One objective of the efforts to legalize cannabis is to displace the illicit market. Much attention in this respect has been focused on the proposed rules regarding licences, taxes and security clearances. Less discussed is a planned tracking system aimed at keeping contraband out of the regulated market, and keeping track of legal cannabis from seed to sale. This article outlines what is currently known about the tracking system, including reporting requirements, rationale, timelines and who may be subject to relaxed rules. Since many aspects of the regime are not yet known, this article considers what the Canadian system could look like in light of existing, analogous tracking systems.
What and why?
The federal government's proposed Cannabis Act1 provides for the Minister of Health to establish a national tracking system. Among other broad strokes, the proposed Act sets out the system's purposes. In addition to the obvious one of enabling the tracking of cannabis, the goals are preventing legal cannabis from being diverted into the illicit market, and keeping illegally-grown product out of the legal supply.2 It will also serve to facilitate any product recalls that may arise.
Who will be impacted?
Any person involved at any stage of the supply chain may be required to report into the tracking system, including persons that "produce, test, package, label, send, deliver, transport, sell, or dispose of cannabis."3 Health Canada has suggested, however, that certain parts of the industry, namely micro-scale licensees4 and producers of industrial hemp, may benefit from less onerous reporting rules.5
The breadth of the reporting requirement is notable in that it will impact those in the "downstream" part of the industry that is subject mostly to provincial regulation, in addition to "upstream" growers and producers that are generally governed by federal rules.
One group that will not be required to report, per the proposed Act, is consumers.6 Just as the government doesn't keep tabs on individuals' liquor purchases (with the possible exception of Mr. Comeau), the tracking system will not require collection of personal information by retail buyers of cannabis. It is not clear whether individuals who grow cannabis for their own consumption will be required to report into the tracking system,7 though if the rules in Canada are similar to those established by US states that have legalized cannabis, "personal use" growers will likely be exempt from reporting.
How will it work?
Health Canada has indicated that reporting will be done via an online portal on a monthly basis (other than for losses or thefts, which would be reportable within 10 days of detection),8 and that the system will expand on the existing tracking mechanism for medical marijuana.
Tracking and reporting in the medical market
Producers of medical cannabis are currently required to track and report their production, inventory and transactions, among other things, in some detail.9 The tracking rules are set out in the applicable federal regulation,10 and the reporting rules are outlined in each production licence. Reporting must be done monthly, but to gather the applicable data producers have to continually monitor many aspects of their business. This necessitates, for example, labelling each plant with a numbered (and sometimes bar-coded) tag.
The Canadian market for recreational cannabis is expected to be much larger than the medical market, which may limit the extent to which the planned tracking system could replicate the existing one. The supply chain in the recreational market will also be more complex. Medical cannabis can only legally be grown for personal use, or acquired from a licensed producer or a medical professional,11 while the proposed regulated recreational market is expected to be less integrated and will vary amongst the provinces and territories. Finally, there is an element of mystery about the current system due to the reporting details being set out in individual licences, rather than having a single, publicly available rulebook.12
Existing tracking systems for recreational cannabis
Examples of cannabis tracking systems south of the Canadian border may provide an indication of what a future Canadian system may look like.
The eight US states that have passed laws to legalize recreational cannabis sales13 have adopted or made plans to adopt a tracking system.14 Although aspects of the reporting rules vary, it is notable that at least five, including the biggest (California), and the one with the most established system (Colorado), require the use of the same software.15
A starting point is that each plant must be physically tagged, assigned a number and strain name, and reported into the system.16 In the five states that use the same software, all tags include a radio-frequency function, which assists in tracking and reporting in that an electronic reader can identify plants thus tagged from a 10-foot distance. At least one state – Washington – does not require this technology, but still mandates a physical tag with an identification number. Waste, such as stems, stalk and unused flowers, must also be calculated and reported.
Once plants are harvested and packaged, each package is given a separate tag. When multiple packages are combined, e.g. for processing, that combined "batch" is given another tag. This tagging at multiple levels of the supply chain allows for tracing of the ultimate cannabis product, be it dried flower or the result of processing (e.g. an oil, tincture or edible), back to the source plants.
Who will have access to the data?
The proposed Act provides that information in the tracking system will generally not be disclosable to the public, and sets out some guidance on who may be given access. For example, information may be shared with provincial governments for verifying compliance or preventing non-compliance with provincial rules. It also may be disclosed if "necessary to protect public health or public safety", such as to keep cannabis from being diverted into the illicit market.
Dentons' analysis
While current licensed producers of medical cannabis will have an advantage over new recreational- market suppliers in understanding and complying with the future tracking system, there will still be much to learn for all market participants—new and old—including manufacturers, distributors and retailers. The costs for market participants required to comply with the tracking system are not yet known, and larger licensed producers and industry stakeholders may benefit from certain economies of scale. We look forward to reporting on the specifics of the new system, and any further consultation the government may solicit.
Contact us
The shift from prohibition to cautious legalization of cannabis is creating opportunities not just for producers of cannabis, but for a wide range of supporting and spin-off industries, many of which will be impacted by the proposed cannabis tracking system.
Dentons' leading Cannabis Group has broad experience in advising businesses in the legal cannabis industry in Canada, and will continue to work closely with policy makers, licensed producers and other key stakeholders, and provide frequent insights on these important developments.
For more information about the proposed cannabis tracking system and how it may impact your business, or to discuss the Canadian cannabis industry generally, please contact Eric Foster, James Wishart or Daniel McElroy.
Footnotes
1 Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts. (2017). As passed by the House of Commons November 27, 2017. This is currently before the Senate, where it has passed Second Reading without amendment. It is referred to herein as the "proposed Act".
2 Section 81 of the proposed Act.
3 Section 82(1) of the proposed Act. Importers and exporters are also captured.
4 Small-scale growers and producers will have specific licencing rules. A micro-cultivation licence is expected to permit the cultivation of a maximum "plant canopy area" of 200 square metres. A micro-processing licence is anticipated to allow the processing of up to 600 kilograms of dried cannabis (or equivalent) per year, or the entire output of a single micro-cultivation licence. This is outlined on page 7 of Health Canada's Summary of Comments Received During the Public Consultation, which is referred to herein as the "Summary of Comments".
5 Page 11 of the Summary of Comments. No details of the relaxed rules for these groups were included in the Summary of Comments. Earlier guidance indicated that producers of industrial hemp would be required only "to report transactions involving the transfer of leaves, flowers and branches to another licence holder", and not be required to report any destruction of such material. See s. 4.3 of Health Canada's Proposed Approach to the Regulation of Cannabis, which is referred to herein as the "Proposed Approach".
6 Section 82(3) of the proposed Act.
7 The wording of the proposed Act indicates that the system will apply to "persons authorized" to do things with cannabis. This doesn't clearly exclude individuals growing for their own use, as the implicit allowances in the Act for growing up to four plants at home (s. 8(1)(a)) arguably means anyone is "authorized" to produce their own supply by the proposed Act. Leaving aside the speciousness of such argument, however, other guidance implies that the tracking system will be aimed at the commercial market, which indicates that own-use growers should be exempt.
8 Sections 4.3 and 4.4 of the Proposed Approach.
9 Health Canada: Licensed Producers' Reporting Requirements(accessed May 31, 2018).
10 Access to Cannabis for Medical Purposes Regulations ( SOR/2016-230). See Division 5 – Record Keeping by Licensed Producers.
11 Above, section 3.
12 Per note 9 above, the reporting requirements are summarized on a Health Canada web page, but the details, including as to the manner of reporting, are not included.
13 The eight are Alaska, California, Colorado, Nevada, Massachusetts, Maine, Oregon and Washington. A ninth, Vermont, has legalized the possession and gifting of recreational cannabis (effective July 2018), but sales are not permitted or regulated.
14 In some states, tracking systems also exist for medical cannabis, but those are less relevant to the impending Canadian tracking system.
15 California Department of Food and Agriculture: California Cannabis Track-and-Trace System(accessed May 25, 2018). The other three states are Oregon, Alaska and Nevada. Massachusetts may follow suit.
16 Seedlings and non-flowering plants are also tracked, but in batches rather than individually.
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