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Selling Your Cannabis Store In Ontario? All the Legal Stuff you Need to Know.

As I am sure you have noticed, there are more and more cannabis retail stores popping up in Ontario every week. That is because the lottery process has finished, and now there are hundreds more cannabis retail stores to pop up as they are still being processed by the Alcohol and Gaming Commission of Ontario (the “AGCO”). As the AGCO is facing delays in processing them, many future owners are second-guessing whether it is worth the wait and opting to sell instead.

General Process of Selling a Cannabis Store in Ontario.

The entity wishing to operate a cannabis store must:

  1. Obtain a license to sell recreational cannabis called a Retail Operator’s License from the AGCO, and
  2. Obtain a Retail Store Authorization from the AGCO for each store location.

The entity wishing to buy or sell a cannabis store must go through the Alcohol and Gaming Commission of Ontario and the Ontario Cannabis Store who will have the right to approve or reject, the proposed purchaser.

Two ways to buy/sell a cannabis store:

If a corporation sells it – there are generally two ways to structure a sale:

1. Share purchase/sale; or
2. Asset purchase/sale.

Asset Transaction

Each one has its pros and cons, depending on whether you are a purchaser or vendor. Simply put, different tax consequences and liabilities are associated with each structure – vendors prefer to proceed with a share sale, while purchasers prefer an asset sale.
Asset Sale allows the purchaser to select those specific assets that it wishes to purchase and the liabilities it wishes to assume or exclude. The assets usually include those used in the operation of the business, which generally include equipment, inventory, goodwill, business names, contracts etc.

Asset Sale has TWO levels of taxation:

  1. At a corporate level;
  2. At a shareholder level (when after-tax sale proceeds are distributed to the shareholders).

The purchaser will have to apply and receive both a ROL ($6,000 application fee) and an RSA ($4,000 application fee) before the sale is finished.

The OCS approval process involves three steps:

  1. The vendor and the purchaser agree to which cannabis inventory is going to be bought/sold;
  2. The OCS invoicing the purchaser (at wholesale prices) for the amount of the cannabis inventory to be sold; and
  3. The purchaser pays the invoice amount to the OCS – the OCS refunds the invoice amount to the vendor. 

Share Transaction

Share Sale occurs when the shareholders of a corporation sell all of the shares they own in the corporation to a purchaser. Unlike in an Asset Sale, purchasing all of the shares includes the assets and liabilities (even unknown ones).

Share Sale has ONE level of taxation:

  1. Only taxed at the shareholder level (since the sale proceeds are paid directly to the shareholder(s)).

One huge benefit for the vendor is that since the sale proceeds are subject to capital gains treatment, individual shareholders may be able to take advantage of their lifetime capital gains tax exemption which is currently at ~ $880,000.

The purchaser does not need to apply for a ROL and RSA since they are attached to the corporation, and only the owners of the corporation are changing.

The AGCO approval process involves the AGCO conducting and completing its diligence on the new owners individually and depends on how many new owners there are.