What he thought was nothing more than a casual dinner conversation a few years ago has led lawyer Mike Hook to where he stands in June 2016. Which is to say, in an industrial unit north of Toronto, surrounded by pallets of glass bottles from Germany, wooden barrels from New York, Tennessee and Portugal, a shiny stainless steel Still Dragon-brand still from China and the din of construction as workers around him build a retail storefront and a multi-use space that will serve as laboratory, bottling and labelling room. Hook had told his dinner companion he’d be willing to provide legal services in exchange for share capital. Three years later, and with a grand opening just around the corner, Hook is counsel to, and part owner of, Last Straw Distillery.
Peer back into Ontario’s history and you’ll discover that prior to Confederation, when Upper Canada had only 15,000 residents, it had more than fifty licensed whisky stills. Fast forward to 2016, with a population nearly one thousand times larger, and you’ll learn there are fewer licensed distilleries in the province than there were one hundred fifty years ago. As compared to wine and beer, government regulation of spirits production and sale is notoriously heavy-handed. But a slew of new distilleries have opened in recent years, and Ontario appears to be in the early stages of a distilled spirits renaissance – and some enterprising lawyers are at the heart of it.
"Even in law firms, the way you make partner now isn’t the same way you did it twenty years ago, so you have a class of people who are relying on themselves a little more. You’ve got to have people who are willing to take risks to move the ball forward.”
The last twenty-five years have seen a flowering of craft and small-scale alcohol producers in Ontario. But as breweries and wineries have proliferated, distilleries – makers of “spirits” such as whiskies, gins, vodkas and liqueurs – have largely been left behind. Which is odd – some of the best-known whisky brands in the world (such as Crown Royal and Canadian Club) are Canadian, and whisky makers have been an integral part of Canada’s history for nearly two centuries (for proof (pardon the pun), look no further than Toronto’s Distillery Historic District, the former home of The Gooderham and Worts Distillery, once the world’s largest).
A recent Ontario beer guide identified over two hundred breweries in the province, and the Ontario Craft Brewers association alone counts more than sixty members. VQA Ontario identifies more than 125 Ontario wineries who meet the VQA’s origin and quality standards. The Ontario Craft Distillers Association, by comparison, consists of a grand total of only fifteen members, not all of whom are yet selling to the public.
There is little mystery about why there are so few Ontario distillers: a restrictive regulatory environment has meant that starting a new distillery can be a risky, even foolhardy, business undertaking. Spirits (what some might still refer to as “hard liquor”) are subject to very different regulation under Ontario law as compared to wine and beer. Distilleries, unlike wineries and breweries, are not permitted to sell directly to bars or restaurants. Despite recent reforms which will see expanded sale of beer and wine in grocery stores, that expansion will not cover the sale of spirits, and no one anticipates that changing any time soon.
For decades the Alcohol and Gaming Commission of Ontario prohibited distilleries from having an on-site retail outlet unless they owned a still with a capacity of 5,000 litres. For start-up distilleries, that enormous volume was difficult to achieve, preventing them from operating the kind of walk-in storefront which has generated so much goodwill (and revenue!) for small breweries and wineries around the province. Changes to the legislation in 1994 allowed distilleries to sell their product on-site subject to obtaining a licence from the Alcohol and Gaming Commission of Ontario. However, as a condition of obtaining the licence, the distillery must agree to remit nearly half of the retail price of every bottle sold to the LCBO.
The structure of the Liquor Control Act and Liquor Licence Act made sense when originally enacted in the late 1920s to suit the needs of politically-connected, well-capitalized businessmen, but they struggle to accommodate contemporary enthusiasms for local start-ups.
It is the government’s share of revenues which is perhaps the most punishing difference in treatment between distillers and their brewing and fermenting competitors. After paying excise taxes and other participations owing to various levels of government, the portion of sales kept by distillers is remarkably low: as Peter Kuitenbrouwer recently reported in the Financial Post, of the amount of money a customer pays for a bottle of alcohol, a winery gets to put about 80% in their pocket, a brewery about 50%. Distillers? Around 20%. The balance is collected by the federal and provincial governments. Hook contends that the existing regulatory scheme is an anachronism – the structure of the Liquor Control Act and Liquor Licence Act made sense when originally enacted in the late 1920s to suit the needs of politically-connected, well-capitalized businessmen, but they struggle to accommodate contemporary enthusiasms for local start-ups.
The robust legal regulation of spirits has long been justified on the basis that the higher alcohol content of distilled spirits results in different public health concerns, necessitating differential treatment. The equation is relatively simple in the abstract: wider consumption of beverages with higher alcohol content results in increased social costs such as alcohol-fuelled assaults and drunk driving. In the government’s view, the AGCO and LCBO have a social responsibility mandate to moderate alcohol consumption, especially with respect to spirits. High prices, lower revenue for distillers and restrictive distribution policies are thus part of a calibrated set of tools meant to dampen the production and consumption of beverages with higher alcohol content. (The government is also up-front about one other aspect of alcohol regulation: it is there to raise revenue for government spending.)
When lawyers Jesse Razaqpur and Charles Benoit started The Toronto Distillery Co. in 2012, it was the first new distillery to be licensed in the city since 1933. They didn’t anticipate that within a few years they would be facing off with the province in the Superior Court of Justice. But that’s exactly what happened when they sought a declaration that Ontario’s revenue collection policy for spirits is unconstitutional on the basis that it constitutes a tax which had never been voted on by the legislature.
Friends from their days in high school in Ottawa, Jesse and Charles run a distillery with more than its share of verve and wit. In addition to offering tours of their facility in Toronto’s Junction neighbourhood, customers can purchase their own custom whisky barrel aging kit (complete with charred American oak barrel). The distillery prides itself on offering an emphatically local and organic product – they generate the concepts for their products themselves and the raw ingredients (from single-grain organic rye to beet spirit derived from fermented sugar beets to their “Applejack” distilled apple cider) are sourced from Ontario farmers. “Everything we make, we try to have an Ontario connection to it,” say Charles, “our juniper comes from Renfrew County near Ottawa, our grain is from up near Schomberg and the apples are from Innisfill.”
In response to the observation that it seems that the demographic of Ontario lawyers who also own distilleries skews awfully young, Jesse notes that “young people are sometimes in a position to see what’s wrong with a situation and do something about it”. The idea to challenge the regulatory environment came from Charles, who gained business and legal insight in the challenges of highly-regulated environments while practising administrative and customs law in Washington, DC. His eyes were opened to the possibilities of local-focused whiskies when he went to a liquor store featuring the products of a local distillery – a conversation with the owners of the distillery eventually resulted in Charles becoming counsel to the American Distilling Institute. Jesse offers that millennials are more entrepreneurial than their predecessors almost out of necessity: “what the Baby Boomers had has disappeared now … even in law firms, the way you make partner now isn’t the same way you did it twenty years ago, so you have a class of people who are relying on themselves a little more. You’ve got to have people who are willing to take risks to move the ball forward.”
At the beginning of April, Justice Akhtar of the Ontario Superior Court of Justice handed down his decision, rejecting the arguments of Toronto Distillery Co. Limited. What might seem a crushing loss is instead being touted by the company as simply one battle in a war which they might yet win. Ontario MPP Tim Hudak represents the riding of Niagara West, which is home to two small distilleries (Forty Creek and Dillon’s). Hudak has mounted something of a crusade championing “microdistillers” and introduced a private member’s bill in the legislature which would loosen many of the current restrictions, and permit activities that wineries and breweries take for granted, such as the ability to sell tastes of their product on the premises. The current Liberal government announced in connection with its 2016 budget that it would introduce legislation which would permit direct delivery to bars and restaurants and loosen the restrictions around on-site distillery stores. Charles and Jesse are optimistic not only about the legislative changes, but also their chances on appeal.
Separate from the Ontario court and legislative developments, a recent decision of the New Brunswick Provincial Court may herald even farther-reaching changes. When the local RCMP detachment stopped Gérard Comeau’s vehicle in 2012, few could have predicted that the six two-fours of beer, three bottles of liquour and assorted other bottles and cans found in Comeau’s trunk would lead to a court decision that resurrected a long-ignored provision of the Constitution and defiantly thumbed its nose at a venerable line of Supreme Court of Canada jurisprudence. Comeau was fined for importing alcohol in contravention of New Brunswick’s own Liquor Control Act. His defence team, supported by the Toronto-based Canadian Constitution Foundation, successfully argued that the New Brunswick legislation – itself the offspring of the federal Importation of Intoxicating Liquors Act which reserves to the government of each province the right to sell alcoholic beverages – was unconstitutional because it contravened Section 121 of the Constitution Act, 1867, which, according to the decision, prohibits trade barriers between provinces. If other courts follow suit, the sale of alcoholic beverages across provincial lines would be vastly simplified. The decision was hailed as a victory for free trade in newspaper editorials across the country, though its impact remains to be seen, as New Brunswick has announced an intention to appeal and some observers, including Toronto lawyer Gary Gillman, a noted writer on the history of bourbon and whisky in North America, caution that the reasoning in the decision may not withstand appellate scrutiny.
...liberalization of Ontario’s spirits regulation will not only result in more fairness, but will ensure that Ontario doesn’t keep missing out on the opportunities presented by the craft distilling revival: more local investment, more employment, even more purchases of Ontario-grown grains and other produce...
In the meantime, Mike Hook and his partners continue to work towards a July grand opening. His view is that liberalization of Ontario’s spirits regulation will not only result in more fairness, but will ensure that Ontario doesn’t keep missing out on the opportunities presented by the craft distilling revival: more local investment, more employment, even more purchases of Ontario-grown grains and other produce to serve as raw ingredients. Hook muses that the rye whisky Last Straw will eventually bottle is his “baby” – he has grown adept at identifying the processes and ingredients his competitors use simply by nosing a tumbler of spirits, and he is putting that knowledge to work in crafting a unique flavour profile. Last Straw aims to deliver a participative, transparent product to its customers. Hook envisions “crowd-sourcing” guidance from customers who will give feedback from tasting sessions as to their preferences. He’s looking forward to putting his rye to that discerning test.
For Jesse and Charles, after spending a couple of years focusing on filling an initial, surprisingly large order from the LCBO, they’ve opened their storefront and are looking forward to expanding their bottled offerings and making The Toronto Distillery Co. a destination for spirits enthusiasts to explore and learn.
For Hook, his hard work is paying off in other ways as well. He thinks his dual role as a lawyer to entrepreneurs and an entrepreneurial lawyer has resulted in him being able to provide his clients with better advice. He’s more empathetic to the stresses and considerations his clients struggle with and his own experience in navigating a complex regulatory environment has enabled him to cultivate a practice servicing clients in the alcoholic beverages market. As we survey the productive jumble in his warehouse, with the sour-sweet aromas of fermenting mash in the air, he says with some satisfaction of his interactions with his clients, “now I understand the emotional attachment they have to their businesses”.
About the Author
Bob Tarantino is a partner with Dentons Canada, where he focuses his practice on the interface between the entertainment industries and intellectual property law, with an emphasis on film and television production, financing, licensing, distribution, and IP acquisition and protection.
Bob is a member of the Ontario Bar Association Board of Directors and Council and is past chair of the OBA’s Entertainment, Media and Communications Law Section. Bob is an adjunct lecturer at Osgoode Hall Law School and holds graduate degrees in law from Osgoode Hall and the University of Oxford.