How to Start a Distillery in Ontario

Here’s an article that’s been a long time coming. On top of my law practice, I’m also a founder of Last Straw Distillery, an award-winning micro-distillery near Toronto, Ontario. I started out as the company’s lawyer, and as with any small business, that role has slowly expanded to a litany of other tasks…. But the lawyer role remains central. I’ve also helped several other alcohol producers through the business startup and licensing process, so the contents of this article are hard-won knowledge. It’s a long read, but it’s a no bullshit assessment of the challenges you’ll face in getting your distillery off the ground.

The first thing you need to know about distilling is that it’s heavily regulated. The laws on spirits are even more dense and difficult to navigate than the regulations on beer or wine. This is, of course, because in the inestimable wisdom of successive governments since the end of prohibition, spirits are evil. For some strange reason (probably at the behest of the beer lobby), some Scottish Presbyterian politician in Ontario decided that the ethyl alcohol in hard liquor should be treated differently than the ethyl alcohol in wine and beer.

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Much like we’re seeing right now with the legalization of marijuana in Ontario, the laws are written by and for established, well-connected, well-funded big businesses. The time, expense, and expensive advice involved in navigating the system are designed to limit competition. For spirits, the government at the end of prohibition wrote the rules in a way that would make it difficult and expensive to start and run a distillery, and impossible to start on a small scale. As a result, Ontario had only a handful of big distilleries for nearly 80 years. It’s only recently that a few dedicated masochists set out to buck the trend. Through their dedicated efforts, some of the barriers to entry were lowered (slightly), and the Ontario distilling renaissance began.

I’m writing this article as an overview of the major steps involved in starting a distillery in Ontario, Canada. I imagine that most of the steps are mirrored in many other jurisdictions, but the nuances of the regulations will differ. As with any business, you certainly don’t need a lawyer to help you get it started, but a good lawyer will reduce the time from startup to sale, and deal with a lot of the headaches that can come from dealing with five or six different government departments at once.

Let’s get started.

Division of Powers

Booze has the unfortunate distinction of being one of the few market sectors that is regulated by Federal, Provincial, and municipal governments. Technically, municipal governments are a subset of the Province, but practically speaking, it’s another layer you’ll have to deal with.

The Federal government’s primary concern with alcohol regulation is tax. As a luxury item, spirits are subject to Federal tax under the Excise Act. This tax accrues from the moment a drop of alcohol is manufactured, but only becomes payable when the alcohol is sold. More on this later. The Federal government also regulates the production, and labeling of spirits through the Food and Drugs Act and its Regulations, Consumer Packaging and Labelling Act, Consumer Packaging and Labelling Regulations, and the Spirit Drinks Trade Act. Oh, and if you’re thinking about selling your products internationally, the Federal government also regulates and licenses cross-border trade, where a different set of taxes and fees apply, on top of those imposed by the jurisdiction you’re exporting to.

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If that bundle of joy isn’t enough for you, the control of liquor is the responsibility of the Province. The Ontario government has created the Alcohol and Gaming Commission of Ontario (AGCO) to control the production and sale of spirits in Ontario. The AGCO then created the Liquor Control Board of Ontario (LCBO), which has an absolute monopoly on spirits sales in Ontario. The AGCO implements government policy on spirits through the Alcohol and Gaming Regulation and Public Protection Act, the Liquor Control Act, and the Liquor License Act. As a manufacturing business, you’re also subject to the rules of the Electrical Safety Authority under the Electricity Act, as well as Ontario’s Building Code and Fire Code.

Lastly, as with any business, spirits producers are subject to the planning and zoning regulations of the municipality you’re in. In some municipalities, there’s a double layer of government – at the regional and town level.

Perhaps the worst part of working through the byzantine maze of regulations are the odd ways in which they interact. As I mentioned, the system was not developed with ease of navigation in mind, and there’s no clear, direct path through them. It’s common for applications to be caught in a Catch-22 of two levels of government refusing to process your application any further without the approval of the other coming first. In my experience, different offices of the same government branch interpret the exact same rules differently (and sometimes incorrectly), and impose different requirements. It takes time and patience to work through these things. Budget at least six months, or more realistically one year to work your way through this stuff. When I say budget, I mean both time and money – as you’ll be spending money on rent for a space you’re not allowed to use while your applications are in progress.

Now that you’re scared, let’s walk you through what it takes to get from idea to open for business.

Form of business

Distilleries can be any form of business, but if you don’t incorporate it, you’re a dumbass. When setting up your corporate structure, two factors will be relevant to the government:

  • Who controls the corporation; and
  • Who are directors, officers, or holders of at least 10% of any class of shares

Control comes into play in two ways. First, the government wants to know if the applicant is controlled by a company that is already licensed to produce spirits. Each distillery with a Provincial license is allowed one bottle shop at its distillery. An existing manufacturer can invest in starting another distillery, but special permission is required to open a bottle shop at the second distillery. Once you have that special permission, you can sell some products from the first distillery at the second one, but not the other way around. Weird, right?

Secondly, and most importantly, the government wants to know who are directors and officers of the business, and who owns 10% or more of any class of shares of the corporation. Because spirits are evil, the government wants to make sure that the people who own and operate distilleries are at least 19 years old, financially responsible, and of good character. If you own your shares through a holding company, you have to disclose the ownership and management of that holding company, and so on.

In my experience, simplicity in the way you structure the business helps a great deal. The folks reviewing your applications at the CRA and AGCO are not lawyers, and don’t understand the finer points of business ownership. If they see something they don’t understand, they’ll flag it, and get legal advice before proceeding. This, of course, takes time. The more complicated your ownership structure, the longer your application will take.

Zoning & Planning

This is probably the biggest, and most unexpected pain in the ass of the whole process, and where your lawyer will earn their keep. It is absolutely essential that you choose a location that will allow your business model to operate. Because distilleries are still relatively rare when compared to breweries and wineries, most municipalities don’t know how to deal with you. When in doubt, town planners and town councils will err on the side of what will get the municipality the most revenue in development fees. If you ask the municipality whether or not a distillery is allowed, you’ll probably end up paying to play. The only thing you actually need the municipality to do is to sign off on your bottle shop. Some municipalities may require a business license before you can set up shop, but most don’t.

Once you know where you want to start your distillery, and before you start searching for properties, get your lawyer to review that municipality’s planning and zoning bylaws, and provide an opinion. The lawyer’s opinion should tell you what zoning in that municipality allows a distillery to operate. The lawyer will also tell you if a variance or zoning change is required in order to operate. Also, believe it or not, some municipalities still have “dry” (no alcohol allowed) or “damp” (retail sales allowed, but not by the glass) neighbourhoods. The status of the neighbourhood may not prevent you from manufacturing, but it can prevent you from selling through a bottle shop, or an on-site bar. Both the CRA and AGCO will consider whether you’re contravening municipal bylaws, and whether your premises comply with the CRA and AGCO’s regulations. The lawyer’s opinion is super valuable in demonstrating that you’ve ticked all of the boxes.

Lastly, before you sign your lease or buy the property, take a good long look at what’s in the area. If any schools, churches, parks or playgrounds, community centres, or libraries are within a one kilometre radius, you may not be allowed to open a bottle shop or on-site bar.

Building/Fire Code

Once you have a location, you have to build it out. Obviously, all of your construction work must be done in accordance with the Ontario Building Code. Make sure that whoever is doing the work knows and complies with that code. Generally, Building and Fire Codes are dictated by the Province, but enforced by the municipality. Fire inspectors can enter anywhere, at any time, and can shut you down on the spot if you’re not in compliance, so don’t cut corners here.

Distilleries in Ontario are considered “High Hazard Industrial Occupancy” under the Fire Code. That means the building can’t also be used for public assemblies, residences, care facilities like hospitals or clinics, or for detention. If the occupancy load of the building is to be more than 25 people, the building requires emergency planning under the Fire Code. The Fire Code rating (F1) triggers specific requirements in the Building Code for fire-resistant barriers and insulation, emergency exits, and the like. It also triggers requirements in the Electrical Act, requiring the sign-off of an Electrical Safety Authority (ESA) inspector.

ESA sign-off is another odd bird. For all the distilleries I’ve helped through the process, I’ve never seen the same standard applied twice. Each inspector seems to interpret the requirements differently. The inspector’s requirements will play into your build-out – ventilation, type of wiring and electrical fixtures, signs, fire suppression systems, and even separating equipment in different fire-resistant rooms, for example. Find an inspector, and get their direction before you start building. Pass that direction on to the person doing the build out work, and make sure they build to that standard.

Lastly, if you’re looking to open an on-site bar, you’ll need the sign off of the Fire Department. Exits, fire suppression, and signage are all things they’ll look at.

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Federal Licensing

Once you’ve got an appropriate space locked down, you can then apply for your Federal licenses. The licenses are tied to the location. You have to occupy/possess the premises before your application will be processed. This means you’re paying rent on a space you can’t use while your applications are being processed – as long as 18 months in some cases.

The Canada Revenue Agency administers the licensing of distilleries under the Excise Tax Act. The licenses are issued for a two year period, and must be renewed. At the time of writing, there are no fees for the federal licenses. There are three key licenses – all of which can be applied for on the same form – which will cover off most things distilleries want to do.

Spirits License

The spirits license is the main one. It’s what permits you to produce or package spirits (beverage alcohol that isn’t wine, and is over 11.9% alcohol – otherwise it’s beer) in Canada, and to possess a still. If you’ve applied for a spirits license, you can possess a still, but can’t operate it. Home distilling is illegal. Without this one, you’re a bootlegger, not a distiller – and you won’t be able to secure any Provincial licenses either.

Excise Warehouse License

If you’re going to be storing spirits – whether in bulk, aging in barrels, or sitting in bottles waiting to be sold – you’ll also need an Excise Warehouse License. This delays the payment of Excise Tax on the spirits until they’re removed from the warehouse.

You will need to post security for the Excise Tax. The amount of security depends primarily on how many litres of absolute alcohol you plan to store in your warehouse. The CRA wants to make sure that even if you go bankrupt, you can still pay your Excise Tax. The minimum is said to be $5,000.00, however the lowest requirement I’ve seen is $10,000.00, and that’s for small distilleries dealing in white spirits – meaning they’re not aging large quantities. If you’re making whisky, rum, brandy, and other aged spirits, plan on posting way more. Security is typically posted by bond (insurance), though you can post negotiable instruments (cash, Canada Savings Bonds, etc) as security as well.

User’s License

The user’s license allows you to transfer bulk alcohol between booze producers of a different type. If you’re planning on buying in bulk alcohol to distill, age, modify, or repackage, you’ll probably need this. I say probably, because different CRA personnel apply the policy differently. You definitely need a user’s license to transfer bulk beer or wine from licensees. You might need a user’s license to buy bulk spirits – such as a neutral grain, or aged whisky for blending. Regardless of what your CRA agent says, some producers won’t transfer bulk spirits to you without seeing your user’s license, so it’s usually a good idea to get this license just in case.

Application

The application process takes anywhere from 3-18 months, depending on your agent, how prepared you are, if there are any issues with the application or the people involved in your business, and how busy the agents are. There are a few parts to the application:

  • L63E license application form
    • This includes details on directors and officers of the business, and will result in a background check on both criminal and financial sides
  • Business plan including:
    • Business industry overview;
    • Operating plan;
    • Human resources plan;
    • Financial plan or sources of funds;
    • Sale and marketing plan;

Your business plan must include 3 year projections of the litres of absolute alcohol you expect to produce, and the amount of what you produce that will be stored in bulk for aging, compared to what you expect to sell. This is what the CRA will use to calculate your security requirements.

You’ll also need to figure out how you’ll post security for the excise. Most distilleries will buy a bond, rather than posting the cash themselves. It’s a monthly expense, but your capital will be more useful elsewhere. The CRA will require the sealed original bond.

Once you’ve submitted the application, the CRA will get in touch with you pretty quickly to start the process. They’ll schedule a site visit, so they can inspect your facility to ensure it’s suitable (they’re primarily concerned with physical security – if someone steals your spirits, they’re stealing tax dollars too!). You don’t have to be fully built out by this point, but you must at least have the premises and a floor plan.

They’ll also confirm that you’ve ordered your still and instruments for measuring alcohol content. Your instruments must be inspected/calibrated by the CRA to ensure they’re accurate, which involves a fee. They may conduct a second site inspection before granting the license.

Once the license is approved, you’re finally able to produce spirits! Crank that still up, and get to work!

Provincial Licensing

Bet you thought the hard part was over. Well, it’s not. While the CRA licenses will allow you to produce and store alcohol, if you want to sell it in Ontario, you’ll need another set of licenses and authorizations from the Provincial government, which are administered by the AGCO.

The Provincial Manufacturer’s License is what allows you to sell spirits in Ontario. It takes about 1-3 months to process, if all goes smoothly, and costs $2,540.00 for 2 years, or $5,040 for 4 years at the time of writing. The application requires:

  • Completed application form
  • Business plan – generally the same one that you used for your CRA license will do, plus:
    • Floor plans for your facility
    • Details on planned sales channels
    • If you’ll be buying in mash, low wines, or bulk spirits from other producers
  • Municipal authorization form
  • Copy of CRA Spirits License
  • Lab test results on at least one product
  • Copy of business name registration
  • Application fee (non-refundable)

The AGCO will schedule a site inspection of your facility. As with the CRA, different agents will focus on different things, and sometimes the agent will waive the site inspection altogether.

Bottle Shop

If you want to operate a retail store on site, then you’ll need a retail store authorization from the AGCO. The AGCO delegates the administration of this to the LCBO. There’s no fee for the application, but you must include:

  • Municipal Information for a Retail Store Authorization form
  • Site plan detailing the production site and the proposed retail store location
  • Floor plan of the proposed retail store including square footage
  • If ownership and control of the production site is shared with any other licensed manufacturer – supplementary documentation demonstrating substantial ownership and control of the production site
  • A copy of each notification letter (if applicable) sent to any place of religious assembly, schools, public parks and playgrounds, community centers or libraries within 1 km of your proposed store location and copies of any responses/objections

If your bottle shop is approved, then you’ll need to sign a non-negotiable contract with the LCBO about how the bottle shop will be operated, and how you’ll pay the Spirits Tax. One of the most time-consuming parts of this contract is waiting for the LCBO to sign it – as only the President of the LCBO signs them, and does so about once a month. Schedule your grand opening accordingly!

Direct Delivery

If you want to deliver directly to bars & restaurants or to duty free shops, you’ll need separate direct delivery authorizations for each. The process is much the same as for a bottle shop, and results in another contract.

There are also separate licenses to sell spirits by the glass, and to operate an on-site bar or restaurant of your own, but we’ll save those for a future article.

Summary

As you can tell, it’s an awfully long and tedious process to get a distillery from the idea stage into operations. The typical timeline is 6-18 months, based largely on factors outside of your control. In my experience, each agent of a regulator that gets its hands on your application views the requirements differently, so there’s often a fair bit of back and forth involved.

TL;DR? Here’s Mikes’ 9 “Simple” Steps to Starting a Distillery in Ontario

  1. Incorporate
  2. Lawyer’s opinion on zoning/planning
  3. Sign lease
  4. Submit CRA license application
  5. Hire ESA inspector, get requirements for buildout
  6. Build
  7. Get CRA licenses, get municipal authorization
  8. Apply for AGCO licenses & authorizations
  9. Profit

Of course, having someone to turn to who’s been through the process before can help to grease the wheels. I’ve helped several distilleries through the startup process, and I’d be happy to help yours too. Drop me an email, and let’s talk!

 

Mike Hook
Intrepid Lawyer
http://intrepidlaw.ca

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Post-flood Tips for Residential Landlords

Over the past 24 hours in Toronto, nature has thrown a full set of metric wrenches at your nice, safe rental revenue stream. The messages from your tenants are filtering in as they’re discovering the extent of the flood damage, and you’re lying awake imagining your savings spiraling down the drain with the last of the water. This article will lay out the basics of what you’re on the hook for as the landlord, and what the tenant has to fix themselves.

The simplest explanation is that you are responsible to fix what you provided to the tenant, while the tenant is responsible for what they put in the space. The tenant can’t sue you for their losses if the cause of the flood was beyond your control, so long as you fulfill your duties as a landlord. There are some exceptions, which I’ll discuss later on. Your damages – the repair costs you pay out – may be covered, in whole or in part, by the insurance you carry on the building.

The law is designed to protect tenants, and gives pretty heavy incentives to landlords to get the repairs done quickly and effectively.

Responding to a Flooding Complaint

Ontario’s Residential Tenancies Act requires you, as the landlord, to maintain your buildings and rental units in a state of good repair, and fit for habitation. This includes complying with health, safety, housing, and maintenance standards. Obviously a flooded or water-damaged unit is not in a good state of repair, and may even be unfit for habitation. You need to act quickly to assess the damage, and start taking corrective action – not only legally, but to minimize your financial cost of flood damage.

In an emergency, you don’t have to give the standard 24 hours written notice to the tenant that you’re entering the unit. Checking to make sure that the flooding has stopped and is receding could be such an emergency. If you’re going in later to inspect the unit to see if it’s in a state of good repair or fit for habitation, you’ll need to give them 24 hours notice, or get their consent to go in right away.

What if It’s Unfit to Live In?

If the unit is not habitable, it’s up to you to provide them with a place to live while it’s repaired. This could be a vacant unit that you own, or a hotel – which can get expensive – so you’ve got incentive to get the repairs done quickly. If you’re not planning on restoring the unit immediately, you and your tenants could agree to terminate the lease as of the date of the flooding. You must then give them an abatement of rent from the flood day forward. The discount on rent could be total, if the whole unit is uninhabitable, or partial if only part of the unit can’t be used. The tenant must agree to the termination of the tenancy. If they don’t agree, you would have to go to the Landlord-Tenant Board to plead your case that the lease should be ended.

What Do You Have to Fix?

If you decide to repair the unit, you’re responsible to return the unit, fixtures, and building, to a habitable state. This includes the common areas, though your priority for the repairs should be the units. You must repair or replace the walls, floors and floor coverings, ceilings, windows, doors, fixtures, heating, lighting, ventilation, plumbing, wiring, garages, patios, walkways, appliances, and anything else that you provided to the tenant. If you’re renting it furnished, you’ll need to replace or repair any damaged furniture as well. If you’re replacing appliances or furniture, you don’t have to provide “same or better” quality – only ones in good, working condition.

Keep receipts for all of the costs you incur in the repair process, including the cost of housing the tenants if it comes to that. It’s all deductible business expenses.

If you’re not anywhere near the property, you can authorize your tenant to organize the repairs to the unit, and have the invoices sent to you. Make sure they provide you with multiple quotes for the repairs, and keep records of all the costs. If you take unreasonably long to respond, or to get the work done, your tenant may be entitled to bring in contractors and you’ll still have to pay for them. What counts as “unreasonably long” depends on a lot of factors, and is a legal grey area – if you find yourself in this situation as a landlord or a tenant, give me a call. The moral of the story is, get the work done quickly, and you’ll have more control over who does it and how it’s done.

Insurance

You should also report the flood to your insurer right away. Most insurance companies insure floods separately from other risks to property, so if you’re not paying for flood coverage separately, you may be out of luck. Most home insurance policies will not cover floods caused by storm surge, although depending on how the flood occurred, it may be fall under sewer backup insurance. If you have building or contents insurance. those policies may include floods coverage as well. Read the policy that they provided to you carefully to see what is covered. Many insurance companies will automatically reject all claims after a widespread event like a flood as a cost-saving measure, so if you think your policy has you covered, you may have to fight it. Consider consulting a lawyer for an opinion on what your policy includes.

You should also advise your tenants to report the flood to their own insurer. Their tenant insurance may help them minimize their losses, though flood coverage is usually separate for tenants as well.

Exceptions

If the flooding was caused or contributed to by a faulty design or poor workmanship in the building, you may have grounds for a lawsuit against the designers or craftsmen who built the property. This could include the failure to grade the land around the building so that water drains away from the foundation.

You may also have grounds for a lawsuit against the tenant if they did something that caused or contributed to the damage – such as blocking drains, leaving basement windows open and so forth.

If the flooding was caused or contributed to by your own actions – such as failing to maintain the building or unit properly – your tenant may have grounds for a lawsuit against you for their damages.

If any of the above apply, you should consult a lawyer as soon as possible to discuss the merits of your case.

 

 

 A Responsible Landlord Will…

Deal with your tenant

  • Respond quickly to the tenant’s report of flooding – inspect the damage, and do what you can to contain or stop the flooding.
  • Take immediate steps to minimize health risks – removing the water, drying out the unit.
  • Explain that you will repair the unit, but their possessions are their own responsibility.
  • If the unit is uninhabitable, provide them with a place to stay and an abatement of rent.
  • If you’re not repairing the unit right away, provide them with a rent abatement.
  • Keep them up to date on the repair plans.
  • Encourage them to report the damage to their insurer.

Deal with your property

  • Start repairs as soon as possible – if you’re acting responsibly to make major repairs, you don’t need to give a rent abatement.
  • Ensure that vital services still work – hot and cold water, fuel, electricity, gas, and heat in wintertime.
  • Determine the cause of the flooding, and make repairs or improvements to prevent it from reoccurring.
  • Repair the units first, then common areas that the tenant has use of – garage, laundry, stairways, walkways, gym, etc.

Deal with your insurance company:

  • Review your policy to see if you have coverage for floods or sewer backup.
  • Notify them of a claim as soon as possible.
  • Be available for adjuster to come and inspect the property, and coordinate entry to the unit with your tenant.
  • Keep receipts for all expenses related to flood – housing the tenant, heaters to dry things out, materials, labour, etc.
  • Be prepared for insurer to deny claim initially – don’t give up if you think it’s covered by your policy.
  • Consult with a lawyer if there is a dispute about coverage.

Obviously not every case will be caught by what I’ve discussed here, but now you know the broad strokes of what’s expected of you. Good luck with your repairs – hopefully they’re as painless as possible, and you leave a trail of satisfied tenants in your wake. When in doubt about landlord-tenant law, ask a lawyer. I happen to know a guy…

Mike Hook
Intrepid Lawyer
Email: mike@intrepidlaw.ca
Twitter: @MikeHookLaw