The Canadian federal Budget item holds promise, but the devil will be in the details, and provincial liquor boards will resist.

In Budget 2019, released on Tuesday March 19, 2019 federal Finance Minister Bill Morneau made a commitment that could substantially open the door to interprovincial direct-to-consumer (DTC) shipments of Canadian wine (and beer, spirits, and cider).

In a small table on p. 119 of the Budget document, the government commits to eliminating the requirement that alcohol must be “consigned” to a provincial liquor authority when it is being shipped to another province.

The Canadian Vintners Association deserves credit for its advocacy on this front. The government’s Budget commitment should also be viewed in the context of last year’s R. v. Comeau decision by the Supreme Court of Canada. In declining to upend the Constitutional powers of provinces that happen to protect domestic industries, the Court was interpreted to be handing the federal government the “baton” to address interprovincial trade barriers – which are appropriately the purview of the legislative branch. (Further implications flow from this for the provinces – see final section below).

Winemakers across the country should be optimistic – but cautious – in celebrating this news. After all, alcohol is a regulated good at both federal and provincial levels, and there is complexity around implementation of any policy change, whether it be a fulsome or limited interpretation.

What details need to be settled?
While the intent of the statement is clear: “remove federal barriers to the interprovincial trade of alcohol”, there are several significant details left to be determined.

The governing federal legislation is the Importation of Intoxicating Liquors Act (1928) (IILA). Section 3(1) sets out the prohibitions on the interprovincial movement of alcohol, as follows:

To accomplish government’s commitment to “facilitate internal trade”, amendments to the IILA would need to specify the following devilish details:

• If the alcohol in question is restricted to Canadian-produced beverage alcohol (this is widely-assumed but not stated in the Budget reference)
• If interprovincial movement of alcohol is for personal use only, or if commercial shipments are also eligible (if commercial, to on-premise only? Or to on-premise and retail?)
• What means of access will be permitted (i.e. can a BC winery keep inventory in Ontario for direct distribution once orders are placed?)
• What – if any – restrictions on quantity may be placed on interprovincial shipments

These specifications would determine how extensive a DTC regime could be put in place. It could mean anything from “full commercial exchange of alcoholic beverages across Canada” (although I don’t think this is the intent), to a much more circumscribed DTC regime where consumers could order limited quantities for personal consumption from Canadian wineries (and craft breweries, distilleries and cideries).

What does it mean for Canadian wineries?
The apparent intent of the Budget commitment should mean that any winery in Canada will be able to – upon the passage of federal amending legislation – sell and deliver their wine directly to any consumer anywhere in the country.

It could be a game-changer for small-medium size wineries that do not or cannot participate in provincial liquor boards’ purchasing regulations and requirements. A boutique producer in Quebec or Nova Scotia would be able to fulfil an order from a customer in Ontario, Manitoba, Alberta… (British Columbia already permits this practice.) The scale of the shift for a winery’s sales channels is difficult to estimate, and would be partly a function of newly-created consumer demand in the other provinces and territories. Anecdotally, two Canadian wineries in different provinces estimate potential growth in the DTC channel of ~12-13 percent (from two percent of sales today to approximately 15 percent under unrestricted DTC).

The table below illustrates the potential impacts for a 20,000 case winery, selling wine in its DTC sales channel at an average price of $20 per bottle, with DTC representing two percent versus 15 percent of sales.

This could very significantly benefit the bottom line of small-medium size producers. For some, it could mean the difference between losing money and being profitable.

What are the provincial ramifications?
The provincial ramifications to an extensive federal legislation change allowing DTC are profound.

First and foremost is foregone tax revenue. Under the present system, when “imported” wine from another province touches the liquor board, provincial taxes and markups are charged – inflating the cost to the consumer in the “importing” province, while adding to the tax revenues transmitted to the Crown by the liquor authority.

If federal legislation allows Canadian wineries unrestricted DTC, inbound provincial liquor board revenue would suffer some foregone tax revenue. While it is inappropriate to attempt an estimate of foregone revenue for any given liquor board, two simplified scenarios are presented below, to give some idea of the possible scale of impact.

If 25 (Scenario 1) or 50 (Scenario 2) BC wineries were to begin shipping directly to Ontario consumers, and if Ontario represented 70 percent of the increase in DTC anticipated by wineries (2,100 cases from a 20,000 case producer), at a range of average retail prices, and if the Liquor Control Board of Ontario collected 35% of that under today’s system, the resulting “loss” to the LCBO’s tax revenue would be as shown in the table below.

No doubt the bottom line would attract the attention of the LCBO if the above “worst case” scenario proved realistic. But $11 million would represent 0.52% of the real-life dividend the LCBO transferred to the Ontario government from its 2017-18 operating year.

Even so, it is prudent to guess that provincial governments are reviewing their “domestic” taxation options (including shifting the tax burden onto different products or categories), and asking their liquor boards to provide new revenue scenarios in light of the federal Budget commitment to enable interprovincial trade in alcohol. Those calculations change dramatically if amendments to the IILA specify that restaurants or other commercial entities may also participate in ordering directly from wineries (or craft breweries, distilleries or cideries).

However, and this is the second and potentially more profound effect on provinces: their scope to recoup foregone revenue may be more limited than in the past in light of the Comeau decision.

The silver-lining finding by the Supreme Court of Canada (for those disappointed wineries who intervened hoping the SCC would open the way to interprovincial trade), was to clarify that a provincial law would not be acceptable under S 121 of the Constitution (1867) if “restriction of cross border trade … [is] the primary purpose of the law”. I leave it to Constitutional experts to weigh in on whether a provincial liquor tax increase or shift in response to a federal policy change with the stated objective of removing barriers to interprovincial trade might contravene the SCC’s newly articulated (as yet untested) principle.

In sum…
Two points in closing: first, as pointed out a BC winery owner, Canada’s wineries are businesses that are about more than just wine. They bring tourism, and incent the development of local supply chains, among other economic benefits. The subtext here is that if wineries are able to thrive, they will leverage additional economic activity.

Wineries, like all businesses, already pay substantial taxes (income, payroll, machinery & equipment etc.) in their home provinces, and an increasing amount to the federal government, thanks to its Budget 2017 increase of federal excise tax by 2%, and tying it to inflation in the coming years.

Wine (and beer, spirits and cider) is already taxed highly enough in this country. Easing one of the more onerous barriers to interprovincial sales should be completed as expeditiously as possible in the House of Commons this spring session. An October 2019 election looms, and if amendments to the IILA aren’t made before Parliament rises (June 21st at the latest) all bets are off…