Ontario’s provincial cannabis law does not prohibit federally licensed cannabis processors and micro-class businesses from opening farm-gate stores, the Ministry of the Attorney General confirmed to Marijuana Business Daily.

However, standard processors will still need to sell and repurchase their product via the provincial wholesaler before it can be sold in their stores.

The province’s 2018 Cannabis License Act allows businesses licensed by Health Canada to produce marijuana to apply for a retail operator license and retail store authorization to open a sales outlet on the site identified in their license.

Previously it was not completely clear which federal license holders would be eligible for farm-gate sales in Ontario.

Federal micro-class license holders would also be eligible to open stores on-site, which should greatly improve the economics of their businesses by opening new revenue streams.

Gray said the Cannabis License Act does not place any restrictions on the size of federally licensed producers that wish to apply for a retail operator permit and retail store authorization.

Micro-cultivation and micro-processor sites face limits on their growing space and other areas of their businesses that limit, but do not prevent, profitability.

Must buy from OCS

Gray said there is nothing in the Cannabis License Act that requires federally licensed producers to only sell cannabis that is produced on-site, “nor are there requirements that they must sell cannabis produced elsewhere.”

However, he said all cannabis sold in a marijuana retail outlet must be purchased through the province’s exclusive cannabis wholesaler, the Ontario Cannabis Store (OCS).

Matt Maurer of Torkin Manes cannabis law group in Toronto said there is very little logic in having a provincial wholesaler involved in a farm-gate store.

To the extent that a federal licensee wishes to sell its own product at a retail store located at its own production side, Maurer said it strikes him “as an unnecessary administrative and regulatory burden to insist that it purchase its own product from the OCS.”

“As matters presently stand, product arrives at the OCS already packaged and sealed, so the OCS does not provide any meaningful regulatory product assurance role.

“While it might make sense for third-party retailers to buy product from the OCS, or even to have federal license holders purchase other license holders’ products from the OCS to sell at farm-gate stores, it makes little sense to inject the OCS as an intermediary for a product that is being produced and sold from the same premises.”

The OCS has promised to revamp the cannabis wholesale system in Ontario. The wholesaler plans to remove itself from being the physical intermediary but still plans to wholesale all cannabis products.

Municipal zoning

A key factor for companies interested in engaging in farm-gate sales is whether their municipality has “opted out” of cannabis stores within their borders.

“Prospective retailers will be able to open cannabis retail stores in Ontario municipalities that have opted in to permitting legal cannabis stores, in areas where retail businesses are permitted,” wrote Gray, the Ministry of the Attorney General’s spokesperson.

He added:

“Retailers must respect store siting requirements established in the Cannabis License Act, 2018 and its regulations, including a minimum distance requirement of 150 meters between cannabis retail stores and schools, including public schools, private and federally funded First Nation schools off-reserve.

“Before an applicant can be issued a retail store authorization, the Registrar of the Alcohol and Gaming Commission of Ontario must also post a public notice at the proposed store location.”

Trina Fraser, a business lawyer at Ontario-based Brazeau Seller Law and an adviser to cannabis companies, said the key part of the ministry’s response is “in areas where retail business are permitted.”

“If the municipality opted in and if the (licensed producer) site is zoned for retail and 150 meters from a school, then the municipality doesn’t really have any power other than to file an objection during the public consultation period, which will probably be overruled by (the Alcohol and Gaming Commission of Ontario).”

However, Fraser said that if the licensed producer site (LP) is not zoned for retail – which will probably be the case for most – then they will need municipal approval to open.

Some towns, such as Smiths Falls, are receptive to cannabis businesses, but many still are not, she said.

“So it will be interesting to see how this plays out. Will also be interesting to see how many LPs actually want a retail store on-site.”

New rules on way

Even considering the latest disclosure by the ministry, a considerable amount of information remains outstanding.

Unanswered questions include:

Can producers create exclusive brands for sale in their on-site store, or does all they produce have to be available to the OCS for broader shipments to other retailers?

For farm-gate sales, will the OCS mark up the cannabis under the new wholesale system or will the OCS sell the cannabis products “at cost” to retailers?

The Ontario Cannabis Store told MJBizDaily that it’s trying to provide answers.

“The OCS is working to finalize details on how on-site retail stores will operate and will share these with federally licensed producers in early 2020,” OCS Communications Manager Joanna Hui wrote in an email.