OTTAWA -- Two years ago, Jens Korberg and Bruno François decided to try something new at their Prince Edward County winery. They had started The Old Third in 2005, planting vines and cultivating grapes to make small batches of Cabernet Franc and Pinot Noir. The property features a chicly decorated restored barn and a few picnic tables, where Korberg and François pictured customers enjoying glasses of wine in the sun. It would also allow them to earn some additional revenue by charging by the glass rather than by the bottle.

To do so, François and Korberg had to get a Liquor Control Board of Ontario (LCBO) licence that permits the sale of wine by the glass on their property, since the winery licence they already had only allowed them to sell small tasting samples. They nevertheless found that still didn't earn them any more money.

"We didn't realize the LCBO considered this a licensee sale," Korberg explained in an interview with CTVNews.ca. That means the LCBO charges the vineyard as if it has sold the bottle to the LCBO for distribution, then charges them to buy it back. "This is a bottle of wine that has never left the property. The wine in the bottle is made 100 per cent by the grapes grown by our own property, by us, and I have to give half the cost of that bottle to the LCBO in order to sell that wine by the glass on my own property," he said.

"It's very frustrating. It feels like theft."

That, to many Ontario producers, is the LCBO in a nutshell. Ask anyone who produces alcohol about the regulations they face, and you'll get a litany of complaints about the paperwork and licensing, as well as the amount of money taken off sales through taxes and mark-up. Add to that the barriers to selling over provincial boundaries, and many are tearing out their hair over how to turn a profit.

Some are starting to fight back. The Toronto Distillery Co. has taken the Alcohol and Gaming Commission of Ontario to court, disputing it has the right to collect taxes - which see the LCBO take around half of every dollar of sales, even if the bottle never leaves its storefront. In Prince Edward County, the Old Third is just one winery that eschews the LCBO, choosing to sell directly to consumers rather than losing half its revenue.

'No recourse'

"The reality is that the industry is not at all profitable, and this goes right back to the government," said Jeff Aubry, the president of Coyote's Run Estate Winery, which sells through the LCBO.

"Unfortunately they're the wholesale monopoly... and so, if the LCBO says no [to your product], you have no recourse."

The LCBO plays a dual role in Ontario, enforcing regulations by auditing wineries and collecting taxes, as well as acting as the retailer for the companies it audits. Producers who sell from their facilities are both a competitor to the LCBO and on the receiving end of the province's policies. And because it's a monopoly, if the LCBO acts like a retailer - raising sales targets or changing requirements - producers have limited options. Those options are further limited in Canada because each province controls its own liquor market, and only British Columbia, Manitoba and Nova Scotia have dropped their barriers to inter-provincial sales.

"That's what makes the LCBO the third or fourth largest wine buyer in the world. Because they have a captive monopoly market," Aubry said. "If I'm a wine producer in Italy, I can sell to anywhere in Italy any time I want, and I get to sell into the LCBO if I want... but as a domestic producer, I don't get that."

The LCBO is a major cash cow for the much-indebted Ontario government. Last year, it returned $1.9 billion in dividends to provincial coffers - on top of the approximately $280 million in HST it makes off the sales. It's not hard to see how it makes that much. When a consumer buys a bottle of alcohol, the LCBO takes:

52 per cent of the cost of wine

59 per cent of the cost of spirits

39 per cent of the cost of beer

An LCBO spokeswoman says those markups fund Ontario's social programs as well as the LCBO's operating costs.

"Profits are returned to the Government of Ontario by way of dividend and are used to fund provincial government priorities such as health care, education, and other important public services," Genevieve Tomney wrote in an email to CTV News.

Last year's $1.9 billion profit was the organization's "22nd consecutive dividend increase," she noted. "Our mark-up pricing structure is standard, transparent and a matter of public record. The pricing structure was established by LCBO with the Ministry of Finance several years ago."

'Crazy, crazy tax'

That kind of markup has convinced some producers to turn away from the LCBO (though many also note their production is too small anyway to handle the LCBO's massive orders). It's also led theToronto Distillery Co. to challenge the AGCO's power to collect taxes, arguing the province doesn't technically have a tax on spirits. The owners hope it forces the government to change its regulations.

"When we sell a bottle out of our retail store, we do all of the work, and on a $40 bottle we have to pay them about $18. I mean, that's a crazy, crazy tax," said Charles Benoit, co-founder of the distillery.

The markup, Benoit points out, was designed to cover the LCBO's distribution and retail costs, as well as provide the province its dividend (the LCBO pays a 13 per cent commission on sales from the distilleries - after taking the standard markup. A recent report commissioned by Ontario Premier Kathleen Wynne recommended raising that.).

"Fair enough," he said. "But when you apply it to our store, they're not doing any work of distribution or retail. Then it's pure tax... and it becomes an outrageous tax."

So far, the Ontario court has disagreed, giving the win to the AGCO and the LCBO. Benoit and his business partner, Jesse Razaqpur, are appealing that decision, with their next court date likely by the end of the year.

Korberg and François say the LCBO's markup has forced them to mostly avoid selling their wine to restaurants. They produce about 1,000 cases of wine a year, and sell the vast majority to customers who go to the winery. Sales to restaurants are unappealing because the LCBO charges the same markup even if the restaurant client walks into the winery and purchases directly. Provincial regulations also block them from charging more at the LCBO or to a restaurant than they do at the winery counter, so they can't make up the difference. They simply lose half their revenue on any bottle they sell to a restaurant.

That's got producers coming up with creative ways to generate more revenue, like the Old Third attempted with per-glass sales. The Toronto Distillery Co. charges for weekend tours, which Benoit says are booked up a month in advance and have kept them in business.

But, despite his frustration over the markup, Benoit doesn't blame the LCBO, and says it was quite helpful when they started out, taking a pitch meeting with no problem and purchasing 150 cases. The downside is that, because small producers don't have a stepping stone that isn't the massive monopoly, they can struggle to keep up with orders.

"There's an inherent tension between any giant retailer, not just the LCBO, and a small producer," Benoit said.

He also notes sympathetically that the organization is getting conflicting signals from the provincial government. "'Squeeze every buck you can to grow your dividend, and at the same time support local'," he said. "The LCBO is doing what they're told to do, which is be a best-in-class retailer."