Canada’s Top Court Considers Inter-Provincial Free Trade of Alcohol

December 20, 2017

Editor’s Note: The following is a guest post by Shea Coulson, founder and partner in Coulson Litigation, a litigation boutique located in Vancouver, British Columbia, specializing in commercial, regulatory, and constitutional law. Shea represented a group of small B.C. wineries at the Supreme Court of Canada in R. v. Comeau, the Canadian constitutional case regarding interprovincial free trade.

In 2005, the Supreme Court of the United States heard and decided Granholm v. Heald, resulting in the majority of states opening their borders to direct to consumer shipping for domestic wineries. Canada, by contrast, despite its burgeoning wine industry, remains in the post-prohibition mindset that sees each province operate as a regional silo for liquor. As a result, Canada has no national market for liquor but rather a collection of 10 independent regions.

On December 6 and 7, 2017 the Supreme Court of Canada heard the blockbuster constitutional case R. v. Comeau, which addresses these interprovincial barriers to liquor. The case centres on the meaning of section 121 of the Canadian Constitution Act, 1867, which states: “All articles of the growth, produce, or manufacture of any of one of the provinces shall, from and after the union, be admitted free into each of the others.” Despite its apparently clear wording, an old prohibition-era decision of the Supreme Court of Canada from 1921 dealing with the enactment of the Canada Temperance Act held that section 121 was restricted to protecting only against tariffs and not other impediments to interprovincial trade.

Over the last 96 years various courts and academics have questioned the correctness of the 1921 interpretation of the interprovincial free trade section of Canada’s constitution, but it took until Canada’s 150th birthday before the issue was brought back to the country’s highest court for reconsideration.

The implications of R. v. Comeau are huge. Currently, Canadian producers of wine and other liquor are prohibited from shipping their products across most provincial borders. Only three of the ten provinces (British Columbia, Manitoba, and Nova Scotia) currently permit small interprovincial shipments. The most populous provinces of Ontario and Quebec outright prohibit direct to consumer shipments of liquor from other provinces. As a result, small and medium-sized producers of Canadian wine, beer, and spirits have been shackled to their physical location within their province and cannot access a national market.

To date, most small wine producers and craft beer producers have done well within their regional markets. However, the industry’s success has reached a point where market saturation has limited future growth. Additionally, just as in the United States, small and medium sized producers find it extremely difficult to access distribution in provinces other than their home provinces and are subject to very significant markups that make it economically infeasible to sell their products in those provinces. The utter lack of a national market is therefore prohibiting small and medium sized liquor producers from growing further as they cannot establish manufacturing in each province (note that the largest breweries, by contrast, have plants in each province to skirt these interprovincial trade barriers). Small producers in British Columbia making under 50,000 cases per year, for example, generally sell only 30-40% of their total sales through the direct to consumer channel. This contrasts to producers of a similar size in the United States who make between 40-70% of their total sales through the direct to consumer channel.

Given the current state of affairs, R. v. Comeau is potentially set to completely change the landscape of liquor sale and distribution in Canada.

The Background to R. v. Comeau

Gerard Comeau is a retired steelworker living in the province of New Brunswick. In 2012 he, like many New Brunswickians, drove across the provincial border into the neighbouring province of Quebec to buy beer and spirits at lower prices from the Quebec liquor monopoly. He then crossed the border back into New Brunswick and was promptly detained and arrested by the Royal Canadian Mounted Police. The RCMP seized the liquor and charged Mr. Comeau under New Brunswick’s Liquor Control Act for “having or keeping” liquor not purchased from the New Brunswick liquor monopoly. That offence brought with it a fine of $292.50.

Instead of paying this fine, Mr. Comeau defended himself by relying on the aforementioned s. 121 of the Constitution Act, 1867. He argued that this section granted him the right to transport Canadian-made goods across provincial borders and that, as such, the New Brunswick prohibition against doing so was unconstitutional.

Mr. Comeau won his case at trial as the trial judge re-examined the historical evidence, the language of the constitution, and its legislative history to determine that the 1921 interpretation was incorrect and that s. 121 protected against both tariff and non-tariff barriers to interprovincial trade.

The New Brunswick Crown appealed the decision up to the Supreme Court of Canada.

The Implications and Potential Outcomes of R. v. Comeau

R. v. Comeau is currently “on reserve”, which means that the Supreme Court of Canada is deliberating the outcome. It is possible that the Court will affirm the 1921 decision. That would be a huge disappointment to all liquor producers and to Canadians at large. A recent Ipsos poll found that 89% of Canadians support Mr. Comeau and agree that Canadians should be allowed to bring any legal Canadian product from one province to another.
It is also possible that the Court will create a legal test that will liberalize free trade in Canada with an incremental expansion of s. 121 to include non-tariff barriers but that will also defer to provincial laws that create trade barriers for legitimate public policy reasons such as health and safety. It also seems likely that the Court will focus more on policing laws with protectionist purposes rather than those with protectionist effects. If this happens, the worst protectionist laws and policies would likely face court challenges and be declared unconstitutional. For example, Ontario currently has a provincial policy that outright prohibits Ontarians from directly purchasing from out-of-province wineries but that permits them to directly purchase from in-province wineries. However, under this sort of test facially neutral policies will likely be extremely difficult to challenge successfully.

The latter, liberalizing, interpretation would change the liquor market in Canada by creating a basic “floor” for free trade that would prevent both outright prohibitions against the goods of other provinces and discrimination against out of province producers in favour of in province producers.

Even if the Court does not give a favourable interpretation in R. v. Comeau, the provincial governments are currently negotiating an expansion to the Canada Free Trade Agreement between the provinces that would encompass alcohol. Given the popular will of Canadians, it is possible that there could be a gradual political solution to the current balkanization of Canada’s provincial liquor markets. On the other hand, given the massive amount of revenues raised by each province through their respective liquor monopolies, it is unlikely that any negotiated ‘solution’ would be any more than a small, token exception to the general prohibitions against interprovincial trade.

If trade is liberalized either through the courts or the political process, Canada will be in desperate need of a system to manage compliance with the various provincial laws and taxes. It is likely, too, that if trade is liberalized the provinces will enact additional regulatory regimes to govern interprovincial shipping and that these could differ from province to province. Canadian small and medium wineries are not familiar with managing interprovincial compliance issues and will need guidance.

Moreover, if trade is liberalized across Canada, there may be implications for challenges under international trade agreements such as GATT. Just as in the United States, a permissive approach to direct to consumer shipping for domestic producers may raise the hackles of international producers not granted such a privilege.

Concluding Thoughts

Canada’s balkanized liquor markets may finally be heading toward the modern era. While provincial liquor monopolies are likely to survive, with trade liberalization will come greater access to products and greater competition across Canada. A national market for Canadian-made liquor will foster greater appreciation for Canadian-made products and will grow Canada’s wine and craft beer and spirits culture immeasurably. It would be the first step toward a more mature and sophisticated market and would create many opportunities across the hospitality sector, increase both business and tax revenue, and create jobs. A bright future awaits an affirmative nod by Canada’s highest court. The Court will release its decision within 6 months.

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