast-to-coast.

On December 15, 2016 Charles Benoit, a lawyer by training and one of the owners of the appellant Toronto Distillery Company (the “Distillery) appeared before the Court of Appeal for Ontario to argue that the April 1, 2016 decision of Ontario’s Superior Court of Justice was wrongly decided. That decision can be found here, and Alcohol & Advocacy summarized it here.

Put simply, the Distillery took issue with its contractual relationship with the Liquor Control Board of Ontario (the “LCBO”). In order to be a licensed manufacturer of alcohol in Ontario the Distillery was required to enter into a contract with the LCBO whereby all of the spirits the Distillery manufactured and wished to sell at its on-site retail store would first be sold to the LCBO (though the spirits would not physically leave the premises), and all sales the Distillery made thereafter of its own products would be made as “agent” for the LCBO. The LCBO has sole discretion over the mark-up the Distillery charges on its products, which it is then required to remit back to the LCBO.

The Distillery’s position before the application judge was that this mandatory mark-up regime was in pith and substance a tax and the LCBO is not authorized to levy taxes. On that basis the Distillery refused to pay any of what it considered to be unconstitutional remittances (read taxes) required by the LCBO contract. As at July, 2015 the unpaid remittances were in excess of $14,000. The Distillery subsequently acknowledged that it did not have sufficient funds to pay the overdue remittances as that money had been used to pay other business expenses.

Before the Court of Appeal the Distillery argued passionately that the application judge incorrectly interpreted the statutory framework and relevant case law; that properly considered the existing mandatory mark-up regime is unconstitutional and a “money grab” on the part of the province of Ontario. The Distillery’s argument can be found here in its appeal factum.

On December 20, 2016, only five days after hearing oral argument, the Court of Appeal released its decision dismissing the appeal, and awarding each of the three respondents (the Alcohol and Gaming Commission of Ontario, the Liquor Control Board of Ontario, and Her Majesty the Queen in Right of Ontario) a costs award of $5,000. Between the two levels of court the Distillery is liable for $37,500 in costs awards. Not an insignificant amount of money for a small business.

The Court of Appeal agreed with the application judge’s analysis of Ontario’s liquor law regime – that the mandatory mark-up on the Distillery’s products was a legitimate “proprietary charge” and not a tax. The Court of Appeal also agreed with the application judge’s alternative conclusion that that mark-up was not a tax because the Distillery agreed to it by way of contract.

The court observed that it is a well-established principle that obligations under a contract arise from the voluntary agreement of the parties, while the obligation to pay a tax does not. Under the contract, the LCBO owns the spirits in the Distillery’s on-site store. As owner of the goods, the LCBO has the right to determine the prices for which they are sold, including the mark-up. It follows that the mark-up is not an exercise of the government’s public authority but of its private law rights.

Lastly the appeal justices agreed with the application judge’s observation that the Distillery entered into a contract with the LCBO for a commercial advantage and it was “clear that the applicant was not compelled to sell its products through its own store. Like others, it could sell its spirits through stores operated by the LCBO or, alternatively, to markets outside Canada.”

While this decision is no doubt a significant blow to the Distillery, and the growing lobby of craft brewers and distillers seeking meaningful legislative reforms to allow their industry to flourish, there does appear to be change on the horizon. Last month the  government of Ontario proposed a new measure in the upcoming budget bill that may put more money in distillers’ pockets by replacing the “old LCBO mark-up fee.” Unfortunately, as the CBC reports, the initial reaction from the stakeholders to the new tax is mixed at best.

Happy New Year from Alcohol & Advocacy!

*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.

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.