This discussion summarizes the legal issues related to the sale and shipment of alcohol for personal use by a licensed manufacturer or retailer to an individual consumer who is located in a Canadian province (the “destination province”) that is different from the location of the licensee (i.e. an interprovincial direct to consumer or “DTC” sale).
Canadian Alcohol Compliance Series
Title: DTC InterProvincial Shipping of Alcohol – Discussion of Issues
Date: March 20, 2020
Author: Mark Hicken, BA JD
This document contains a general discussion of the issues noted which was prepared on the date noted above. It does not constitute legal advice and was not prepared for you specifically. If you or your business needs a legal opinion, you should contact a lawyer for individual and updated advice.
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Section A: Short Answer
Section B: Discussion of Issues
Accompanying Articles: InterProvincial Shipping Current Provincial Laws Summary and InterProvincial Shipping Sample Terms of Sale
Short Answer
The federal government recently repealed a federal prohibition on interprovincial shipments of alcohol that had existed in Canada for 91 years (from 1928 until June 2019). As a result, under federal law, it is now legal to transport or ship alcohol between provinces. However, most provinces also have laws that either directly or indirectly regulate the transport or possession of alcohol purchased in a different province. For the most part, and due to limits on a province’s jurisdiction, these provincial laws are directed at regulating individuals or legal entities within the destination province (i.e. most obviously the customer rather than the vendor). Some provinces permit certain types of DTC transactions but most place restrictions or prohibitions on them (see table in the InterProvincial Shipping Current Provincial Laws Summary for a list of these rules).
As such, the customer in a DTC transaction now appears to face more restrictive rules and consequences than the vendor. There are obvious difficulties in attempting to enforce these laws since there are no ‘hard borders’ between provinces. To date, there has only been enforcement of these provincial laws against the customer (or, in one failed attempt, against the shipping company). As far as can be determined, there has not been any enforcement against a vendor. Nevertheless, in theory, these provincial laws could also be enforced against the vendor if it assists in shipping alcohol to a customer in a province where there is a restriction or prohibition. In addition, there are other provincial laws that relate to the sale and advertising of alcohol as well as to licensing and taxation which could conceivably be used against the vendor.
It is currently unclear whether provincial liquor regulators may seek to enforce any of these laws in respect of interprovincial transactions. However, theoretically it is still possible that a regulator might seek to extend enforcement, particularly if it became aware of any significant sales to a particular province or if a vendor undertook marketing initiatives that obviously target a particular province. However, given the current national emergency related to COVID, and although the legal situation has not changed, it may well be that the risk of enforcement is lower, particularly for any province where it is difficult or impossible to purchase at retail. If a vendor decides to ship, or continue to ship, to provinces with restrictions, it may wish to obtain specific legal advice on ways to mitigate any risks.
Discussion
What Changes Happened Under Federal Law?
From 1928 until June 2019, the federal Importation of Intoxicating Liquors Act (“IILA”) prevented the shipment of all alcohol across provincial borders unless the alcohol was destined for the provincial government liquor agency (e.g. BCLDB or LCBO) responsible for alcohol distribution in the destination province. In its old form, this law made it illegal for a manufacturer or retailer to ship alcohol to a customer in another province. From 2012 until 2019, there was an exemption for certain interprovincial shipments of alcohol for personal consumption[1]. However, that exemption was dependent upon the provincial laws in the destination province also permitting the incoming shipment. In June 2019, the IILA was amended to completely remove the prohibition on interprovincial shipments of alcohol[2].
What has changed as a result of the above reforms? Under the previous IILA prohibition, it was not legal under federal law to ship or transport any alcohol between provinces unless the “personal use” exemption applied. The personal use exemption was contingent on provincial laws allowing the shipment. In many cases it was difficult to determine whether or not that exemption applied because the relevant provincial laws were not clear or only permitted certain types of shipments. This placed the vendor or shipper in a difficult position because the shipment would be illegal if the exemption did not apply.
Now that the federal prohibition is gone, this ambiguity is removed. The shipment and transport of alcohol between provinces is now legal under federal law. As such, a manufacturer or retailer in one province can legally sell and ship alcohol to a resident of another province without worrying about breaking federal law. However, various provincial laws may affect the transaction and/or the ability of the customer to possess the imported alcohol after it is received.
As a result, the only real issue that remains is whether the relevant provincial laws restrict the transaction either for the customer or for the vendor. These laws are discussed in the following sections.
What is the Effect of Provincial Law on DTC Shipments?
Generally, the provinces have jurisdiction to regulate the possession and supply of alcohol within provincial borders and to regulate the sales and marketing of alcohol within those borders. The recent Supreme Court of Canada decision in R. v. Comeau[3] generally upheld the ability of a provincial government to implement such laws and to place legal restrictions on the inter-provincial trade in alcohol so long as the primary purpose of the law is not to restrict trade[4]. The uncertainty regarding the constitutionality of provincial laws that restrict the inter-provincial trade in alcohol was removed by this decision.
The issue of how a particular province’s laws affect a DTC sale or shipment is not straightforward since the legislative approach varies considerably by province. All of the provinces except Manitoba have laws that restrict the importation (via shipment) of alcohol from another province, the possession of alcohol that has been imported (via shipment) and/or the transportation of alcohol from another province[5]. The table that is included in the InterProvincial Shipping Current Provincial Laws Summary lists the relevant provincial laws and provides references to the relevant statutes and regulations. It is important to review this table and understand the differences in these rules since some types of DTC shipments are allowed to certain provinces (e.g. all shipments to Manitoba and shipments of Canadian wine to B.C. and N.S.) while other provinces prohibit all shipments. Some provincial laws have also changed recently (e.g. Ontario).
It should be noted that most of these laws are targeted at regulating the conduct of individuals or legal entities within the destination province (i.e. most obviously the customer rather than the vendor). Generally, provincial law only applies to transactions that occur within the province and to businesses that are operating within the province. This explains why the laws are aimed at customers rather than vendors.
Consequently, it now appears that the customer in a DTC transaction faces more stringent rules and consequences than the vendor since the provincial rules would apply to the recipient (i.e. the customer, in the case of restrictions on possession or importation) or perhaps to the shipping company[6] (in the case of restrictions on transport). This result is an improvement for the vendor than the situation under the old federal law which clearly applied to all vendors who were shipping across provincial boundaries. Nevertheless, there are some other potential ways that the vendor might assume legal risk, particularly if a liquor regulator wished to be aggressive on these issues.
For example, the provincial laws governing possession and transportation make it a “provincial offence” to violate the restrictions or prohibitions. The laws that govern the prosecution of such offences also extend liability to those that assist or aid with the commission of an offence, particularly if that assistance is provided in pursuit of an ‘unlawful purpose’. As a result, and in theory, these provincial laws could also be enforced against a vendor if it assists in shipping alcohol to a customer in a province where there is a restriction or prohibition on the possession, importation or transport of alcohol.
In addition, there are other provincial laws that could apply to an interprovincial DTC alcohol transaction. For example, most provinces require a vendor of alcohol to obtain a liquor licence to sell in that province. Most also restrict the advertising and marketing of liquor to those that have a liquor license. There are also laws related to the application of sales tax that may apply if a product is sold to and then shipped to a resident of another province.
As noted above, normally provincial laws will only apply within the boundaries of the province. However, there is a complicated debate occurring right now as to the extent of a province’s ability to regulate interprovincial transactions including those arising from e-commerce. Generally, provincial laws have been held to reach transactions that cross provincial lines where there is a “real and substantial” connection to the province in question and where the regulatory requirement is within provincial jurisdiction.
To date, there have been mixed results in terms of the ability of a province to extend its ‘regulatory reach’ to interprovincial transactions depending upon the “subject matter of the dispute”[7]. For example, in the context of the regulation of product safety and of taxation, a sufficient connection has been established if an out-of-province vendor is marketing in another province, if the customer is located in that province and if the goods are shipped to that province[8]. However, in a case that dealt with an interprovincial sale of prescription optical products, the court found that there was an insufficient connection for the regulatory regime to apply[9].
These principles have not yet been applied to any cases involving liquor regulation and interprovincial alcohol sales. As such, it remains to be seen what conclusions the courts will come to. However, in the optical case (mentioned above), the court implied that the regulatory regime would have applied if the province had created a “commercial monopoly” over the products in question (which all provinces have done with respect to liquor)[10].
As a result and theoretically, it may be possible for a liquor regulator in another province to take the position that a winery or retailer cannot assist with the shipment of alcohol to a province where there is a restriction on possession, importation or transportation and cannot market[11] or sell to customers within that province since it might be reached by that province’s liquor regulatory regime and would not hold a liquor licence for that province.
At the current time, it is not clear to what extent provincial liquor regulators may seek to enforce these rules, how they would do so or, even, to what extent they are interested in doing so. The considerable media attention and public concern regarding this interprovincial trade issue may affect the likelihood of any enforcement action. As far as can be determined, there have been no cases dealing with prosecutions under the (now defunct) federal IILA that relate to interprovincial alcohol transactions. However, there have been some prosecutions under provincial laws including the Comeau case (where the customer was charged), an older case from New Brunswick[12] (again where the customer was charged) and a case in Newfoundland (which was withdrawn) where the shipping company was charged[13]. No cases could be found where the vendor was charged.
There are obvious issues related to the difficulty in detecting interprovincial transactions and in gathering the necessary evidence to pursue any enforcement. For some provinces (e.g. Ontario), it also may be possible to argue that the destination province is imposing impermissible discrimination against out-of-province manufacturers if it allows its own manufacturers to ship directly to customers but does not extend those same privileges to out-of-province manufacturers (see reasoning from Comeau case, discussed above).
In conclusion, it is important that vendors be aware of these theoretical risks and, particularly, be aware that they or their customers (if they live in a province with restrictive rules) could be subject to enforcement action. In addition, and following the removal of the federal restrictions, it is possible that regulators in such provinces may adopt a more aggressive approach if they detect sales to other provinces and/or if marketing initiatives are undertaken that obviously target a particular province[14].
Update (March, 2020): However, the current national emergency related to COVID may have reduced the likelihood of any enforcement related to interprovincial DTC. We are now in an (unfortunate) new world where delivery and e-commerce have become the preferred options for customers who are working and staying at home. In some provinces (e.g. PEI), retail liquor stores have closed. In others, hours have been reduced. In many provinces, the courts have closed for non-essential matters. As a result, while the legal situation has not changed, the likelihood of enforcement action may have. Contact a lawyer if you need more detailed or specific advice.
Considerations in Dealing with DTC Legal Issues
This discussion is general in nature and is designed to provide vendors with the information necessary to understand the compliance and legal issues that relate to interprovincial DTC shipments. Because this is a general discussion, it does not provide specific advice on whether or not any particular vendor should ship to a province or provinces.
Vendors may need to make decisions on these issues on a province-by-province basis after considering all of the various factors including their tolerance for risk. If a vendor determines that it needs or wants more detailed advice, it should obtain a legal opinion. Such an opinion could discuss the particular risks and potential consequences of shipping to a province with restrictive rules, assess the issues unique to that particular vendor, and review possible ways to structure any sales transactions so as to mitigate risk.
To provide context in assessing such decisions, vendors may wish to consider the experience of vendors in the United States, where similar inter-state shipping issues have posed problems that are comparable. For example, in the United States, vendors have usually chosen one of the following options:
- Ship only to those jurisdictions where DTC shipments are permitted (many jurisdictions in the U.S. require permits or licenses for inter-state shipments).
- Adopt policies such that the alcohol is sold, and title transferred, at the vendor’s location in their home jurisdiction. Any subsequent shipment of the alcohol has to be arranged by the customer.
- In some jurisdictions in the U.S., vendors have attempted to limit the risk of shipment for the vendor by transferring it to the customer. They have typically done so by taking the position that all inter-state shipments are made on the customer’s behalf and that any vendor involvement is done as his or her “agent”. Such vendors usually adopt “terms and conditions” for all sales under which the customer agrees to assume the interstate shipping obligations and associated risk[15]. Some U.S. lawyers do not believe that this approach is effective at reducing risk.
Sales Tax Issues
Finally, and in respect of all out-of-province shipments, the correct taxation treatment if a vendor ships alcohol directly from the vendor to a customer address located in another province, is for the vendor to charge the customer the sales tax that is applicable in the destination province and then to remit that tax to the appropriate taxation authority (i.e. HST to CRA and provincial sales tax to the provincial tax authority).
This approach would not apply if the customer either visits the vendor to purchase the alcohol or if the customer agrees to purchase the alcohol in the province of sale prior to arranging shipping of the alcohol themselves. In both such cases, the sales tax of the province of sale would apply because the customer has purchased the alcohol in that province.
[1] The exemption was introduced for wine in 2012 and then extended to include beer and spirits in 2014.
[2] The IILA prohibition still exists but now only applies to shipments of alcohol coming from outside Canada.
[3] 2018 SCC 15.
[4] A recent decision (Steam Whistle Brewing Inc v Alberta Gaming and Liquor Commission, 2018 ABQB 476) in Alberta found that preferential markups and grant programs for beer in Alberta were unconstitutional since they provided beneficial treatment to local in-province producers over those from out-of-province producers. The Alberta government has indicated that it will appeal this decision.
[5] Most provinces have different and more permissive rules for alcohol that has been brought back from another province “on the person” of the traveler (i.e. after a trip). All of these rules apply only to alcohol for personal consumption (i.e. not for commercial resale).
[6] Interprovincial shipping companies are federally regulated and may be immune from the operation of provincial laws that impair their ability to carry out their federal undertaking. Indeed, recently the Newfoundland government withdrew a charge against FedEx for shipping wine from a British Columbia winery to a customer in Newfoundland on the basis that the Crown admitted that the relevant Newfoundland laws were not enforceable against a federally regulated courier company.
[7] See Unifund Assurance v. Insurance Corp. of B.C., [2003] S.C.R. 63.
[8] See note 7, at paragraph 65.
[9] See Colleges of Optometrists of Ontario v. Essilor Group Inc., 2019 ONCA 265.
[10] See note 8, at paragraphs 125-127.
[11] These (admittedly old) cases upheld marketing and ordering restrictions: R. v. Western Canada Liquor Co. (1921), 60 DLR 217 (BCCA) and Benson and Hedges, [1972] 5 WWR 32 (BCSC).
[12] R. v. Gautreau (1978), 21 N.B.R. (2d) 701 (S.C. App. Div.).
[13] See note 6 above.
[14] It is also possible that provincial liquor boards could take other actions to ‘punish’ a vendor, particularly a manufacturer, such as denying it listings within the province.
[15] This is obviously a tricky issue from a customer service perspective and, if not explained effectively, could conceivably create complaints or even a legal claim from the customer against the vendor if the risks are not properly set out. Specific legal advice should be obtained if this option is considered.