Under the Influence: Regulating the Interprovincial Trade of Alcohol

Lindsay Handren

Later this week, the Council of the Federation is set to meet in Charlottetown to discuss and take action on shared priorities in the Canadian federation. In the weeks leading up to the annual meeting, internal trade has resurfaced as a key issue, with the Western Premiers going so far as to sign a letter urging their counterparts to join the call for a Canada free trade zone. While the obstacles to internal trade are numerous, the recent coverage has brought one heatedly contested issue back into focus: the flow of wine, beer, and distilled spirits across provincial borders.

Amendments to the Importation of Intoxicating Liquors Act (IILA) have passed through Parliament in recent years as the federal government attempts to address what many see as a fragmented and outdated regulatory environment for internal trade. The prohibition-era Act, established in 1928 at the tail end of a temperance period that saw the United States criminalize the sale of alcohol outright, required intoxicating liquors to be purchased by or on behalf of a provincial government and to be cosigned by that government upon entry into a province – making it a criminal offence to transport or ship alcohol from one province to another. Two key amendments have since attempted to modernize the IILA: Bill C-311 (‘An Act to Amend the Importation of Intoxicating Liquors Act’) removed federal restrictions on the importation of wine across provincial borders in June 2012, and the same exemption was applied two years later to beer and distilled spirits designated for personal consumption.

Federal law in Canada now makes it legal to ship or carry small quantities of alcohol across provincial borders. But while amendments made to the IILA were intended to strengthen Canada’s economic union by better positioning Canadians to compete for market opportunities, the expected flood of wines, beers, and spirits flowing between the provinces never materialized.

This is a product of Canada’s unique style of federalism. Now more than two years after the passage of a law that was supposed to “free the grapes”, most Canadians still can’t buy wine directly from an out-of-province winery (unless they haul it back themselves). The same rings true for other alcohols. The fact of the matter is that while interprovincial trade may be the purview of the federal government, liquor laws fall under provincial jurisdiction – and only British Columbia and Manitoba have lifted their restrictions on the flow of alcohol.

Think of it this way: If while in town for the Council of the Federation meeting this week Ontario Premier Kathleen Wynne visits a Prince Edward Island winery and wants to ship a case of that wine back to Ontario, she could not legally do so.

So why haven’t more provinces lifted their restrictions on the flow of wine, beer, and distilled spirits across provincial borders?

Provinces may see the logic behind recent federal government amendments to its outdated regulations, but many have expressed concerned about the impact that direct-to-consumer alcohol sales would have on provincial treasuries. Ontario, for one, has closely guarded the revenues that flow through its liquor distribution centre. Contributing a $1.74 billion dividend to the provincial government in 2013-14 alone, the Liquor Control Board of Ontario (LCBO) – which holds a monopoly on liquor sales in the province – has argued that direct ordering is unnecessary because consumers can purchase alcohol not sold in its stores through its private ordering system. Yet small wineries and craft breweries, which often have the most sought-after products, are generally unable to participate as a consequence of the steep mark-ups charged.

Former Federal Industry Minister Christian Paradis blamed the lack of interprovincial trade in wine, beer, and distilled sprits on “foot dragging” by Ontario and Alberta, and James Moore – who currently holds the post – has expressed growing impatience with the provinces over trade barriers. The Canadian Vintners Association has dubbed Ontario to be the an “elephant in the room… who sees the open trade of wine and other liquors as a threat to its liquor retail system.”

But is Ontario’s position – one shared by a majority of the provinces – justified? The evidence would suggest not. According to a recent report by the C.D. Howe Institute, the Ontario government is actually forgoing revenue by preserving its monopoly on alcohol sales, and could reap bigger benefits – with consumers paying less – if it opened up the market to a greater number of retailers. The report also found that Western provinces with more competition have 7 per cent more per capita in provincial alcohol profits than those with government-run monopolies. And there has been no evidence of any negative impacts of BC or Manitoba’s decision to remove their restrictions on the interprovincial trade of alcohol.

Opening the market for internal trade in alcohol is likely to result in a stronger economic union in improving the ability of small businesses to compete, and ultimately creating larger revenues for provincial and federal governments. The experience south of the border, where more than 40 U.S. states now permit the flow of alcohol across state borders, has shown to expand overall markets while grabbing just 1% of total sales. And any concerns that allowing for direct-to-consumer sales could open a back door for the sale of foreign wines have been quashed in the proposed CETA.

The amendments to the IILA made in 2012 and 2014 should have been the toast of Canadian drinkers, vintners, brewers, and distillers alike – but just how effective these changes will be remains to be seen, as the provinces have, for the most part, created restrictions to try to prevent direct-to-consumer alcohol sales. While strict laws governing the transport of alcohol may have once had a moral argument to fall back on, it is now an economic issue, and the federal government has “passed the buck” to the provinces. Allowing Canadians to order wine, beer, and distilled spirits from across provincial borders would give consumers more options, grow businesses, put more money in provincial coffers, and ultimately strengthen Canada’s economic union. With any luck, this week’s Council of the Federation meeting will see the Premiers take a strong stance in committing to eliminate remaining barriers to internal trade.

Lindsay Handren is a 2015 Master of Public Policy candidate at the School of Public Policy and Governance, University of Toronto. She holds a BA (Honours) in Political Science and History from the University of Prince Edward Island, and recently completed a summer internship with the Mowat Centre. Her policy interests are broad, but are focused primarily in the social and economic policy spheres.

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