By Chris Nyberg, Partner, MLT Aikins LLP & Kaitlin Ward, Associate, MLT Aikins LLP

Since the release of Tantalus Labs Ltd. (Re), 2023 BCSC 1450 ("Tantalus"), a decision of the British Columbia Superior Court ("BCSC") that required Canada Revenue Agency ("CRA") to temporarily extend a cannabis excise licence held by Tantalus Labs Ltd. ("Tantalus") to facilitate the disposal of its remaining cannabis inventory, there have been a series of orders granted in Ontario insolvency proceedings granting "status quo" relief in respect of debtors' material cannabis licences. These provisions have the effect of staying the expiry of, among other things, the cannabis excise licences of insolvent cannabis companies for as long as the applicable stay of proceedings is in place and have been sought to, among other reasons, counter the approach of CRA to issue either 30 or 45-day licence terms when a debtor company is on a payment plan.

An overview of the relevant Ontario proceedings and recent updates from the CRA's position in the proceedings of the Delta 9 Cannabis Inc. et al (the "D9 Group") under the Companies’ Creditors Arrangement Act, as amended (the "CCAA") is set out below.

Tantalus Decision

While Tantalus has been routinely cited as authority that the Court has jurisdiction to require the CRA to renew a cannabis excise licence during an insolvency proceeding, the case largely turned on the urgent circumstances and imminent expiry of the licence with the Court preferring to leave the question for a more fulsome hearing which did not occur.

By way of background, Tantalus commenced its proposal proceedings under the Bankruptcy and Insolvency Act (Canada) (the "BIA") on June 28, 2023. Tantalus’ cannabis excise licence (the "Tantalus Licence") was scheduled to expire on July 10, 2023. Up to the filing date, Tantalus was under a payment plan with the CRA for its excise tax arrears. The CRA noted that compliance with this plan was required for Tantalus to demonstrate it had sufficient financial resources to conduct its business in a responsible manner pursuant to subsection 2(2)(c)(i) and (e) of the federal Regulations Respecting Excise Licences and Registrations (the "Regulations").

Tantalus’ next scheduled payment under its payment plan was June 30, 2023. Given Tantalus had commenced its proposal by then, it did not make its scheduled payment to the CRA as it was a pre-filing obligation. As a result of the missed payment, the CRA advised Tantalus on July 7, 2023, it did not meet the requirements for a renewal and the Tantalus Licence would not be renewed past July 10, 2023. This would have prevented Tantalus from closing the planned liquidation of its remaining cannabis inventory. Tantalus brought an emergency hearing on July 10, 2023 for an order declaring the Tantalus Licence would continue until the end of the stay period, which was scheduled to expire on July 28, 2023.

The Court recognized that allowing the Tantalus Licence to expire would significantly reduce the value of the estate and that the CRA’s decision to refuse to renew the Tantalus Licence was "inexplicable, given the CRA is itself one of the substantial stakeholders who stands to benefit from a proper and orderly disposition of the inventory, given its substantial unsecured debt." (at para 20)

Setting that aside, the Court went on to note that the CRA raised "substantial issues" concerning the jurisdictional basis upon which the Court might grant an order forcing the CRA to extend the Tantalus Licence until July 28, 2023.

Both Tantalus and the CRA agreed a more fulsome hearing should be convened to fully address the matter with proper consideration of the relevant authorities, and agreed to do so by July 27, 2024. In the meantime, the Court considered the authorities cited by Tantalus and the CRA and held it had jurisdiction under section 183(1) of the BIA to grant the "status quo order" until July 28, 2023 due to the considerable urgency and significant interests at risk.

Tantalus was able to sell its inventory in the meantime before July 28, 2024 and there was no need to return to court to address the continued renewal of the Tantalus Licence. As a result, Tantalus stands as one of the only authorities where the Court considered the case law, albeit briefly, and arguments from the affected parties, on the Court’s jurisdiction to require the CRA to renew a cannabis excise licence.

Status Quo Orders in Ontario

In the past year, there have been several CCAA filings in Ontario where the Court granted the requested "status quo" provisions deeming the cannabis excise licences to be extended for as long as the stay of proceedings was continued, including Aleafia Health Inc. et al ("Aleafia"), BZAM Ltd. et al ("BZAM"), Heritage Cannabis Corp. et al and Indiva Limited et al ("Indiva"). In all four of these cases, the CRA was served with notice of the application for the applicable order and either did not respond with a position or confirmed it took no position.

In Aleafia’s application for an order preserving the status quo of its cannabis excise licence, Aleafia relied on Re Just Energy Corp., 2021 ONSC 1793 ("Just Energy") as authority that the Court had jurisdiction to stay a regulator from taking action against a regulated entity if doing so would compromise the restructuring process. In granting Aleafia’s application to include status quo language in an order approving a sales and investment solicitation process, Justice Conway held that maintaining the status quo would mitigate the risk that the value of Aleafia's business would be destroyed if its excise licence were allowed to expire.

In BZAM, Justice Osborne applied similar reasoning in his endorsement of the Initial Order, citing Tantalus as authority that a ministerial decision not to renew a licence is subject to a stay of proceedings under the BIA, noting that the same principles applied in a CCAA proceeding.

Justice Osborne further relied on the principle in Just Energy that regulatory action can and should be stayed if the regulatory action would compromise a restructuring. Noting the unique value of the cannabis excise licences, Justice Osborne stated as follows:

• The cannabis licences of the Applicants are among their most valuable assets. Just as importantly, they are required to permit the Applicants to continue operating their underlying business. The expiry or cancellation of licences will suspend or terminate completely the operation and delivery of products by the Applicants with the result that the ability of the Applicants to restructure or continue as a going concern business will in all probability be eliminated.

Justice Osborne also granted Indiva’s application to include status quo language in the Amended and Restated Initial Order. In that endorsement, Justice Osborne relied on the specific language of section 11.1 of the CCAA as authority for extending the cannabis excise licences throughout the stay period.

Specifically, Justice Osborne noted that under subsection 11.1(2), no order made under section 11.02 (for a stay of proceedings) will affect a regulatory body’s investigation or an action, suit or proceeding taken by the regulatory body other than the enforcement of payment. Under subsection 11.1(3), however, the Court is authorized to order that subsection 11.1.(2) does not apply if, in the Court’s opinion: (a) a viable compromise or arrangement could not be made without staying the regulatory action at issue; and (b) it is not contrary to the public interest that the regulatory body be stayed. The Court could only apply this exception if the regulator was properly served.

In Indiva, Justice Osborne specifically noted that the CRA was served and its counsel at the Department of Justice did not oppose the status quo language in the order. On that basis, Justice Osborne was satisfied that it was not contrary to public interest to apply the stay of proceedings in a way that maintained the status quo of the cannabis excise licences.

Recent Western Canadian Updates

It is important to re-emphasize the fact that the CRA either did not attend or did not object to the status quo relief being sought in the Ontario proceedings. However, there appears to be a significant discrepancy between the policy positions of CRA within Ontario and in Western Canada, as the CRA recently appeared to object to similar relief in the CCAA proceedings of the D9 Group sought at the applications for both the Initial Order and Amended and Restated Initial Order (the "D9 ARIO"). The basis of CRA's objection was largely the same as its objection in Tantalus: that the Court did not have jurisdiction to direct the CRA to exercise its discretion to renew the cannabis excise licences and that a fulsome hearing on the jurisdiction issue had not yet occurred.

While the D9 Group and the CRA were able to reach an amicable agreement on the continued extension of D9 Group’s cannabis excise licence during the proceeding in exchange for removal of the status quo provision from the D9 ARIO, it evidences the divergent policy position of CRA in insolvency proceedings conducted inside Ontario versus Western Canada. Notably, during the hearing for the D9 ARIO, Associate Chief Justice Nielsen commented that if the parties had not otherwise come to an agreement on the continuation of D’s cannabis excise licence, he would need to be shown clear case law demonstrating his jurisdiction to mandate the CRA to exercise its discretion to renew the cannabis excise licence in the circumstances.

Advisors involved in any future cannabis proceedings should therefore expect a shift in the CRA's position related to this relief as its position continues to be that it remains a live issue as to whether the Court’s authority to stay regulatory action under subsection 11.1(3) of CCAA extends to making a mandamus order requiring a regulator to exercise its discretion a certain way for the benefit of a restructuring.