The Regulatory Haze Around Cannabis Lingers On… But Greater Visibility for Packaging and Labelling Emerges

Health Canada released a summary of the comments received during the public consultation on the cannabis regulatory framework¹ proposed late last year (Summary Report).² While industry stakeholders may have expected greater insight into proposed regulations, the government was short on answers and instead pledged to further consider measures to address stakeholder concerns in the final regulations. The only exception was with respect to packaging and labelling where Health Canada, recognizing that details are required if industry is expected to prepare for implementation in a timely manner, provided specifics on federal rules and expectations. In this bulletin, we provide a summary of key regulatory proposals and Health Canada's response to the feedback received earlier this year.

What You Need To Know

• Final regulations will be published as soon as possible following Royal Assent to meet the government's commitment to bring the Cannabis Act (the Act)³ into force as soon as possible. While the Act may receive Royal Assent close to its initial target date in the summer of 2018, the retail sale of recreational cannabis is unlikely to begin before August 2018.⁴
• Regulations will not be pre-published for comment (this is atypical), meaning there will be uncertainty until the final regulations are published and are law.
• It is very unlikely that there will be significant changes to the packaging and labelling requirements outlined in the Summary Report. Manufacturers of cannabis for medical use, currently operating under the requirements of the Access to Cannabis for Medical Purposes Regulations (ACMPR),⁵ will have a six-month period within which to bring their packaging and labelling into compliance with the final regulations, while packaging and labelling for recreational-use cannabis will be required to comply with the Act and regulations as soon as they are in force.
• There will likely be different compliance standards for "micro" scale versus "standard" scale licensed producers in the final regulations. This is unique to cannabis as current federal laws affecting other regulated products do not have different compliance standards based on output.
• The proposed regulatory framework would include a distinct system for patients to access cannabis for medical purposes, which would remain substantively similar to the existing system under the ACMPR.

Background on the Cannabis Regulatory Proposal and Public Consultation

The proposed Act establishes the broader framework of cannabis legalization in Canada, but regulations need to be enacted to provide necessary granularity in a range of areas, including, for example, license requirements, packaging/labelling restrictions, and product standards. The uncertainty surrounding the language of the regulations to the Act is particularly troubling for stakeholders in light of the government's intention not to pre-publish the regulations for comment. Instead, final regulations will be published following Royal Assent to meet the government's commitment to bring the proposed Act into force as soon as possible. In lieu of the traditional approach where regulations are pre-published for comment before becoming final, the government set out a detailed regulatory proposal in 2017 and solicited comments from industry and stakeholders with the intention of incorporating their feedback and perspectives into the final regulations.

Details of the Proposed Regulations and Stakeholder Feedback

The key aspects of the federal government's proposed cannabis regulatory framework and Health Canada's response to stakeholder feedback include the following:

Licences

Under the proposal, different types of cannabis authorizations will be issued, each with a unique set of requirements, depending on the class of cannabis, the activity and scale undertaken. These include authorization(s) for cannabis cultivation, processing, sale, analytical testing, import and export, and research. Licenses will be valid for a maximum period of five years. While Health Canada asserts there was general support for the proposed system of licenses, the following four topics in particular elicited considerable stakeholder feedback:

• Commercial outdoor cultivation. The original regulatory proposal would permit both outdoor and indoor cultivation of cannabis. Stakeholders raised concerns over the potential impact of outdoor cultivation on adjacent agricultural crops (including industrial hemp), increased risk of theft and diversion, difficulties in ensuring good production practices and odour management during flowering. In response, Health Canada will further consider measures required in the final regulations to address these concerns.
• Multiple licences at a single site. Comments highlighted loopholes in the proposed regulations whereby a single person could legally hold multiple micro-cultivation or multiple micro-processing licences (described below) at a single site and combine these multiple micro-scale licences together at a single site to avoid the more robust requirements associated with standard-scale licences. To avoid system abuse, Health Canada will consider ways the final regulations would restrict the number of micro-cultivation or micro-processing licences at a single site.
• Thresholds for micro-cultivation and micro-processing. The original regulatory proposal would establish micro-cultivation and micro-processing licences to facilitate the participation of small-scale producers in the legal cannabis industry. Health Canada further proposes in this Summary Report that the final regulations define micro-scale licences as follows:
  • Micro-cultivation licence: would authorize the cultivation of a plant canopy area of no more than 200 square metres (approximately 2,150 square feet).
  • Micro-processing licence: would authorize the processing of no more than 600 kilograms of dried cannabis (or equivalent) per year, or the entire output of a single micro-cultivation licence.

Import and export

Import and export of cannabis would continue to be restricted and permits, valid for a maximum of six months, would be issued for the import or export of cannabis for medical or scientific purposes, as well as for industrial hemp.

Security clearances – Requirement for major shareholders of privately-held companies.

To hold a valid security clearance issued by Heath Canada, the proposed regulatory framework would require 1) employees who hold key positions with access to sensitive security or business information, 2) directors and officers of the organization and any parent company, and 3) major shareholders. With respect to the latter, the regulatory proposal will require security clearance for any shareholder who owns more than 25% of a privately held licensed organization or of a privately held parent company in an effort to ensure that organized crime are not able to infiltrate the legal industry.

Concerns over difficulty in enforcing this requirement and the relative ease of bypassing the requirement through strategic investments and asset structuring were raised during the comment period. Health Canada will consider alternative options in reducing the risk of financial relationships between criminal organizations and legal cannabis producers (e.g., requiring financial information, including information about investors, as part of the licence application process, and ongoing reporting of financial information by licensees).⁶

The decision to grant security clearance would be made on a case-by-case basis. Information provided by the applicant, criminal record checks, and law enforcement record checks would all be considered. With respect to individuals with non-violent, lower-risk criminal activities, stakeholders urged the government to allow certain individuals currently involved in the illegal production of cannabis – and who are not associated with organized crime – to participate in the legal industry in order to displace the illegal market and thereby prevent these individuals from continuing their illegal activities.

Tracking system

A national Cannabis Tracking System to track cannabis throughout the supply chain would be established by the proposed Act and maintained by Health Canada to prevent illegal cannabis diversion. The proposed regulatory framework would require any person authorized to conduct activities with cannabis to report into the system. Activities with industrial hemp and lower risk research and development would be exempt from reporting. In response to concerns about cost and the potential challenges in implementing the system, Health Canada confirmed it will consider what, if any, changes are required to ensure the system meets its objective while minimizing the burden on those required to report, particularly micro-scale licensees and industrial hemp producers.

Cannabis products

The sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants, and cannabis seeds would be permitted by the final regulations. The proposal would also permit a range of alternative product forms of dried and fresh cannabis, including the production of single-use forms of dried cannabis products intended for inhalation (e.g., pre-rolled cannabis, vaporization cartridges, etc.) containing a maximum of 1 gram of dried cannabis per unit. Proposed maximum THC concentrations of 10 milligrams of THC for a single unit of cannabis product intended for ingestion and a maximum THC concentration of 30 milligrams of THC per millilitre of cannabis oil were also proposed. In the Summary Report, Health Canada reinforced its intention to introduce specific regulations for the sale of edibles and concentrates in 2019. This means that edibles and concentrates will not be available for sale upon coming into force of the Act and will only be legally available in 2019.

• A note on starting material and access to plant genetics. For the legal market to successfully compete with the current illegal market, stakeholders are demanding the regulations facilitate access to a broad diversity of cannabis plant genetics for cannabis propagation (e.g., seeds, seedlings or cuttings). Health Canada has recognized that access to a broad diversity of cannabis plant genetics is necessary to allow the legal market to successfully compete with the illegal market and stated it will consider ways the regulations could enable introducing new plant genetics into the legal system. The government will want to consider addressing the following:
  • how to source cannabis germplasm (including by importation);
  • how to transport and share cannabis germplasm across the country;
  • how to encourage innovation in breeding and development of new cannabis germplasm, across universities, public/government institutions and private companies; how to encourage cannabis breeders to share germplasm; and
  • how to encourage innovation in cannabis research, including molecular research, whole plant research, and medicinal product research.

Cannabis accessories

The proposed Act has defined the term "cannabis accessory" to include "a thing" used in the consumption and/or production of cannabis. Health Canada commented that it has received feedback against including common lawn and garden products used to grow cannabis in the definition of an accessory and stated it will consider what measures, if any, are required in the final regulations to address this concern.

Packaging and labelling

Consistent with the current medical cannabis law, the proposed regulatory framework would require all cannabis product packaging to be tamper-evident, child-resistant and include 1) a standardized cannabis symbol that must appear on every label, 2) mandatory health warning labels similar to tobacco products, and 3) requirements with respect to information on THC and CBD content. Strict limits on the color, graphics, and other special characteristics of packaging are also proposed. For example:

• in addition to the brand name, the packages would be permitted to display only one other brand element (e.g., trademark, tradename, distinguishing guise, logo, graphic arrangement, design or slogan) if:⁷
  • the brand element to be displayed is a text element, the font must be no larger than the font of the health warning message, and must be a single, uniform colour, or if
  • the brand element to be displayed is a graphic, image or logo, its size must be limited to the size of the standardized cannabis symbol;
• the display of any other image or graphic is prohibited;
• label and package backgrounds must be a single, uniform colour both inside and out;
• fluorescent or metallic colours are prohibited;
• labels and packaging must not have any coating (e.g. could not be glossy), embossing (raised or recessed relief images), texture, foil, cut-outs or peel-away labels; and
• package inserts are prohibited, however the regulations require licensed processors to ship a health and safety informational document developed by Health Canada with every package delivered to a federally, provincially, or territorially licensed distributor or retailer (the document is not included as an insert in the package, but is provided to consumers with the sale or delivery of the package).

Under the proposed Act, brand elements, including trademarks and logos, are prohibited from being presented in a manner that would evoke emotions or be associated with a way of life. Companies may promote cannabis products by displaying a brand element on something that is not the cannabis product, provided that it will not be appealing to children and not be associated with a way of life. We note that informational promotion or brand-preference promotion is permitted under limited circumstances, and it appears that such promotion could include brand elements. While the packaging and labelling requirements are strict, there will be opportunities for licensed producers to provide accurate and factual information to adult consumers.

• The draft Cannabis Act⁸ contemplates "informational promotion" and this will provide opportunities for licensed producers to relay factual and accurate information to adult customers, provided that the informational promotions are otherwise compliant with the Act and final regulations.
• For other regulated products, Health Canada does not regard press releases or communications for the benefit of investors to be "advertising" and it is possible that Health Canada will take the same position for communications of cannabis companies.⁹
• Point of sale promotions are also permitted if they only indicate the availability and price of the cannabis product.
• Informational promotion or brand-preference promotion is not limited to point of sale if it can be ensured that the target audience is over the age of legal consumption and the material cannot be accessed by children/youth, or the promotion is in a place or manner prescribed by the final regulations.

A six-month transition period following the coming into force of the proposed Act for medical-use cannabis products has been proposed to facilitate a transition from the current packaging and labelling requirements under the ACMPR to the new regulatory requirements. Despite this transition period for medical-use products, packages or labels that clearly contravene the principles of the Act by appealing to young persons or containing a celebrity endorsement, for example, are prohibited for all cannabis products, medical and non-medical, upon coming into force of the proposed Act. This nuanced approach addresses the concern that companies may abuse the six-month transition period Health Canada is providing by selling products for medical use that may have prohibited packaging or labelling in that brief time frame.

For cannabis products sold for non-medical purposes through a provincial or territorial retail distribution system, there is no transition period. These recreational-use products must comply with all the packaging and labelling requirements of the Act and its regulations as soon as they come into force. This means that companies should ensure that packaging and labelling requirements under the proposed Act and final regulations, for which no transition period has been offered, are met by the time the proposed Act and final regulations come into force so that they hit the ground running and are able to offer their products in the Canadian market as soon as possible.

Medical cannabis

The proposed regulatory framework would include a distinct system for patients to access cannabis for medical purposes, which would remain substantively similar to the existing system. Proposed adjustments to improve patient access include 1) allowing individuals to transfer prescription to a different federally-licensed seller of cannabis for medical purposes, and 2) beginning registrations on the date of initial registration with a federally-licensed seller of cannabis for medical purposes rather than the date the medical document was signed by the health care practitioner.

Health products and cosmetics

The regulatory framework proposed a scientific, evidence-based approach for the approval of health products containing cannabis. These products would be regulated under the Food and Drugs Act and exempt from certain provisions of the proposed Act. New applications are being accepted through the current approval pathway for prescription drugs containing cannabis, medical devices used for consuming cannabis for medical/therapeutic purposes, Natural Health Products (NHPs) and Veterinary Health Products (VHPs) that contain permitted cannabis parts at a maximum of 10 ppm THC. For cannabis health products, the proposed regulations would outline the applicability of requirements under the proposed Act. Specifically:

• licensing requirements for holders of a Drug Establishment Licence that manufacture prescription drugs containing cannabis would be similar to those of the existing Dealer's Licence under the Narcotic Control Regulations¹⁰ (e.g., requirements for security, record keeping, reporting and good production/manufacturing practices) without duplicating rules and standards under the Food and Drugs Act¹¹ and its regulations;
• current Dealer's Licences would remain valid during a limited period to support transition to a new licence under the proposed Act;
• promotional controls for prescription drugs under the proposed Act will be considered (for example, Health Canada has proposed that prescription drugs with cannabis will only be subject to the requirements of the Food and Drugs Act and its regulations with respect to packaging and labelling); and
• medical devices used for consuming cannabis for medical purposes would be subject to certain prohibitions for cannabis accessories under the proposed Act.

It is likely that the advertising and promotion of such products will be governed by the current regulations that apply to such products, meaning that there will be opportunities to promote such products, within the confines of the current laws that apply to such products.

Excise Tax

The Department of Finance proposed to apply an excise duty to all cannabis products in Canada back in the fall of 2017.¹² While this was not a part of Health Canada's regulatory proposal, the regulator stated that products containing low amounts of THC will generally be exempt from the excise duty. Pharmaceutical products derived from cannabis will not be subject to the excise duty as long as the product has a Drug Identification Number and is only available through a prescription.

What's Next

The Senate has agreed to hold a final vote on the federal draft cannabis legislation by June 7, 2018. Final regulations will be published as soon as possible following Royal Assent of the Act.  Once approved by Parliament, the new legal framework would remove cannabis from the Controlled Drugs and Substances Act¹³ and its regulations. Assuming the draft legislation is passed into law this summer, the provincial and territorial governments will need 8-12 weeks to prepare for retail sale following the passing of the federal legislation. Licences issued under the ACMPR and the Narcotic Control Regulations would remain in effect until expiration or revocation.

It is highly unusual for the federal government not to pre-publish draft regulations for consultation and the proposed regulatory framework and subsequent Summary Report still leave many questions unanswered. While stakeholders and industry detailed key concerns, for its part, the government did not provide meaningful insight on where it will land on many regulatory questions leaving many issues still to be resolved. One thing is certain, in its drive to roll out legalization, the federal government is determined to implement the proposed Act as close to the original target date as possible. Stakeholders may wish to continue to provide feedback to the federal government in the limited time available.

We have written extensively about emerging trends in the cannabis industry. You can read all of the team's insights by visiting our dedicated cannabis page.

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¹ See: https://www.canada.ca/en/health-canada/programs/consultation-proposed-approach-regulation-cannabis/proposed-approach-regulation-cannabis.html.

² See: https://www.canada.ca/en/health-canada/services/publications/drugs-health-products/summary-comments-public-consultation-regulation-cannabis.html.

³ Cannabis Act: Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts [Cannabis Act]. Online: http://www.parl.ca/DocumentViewer/en/42-1/bill/C-45/third-reading.

⁴ The Senate has committed that it will hold a third reading vote on Bill C-45 no later than June 7, 2018. There is likely to be a period of between 8 to 12 weeks from the date when the Bill receives Royal Assent and when the new laws come into force to effect an orderly transition to the new framework. The government has indicated that this transition time is important for all levels of government, industry, law enforcement and other stakeholders to prepare for implementation of the new system. Supra, note 1. Also see: http://www.cbc.ca/news/politics/senate-vote-pot-bill-1.4537624.

⁵ SOR/2016-230.

⁶ Stay tuned for Torys' upcoming bulletin for a further discussion on the disclosure of investor information for cannabis companies.

⁷ Stay tuned for Torys' upcoming bulletin on cannabis branding.

⁸ See our previous publication on the proposed Cannabis Act: "Breaking Ground: Canada's Cannabis Framework".

⁹ See Health Canada's policy document on "The Distinction Between Advertising and Other Activities": https://www.canada.ca/en/health-canada/services/drugs-health-products/regulatory-requirements-advertising/policies-guidance-documents/policy-distinction-between-advertising-activities.html.

¹⁰ CRC, c 1041.

¹¹ RSC 1985, c F-27.

¹² See our previous publication: "Government of Canada's Draft Proposal on Cannabis Taxation".

¹³ SC 1996, c 19.

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