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On June 19, 2018 Steam Whistle Brewing and Great Western Brewing scored an historic victory against the Alberta Gaming and Liquor Commission: Madam Justice Marriott of the Alberta Court of Queen’s Bench declared Alberta’s beer mark-up regime unconstitutional, and awarded the brewers over $2 million in restitution. The full decision can be read here. The decision also marks the first time a court has been called on to apply the Supreme Court of Canada’s recent statement of the law in?R v. Comeau?with respect to the proper interpretation of s. 121 of the?Constitution Act as it relates to liquor retailing and taxation. It will not be the last.

As this columnist has previously observed, Canada’s federal and provincial liquor laws have been under siege over the past couple years, and in many respects the?Steam Whistle?decision relies on the heavy lifting performed by those courageous liquor litigants that came before it, namely Gerard Comeau, Toronto Distillery Company, and Unfiltered Brewing Incorporated. Although Mr. Comeau, the Toronto Distillery, and Halifax’s Unfiltered Brewing were not successful in their respective court challenges, those decisions contain important analysis on this rich area of administrative and constitutional law, that until recently – as exemplified in the Supreme Court of Canada’s decision in?R. v. Comeau?– went largely unexamined.

Since the end of prohibition, politicians and the administrators of provincial liquor licensing regimes have proceeded with impunity fixing prices, mark-ups, and terms of licences without serious thought as to their legality. By burying the mechanics of the administrative regimes that facilitate liquor sales and manufacture in policy statements and boilerplate contracts foisted on manufacturers and retailers, the provinces have until now have been successful in keeping these important documents out of the public eye, and away from serious scrutiny. Fortunately, the tidal wave of liquor law litigation sweeping the nation is taking many of these documents out of the shadows, and putting them squarely in the light of day. Sunlight makes for an excellent disinfectant. The litigation process is no doubt giving bureaucrats reason to pause and get their house in order, as evidenced by Ontario and Nova Scotia’s relatively recent decisions to, rather hastily, amend their respective liquor control acts in the face of probing inquiring.

The Facts

At issue in?Steam Whistle Brewing Inc v Alberta Gaming and Liquor Commission?was the AGLC’s mark-up regime on beer.

Though the liquor market in Alberta is privatized, before any liquor makes its way to retailers, it first passes through the AGLC, a corporation established under Alberta’s?Gaming and Liquor Act. Even in provinces where the sale of liquor is largely, or in part, “privatized” the federal?Importation of Intoxicating Liquors Act prohibits entities other than the government from importing liquor on a commercial scale. As importer, the AGLC collects a mark-up on the liquor it then sells to private retailers.

The AGLC applies different mark-up rates to different classes of liquor. Historically, it has applied higher rates to beer produced by large, multi-national corporations than to beer produced by small, domestic “craft” brewers.

Prior to October 28, 2015, the lower mark-up rate applied to all craft beer produced anywhere in Canada. On that date, a new mark-up regime (the “2015 Mark-up”) came into effect, giving favourable treatment to craft beer produced in British Columbia, Alberta and Saskatchewan (the signatories to the?New West Trade Partnership Agreement), and thus adverse treatment to beer brewed elsewhere in Canada. Shortly thereafter, Steam Whistle Brewing Inc., an Ontario craft brewer, commenced an action against the AGLC, claiming that the regime was unconstitutional.

On August 5, 2016, the government of Alberta further altered its mark-up regime. Under the new regime (the “2016 Mark-up”), all brewers were charged the same rate. However, the Province of Alberta simultaneously created a related program which provided Alberta craft brewers with a grant identical to the difference they paid under the 2015 and 2016 Mark-ups. Great Western Brewing Company Ltd., a Saskatchewan craft brewer, then sued the AGLC.

Simultaneously Artisan Ales Consulting Inc., an agent for both domestic and international beers, filed a complaint under what is now known as the Canadian Free Trade Agreement, alleging that both the 2015 Mark-up and the 2016 Mark-up (inclusive of the “grant” regime) were inconsistent with Alberta’s obligations under the Agreement on Internal Trade because it discriminated against beer imported from other provinces as compared with beer produced in Alberta. A panel constituted under the Agreement on Internal Trade confirmed that the 2015 and 2016 Mark-ups were in fact inconsistent with Alberta’s domestic free trade obligations, and a May, 2018 appeal panel decision upheld that result in part. That decision can be read in full here.

In Steam Whistle, the breweries argued that both the 2015 and 2016 mark-up regimes were “taxes” that violated s. 53 of the?Constitution Act, and that the same constituted a barrier to interprovincial trade that violated s. 121 of the Constitution. They sought both declaratory relief and restitution of amounts paid under the Mark-up.

Are the Mark-Up Regime’s Unlawful Taxes?

Section 53 of the?Constitution?codifies the principle that there can be no taxation without representation, the effect being that any law that imposes a tax must originate in a legislature. This prevents taxation powers arising incidentally in delegated legislation. In theory this ensures legislative control and accountability for taxation.

The court in Steam Whistle found that the mark-up regimes had the characteristics of a tax (i.e. the mark-ups were imposed by a public body, to generate revenue for a public purpose and enforceable by law). Nevertheless, if in pith and substance the mark-ups were a legitimate regulatory charge, or a propriety charge, they could not be considered taxes.

The AGLC did not lead sufficient evidence to demonstrate that the mark-ups were valid regulatory charges. Though the mark-ups clearly generated revenue, it was unclear how that revenue was connected to the regulation of alcohol in Alberta.

The court went on to conclude, as did the Supreme Court of Nova Scotia in?Unfiltered Brewing Incorporated v Nova Scotia Liquor Corporation and the Attorney General of Nova Scotia?on similar facts, that the mark-ups were a proprietary charge, that is Alberta’s fee for the use of its services – in this case the AGLC’s role as importer and wholesaler of beer in the province. As the mark-ups were in pith and substance a proprietary charge for governmental services, they could not be considered a tax.

Importantly, the Court’s determination that the mark-ups were legitimate proprietary charges, and not taxes, was not the end of the matter. Steam Whistle and Great Western also argued that the mark-ups constituted barriers to internal trade in contravention of s. 121 of the?Constitution, which reads:

121. All Articles of the Growth, Produce, or Manufacture of any one of the Provinces shall, from and after the Union, be admitted free into each of the other Provinces.

Interpretation of Section 121 – The Comeau Doctrine

Madam Justice Marriott began her analysis with the observation that until recently, the jurisprudence addressing s. 121 of the Constitution was both limited and somewhat dated, but with the release of its decision in?R v Comeau, the Supreme Court of Canada has clarified the law and provided specific guidance on the interpretation of s. 121.

A party wishing to challenge the constitutionality of a law, in this instance the mark-ups, on the basis of s.121 must do the following:

  1. Establish that the law in essence and purpose restricts trade across a provincial border; and
  2. The primary purpose of the law is to restrict trade.

The Court without hesitation found that both the 2015 Mark-up and the 2016 Mark-up restricted trade across Alberta’s provincial borders, and that this was in fact the primary purpose of both regimes – to discriminate beer products based on province of origin and give a financial advantage to Alberta craft brewers. Therefore the mark-ups offended s.121 of the Constitution and the Court declared the 2016 Mark-up (the 2015 Mark-up no longer extant)?ultra vires.

To remedy the AGLC’s unconstitutional conduct, the Court ordered that by way of restitution it pay back to Steam Whistle $163,964.98, being the amount paid by it under the 2015 Mark-up and Great Western of $1,938,660.06, being the amount it paid under the 2016 Mark-up. To “prevent fiscal chaos” and allow Alberta time to consider its policy options, both the declaration and the restitution order were suspended six months.

The writer expects the AGLC to appeal the decision.

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