The Jaswal Institute advised AIP Asset Management Inc. (“AIP”) on a Note Purchase Agreement (the “Agreement”) with Carl Data Solutions Inc. (CSE: CRL, Frankfurt: 7C5) (“Carl” or the “Company”), a developer of Big-Data-as-a-Service (“BDaaS”) and Internet-of-Things (“IoT”) solutions for data collection and analysis, pursuant to which Carl has agreed to issue certain funds of AIP (collectively, the “Holders”) senior secured collateralized convertible notes (the “Notes”) in the aggregate principal amount of CAD $2,000,000 (the “Offering”). The Company has received in escrow gross proceeds of $2,000,000.

Jay Bala, Portfolio Manager at AIP Asset Management, commented:

“Johnny Jaswal is a highly proficient lawyer who has deep legal and business expertise as well as the personality and professionalism to make everyone feel at ease and get the deal done.

Johnny strikes a perfect balance between accomplishing business objectives and risk mitigation. His ability to anticipate and prepare for issues allows you to close a deal on great terms while ensuring you are protected. We would highly recommend Johnny as your advisor.”

In connection with the closing of the first tranche of the Offering, the Company has issued Notes in the aggregate principal amount of $500,000 (the “Initial Notes”). Notes representing the balance of the $2,000,000 will be issued upon satisfaction of the various closing conditions as set out in the Agreement.

The Notes are due and payable two years from their respective date of issue, and will bear an interest rate of 10% per annum calculated and payable monthly, in advance. At the option of the Holders, the Notes will be convertible into common shares of the Company (each, a “Share”) at a conversion price of $0.45 per Share, subject to adjustment as provided in the Agreement.

If, at any time following four months after the issue date of any Note, the closing price per Share is at least $0.75 per Share for 30 consecutive days with a daily weighted average trading volume of more than 400,000 Shares, the Company may force the conversion of one half of the aggregate principal amount of the outstanding Notes.

After the first anniversary of the issuance of the Notes, the Company, at its option, may prepay, without notice or penalty, the principal amount of all of the outstanding Notes in full or in part, together with any accrued and unpaid interest.

In connection with the issuance of the Initial Notes, the Company issued 400,000 bonus Shares to the purchasers of the Initial Notes. The Company has paid AIP a $100,000 closing fee concurrently with the issuance of the Initial Notes and certain other consideration as provided in the Agreement, a copy of which will be filed on SEDAR.

Proceeds from the Notes will be used for the development of the Company’s BDaaS technology, for further development of the FlowWorks application, sales and marketing, and for general working capital purposes.

Greg Johnston, CEO of Carl, commented:

“We’re very pleased to have entered into the Agreement and closed the first tranche of the Offering with AIP. It is great to have the confidence of a long-term strategic investor that has expressed an intention to support Carl as we grow.  The additional capital will allow Carl to accelerate our business plan by way of acquisitions, the launch of new applications, and expansion of our BDaaS and IoT technology.”

All securities issued or issuable in connection with the Offering are or will be subject to a statutory hold period expiring on the date that is four months and one day after the distribution date.

None of the securities issued or issuable in connection with the Offering will be registered under the United States Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in any jurisdiction in which such offer, solicitation or sale would be unlawful.

About AIP Asset Management Inc.

AIP Asset Management Inc. (“AIP”) is a Toronto based privately held investment firm as – Investment Fund Manager, Portfolio Manager and Exempt Market Dealer. AIP has gained a reputation for its innovative approach to portfolio construction and commitment to investor advocacy. AIP was recently nominated for the Ernst & Young Entrepreneur of the Year Award. AIP has also been named Best Emerging Market Focused Private Investment Firm in North America at the Alternative Investment Awards and was named Best Macro Hedge Fund in Canada at the Hedge Fund Awards sponsored by Barclay Hedge. More information can be found at www.aipassetmanagement.com. 

About Carl Data Solutions Inc.

Carl Data Solutions Inc. is focused on providing next generation information collection, storage and analytics solutions for data centric companies. Building on its recent acquisitions, FlowWorks Inc., a company that helps its clients analyze and understand all forms of environmental data through a powerful platform of data collection, monitoring, analysis, and reporting tools, and Extend to Social Media Inc., a company with an application that allows clients to leverage their customers’ social networks for referral marketing and analytics, Carl develops applications to work with new cloud-based mass storage services and analytics applications (Big-Data-as-a-Service (BDaaS)). Carl is creating a virtually unlimited data storage environment from which informative visual representation of data can be created and new insights generated. Carl’s goal is to deliver a comprehensive data management solutions for datasets of any size and type from any source. More information can be found at www.CarlSolutions.com.

About the Jaswal Institute

The Jaswal Institute is a Toronto-based business law firm that provides exceptional legal services, government relations services and a full range of related investment banking advisory services to small- and mid-market companies.

Through our expertise with respect to legal frameworks, regulations, capital markets and business issues, the Jaswal Institute provides its clients a unique outlook on the business environment, offering crucial insight into difficult but important business matters.

Our role is to provide advice and solutions to complex legal, financial and strategic issues, thus enabling our clients to maximize value and realize corporate and personal goals. More information can be found at www.jaswalinstitute.com.

For further information please contact:

Johnny Jaswal
Managing Director
Jaswal Institute
Telephone: (416) 737-9653
Email: [email protected]

The Canadian Securities Exchange (operated by CNSX Markets Inc.) has neither approved nor disapproved of the contents of this press release.

Disclaimer for Forward-Looking Information

Certain statements in this press release related to the Notes and the various loans are forward-looking statements and are prospective in nature. Forward-looking statements are not based on historical facts, but rather on current expectations and projections about future events, and are therefore subject to risks and uncertainties which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. These statements generally can be identified by the use of forward-looking words such as “may”, “should”, “will”, “could”, “intend”, “estimate”, “plan”, “anticipate”, “expect”, “believe” or “continue”, or the negative thereof or similar variations. Forward-looking statements in this news release include statements regarding the private placement financing of the Notes, including the proceeds to be raised pursuant to the Note financing, resale restrictions relating to the securities to be issued, and the use of proceeds to be raised pursuant to the Notes and the previously announced equity private placement; a statement that the Note financing will allow the Company to accelerate the development and launch of new applications in data intensive industries; and a statement that Carl’s goal is to deliver a comprehensive data management solution for datasets of any size and type from any source. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding the Company’s ability to complete the private placement financing for the Notes, including the risk that the entire amount may not be raised as expected or at all, that the proceeds from the Notes may be used other than as set out in this news release and other factors beyond the control of the Company. Such forward-looking statements should therefore be construed in light of such factors, and the Company is not under any obligation, and expressly disclaims any intention or obligation, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

On March 24, 2016, Health Minister Jane Philpott released a statement announcing that the government will not appeal a Federal Court ruling in Allard that found that the Marihuana for Medical Purposes Regulations (“MMPR”) regime, made pursuant to the Controlled Drugs and Substances Act, infringes section 7 Charter rights to liberty and security by unjustifiably restricting access to medical marijuana. The Court found that, under the single source system of a licensed producer, there is no guarantee that required marijuana will be available when needed at an acceptable price level due to the MMPR structure and market characteristics. According to the Court, limiting patients to government-approved contractors and eliminating the ability to grow one’s own marijuana or to engage one’s own designated producer is not tenable. Given that liberty and security interests are engaged, the Court held that MMPR regulatory restrictions, including prohibitions against plant growth by patients or their delegates, are arbitrary, overbroad and do not minimally impair section 7 rights. The Court declared the entire MMPR regime invalid, striking it down, but suspended the operation of the declaration of invalidity for six months to permit Canada to enact a new or parallel medical marijuana regime. As stated by Health Minister Jane Philpott on March 24, 2016, the government’s goal is to complete the amendment process by August 24, 2016, which is the timeframe set by the Court.

Though the case did not turn on a right to grow one’s own cannabis, which Canada has seen previously under its repealed personal cultivation regime (the Marihuana Medical Access Regulations), and instead focused on enhanced access to medical cannabis, the implications to licensed producers are potentially significant. Although the impact of specific medical marijuana amendments may not be drastic on the medical marijuana regime, the impact of the Court’s principles on future recreational marijuana regulation may have significant financial and market impacts that affect the economics of the marijuana space. In other words, in a rapidly changing environment, the status quo is subject to extreme shifts which require diligent attention.

Under the current regime, until the amendment process is complete, unless covered by a court injunction, licensed producers are the only legal means of obtaining medical marijuana. The application process to become an exclusive government-approved contractor is strict, thorough and expensive. Based on 2015 statistics obtained from Health Canada, the application success rate is less than 2%, which highlights the exclusivity of the licensed producer club. This exclusivity is essential when considering the fact that these government-approved contractors, because of the regulated supply chain and lobbying campaigns, are assumed to be the frontrunners of production and supply in the recreational marijuana market promised by the federal Liberals. In an attempt to differentiate themselves and prepare for legalization, licenced producers have gone as far as signing major artists to gain an early advantage. For example, a major marijuana company recently partnered with Snoop Dogg on content and brand strategy, a move highlighting a shift towards recreational marketing and away from earlier medical positioning which used lab coats and doctors for branding. In other words, rappers are being used to build the recreational market over doctors, unless of course you are Dr. Dre. To that end, it is no surprise that certain licenced producers have market capitalizations in the hundreds of millions of dollars, which do not coincide with the smaller medical marijuana market but appear to price in the anticipated market for recreational marijuana being branded by the likes of the D-O-double-G. In other words, despite what the retail points of sale end up being for medical and recreational marijuana, it is safe to assume investors in specific licensed producers are buying forecasts of these government-approved contractors as exclusive or leading producers and suppliers of both the medical and recreational marijuana markets. As discussed above, for that reason, stakeholders must assess the impact of regulatory changes on economics as legal decisions can significantly alter forecasts that form the basis of significant investments.

Given the rapidly changing regulatory market, any stakeholder in the current regime should understand the potential economic impacts of regulatory movement. To that end, this article will attempt to highlight the significance of legal decisions on the economics of the marijuana space using the Allard decision. To pursue our economic impact goals, though Ottawa has not confirmed that the amended rules will allow for personal cultivation, we are assuming, at the very least, the amended medical marijuana regulatory regime will include personal cultivation provisions. Based on principles espoused by Canadian courts, we are further assuming that personal cultivation provisions will be included in any recreational marijuana regime. Importantly, given Canada’s position on accessibility and affordability, we have assumed that a personal cultivation regime will not include taxes or plant fees. Following the Allard decision, based on personal cultivation regimes in the United States, publications have made the assumption that legal personal cultivation would not significantly impact sales or tax revenue in the Canadian marijuana market. It is the Jaswal Institute’s view that, given unique Canadian market characteristics, the Allard decision may have significant impacts on the economics of the cannabis market in Canada.

We started by employing a methodology used by a University of Chicago study that estimates the marijuana tax gap by comparing marijuana taxes to cigarette taxes. The tax gap is a tax compliance measure defined as the amount of tax liability that is not paid and includes revenues lost to tax evasion. Though the Canadian experience will encompass tax losses due to legal personal cultivation, the tax gap analysis is useful as it embodies similar concepts of tax avoidance. We believe tobacco to be an appropriate comparison in our situation given our view that cannabis will be taxed similar to comparable goods in Canada such as tobacco and alcohol. Similar to the Chicago study, given personal cultivation of marijuana is easier than tobacco cultivation, we assume that marijuana tax gap rates will be higher than those of tobacco, which would render our estimates of economic impacts conservative. Next, we estimated tobacco tax gap statistics by studying Canada’s contraband tobacco market. It is important to note that estimates of marijuana tax gaps based on contraband tobacco tax gaps involve comparing legal tax avoidance through personal cultivation and illegal tax evasion through contraband tobacco. Accordingly, given personal cannabis cultivation will be legal, our cannabis tax gap estimates using the contraband tobacco market as a comparison will further render our estimates and economic impacts conservative.

With respect to our results, given Canada’s unique market characteristics, our contraband tobacco market is disproportionally greater by comparison when evaluated globally. Our research implies that tobacco tax gap rates in Canada range from 15 to 33 percent, with government sources indicating an average rate potentially as high as 30 percent. Notably, as mentioned above, given Canada’s unique market characteristics, Quebec and Ontario may have the highest Canadian tax gap rates ranging from 40 to 50 percent. When analyzing marijuana market forecasts, the implied economic impacts of the Allard decision, using tax gap rates, are significant. A recent research report by CIBC World Markets Inc. suggests a recreational marijuana market of $5-$10 billion, with federal/provincial governments potentially reaping as much as $5 billion from legalization. Applying our tobacco tax gap rates, by virtue of assumed legalized personal growing, the government share with respect to the legal marijuana market can be estimated to decline by ~$1.2 billion on average using conservative estimates. If we begin to experiment with higher tax gap rates, such as those in Quebec or Ontario, use various market size estimates, or adjust the tax gap rates upwards based on the legality of personal marijuana cultivation, versus the illegality of the contraband tobacco market, or the relative ease of personal marijuana cultivation, versus tobacco cultivation, the economic impacts of the Allard decision can significantly alter expectations with respect to the Canadian cannabis market.

When examining Marijuana laws across the United States, an interesting point can be noted. Washington State does not permit personal cultivation for recreation use. When conducting our tobacco tax gap rate analysis, we noted that Washington has one of the highest tax gap rates of any state. Further, in the RAND Corporation’s Cannabis Consumption Survey, 17 percent of respondents reported growing cannabis for consumption under the medical marijuana regime, which is over four times the rate observed nationally (the national rate is assumed to be understated as it is reported in the context of illegal personal cultivation). Though we cannot conclude Washington’s high tobacco tax gap rates and personal cultivation rates resulted in the prohibition on personal cultivation for recreational use, they are aspects that should be examined more closely by Canada’s stakeholders in the marijuana space as failure to examine the appropriate factors could be a costly mistake.

Our analysis above was focused on estimating the economic impacts of the recent Allard decision. As stated above, we have assumed that, at minimum, the amendments will include personal cultivation provisions and further that those principles will impact the recreational marijuana market in Canada. Though beyond the scope of this article, given the Court’s position regarding access, it is an interesting exercise to anticipate what the future of cannabis regulation may look like in Canada. Specifically, beyond anticipated amendments to allow for personal cultivation, the Court’s language with respect to access restrictions provides the government with the opportunity to address issues regarding retail channels for the sale of medical marijuana. The Court in Allard observed that dispensaries play a crucial role with respect to cannabis access. As stated by the Court, although the dispensaries are not legal, dispensary growth trends suggest a connection between the access restrictions under the MMPR and the need for patients to pursue illegal sources to obtain their medical marijuana. When studying statistics, illegal dispensaries and compassion clubs are potentially supplying five times more patients than licensed producers, reportedly selling more in one month than the combined licenced producers sell in three months. This trend is likely to continue if personal cultivation is permitted as personal cultivation is the alleged source of supply for dispensaries. Though Health Minister Jane Philpott did not provide guidance with respect to whether the amendments will allow for storefront sales of medical marijuana to further address the Court’s observations regarding access, the point to make is that any amendments could drastically impact the current structure and market forecasts assuming that the principles translate to the recreational market. As mentioned above, in the rapidly changing cannabis space, stakeholders must consider multiple factors that may drastically impact the economics of planned investments.

Based on personal cultivation regimes in the United States, Canadian commentators have come to the conclusion that potential regulatory amendments, including legalized personal cultivation, would not significantly impact sales or tax revenue in the marijuana market. We have attempted to highlight that small changes in a rapidly changing regime may have significant impacts for certain economies, which should create pause and diligence. Canada cannot afford to blindly follow results from other jurisdictions in a rush to legalization as regulatory impacts have different outcomes based on unique characteristics of a specific economy. This article used Canada’s unique market characteristics and disproportionally large contraband tobacco market to estimate the potential economic impacts of legalized personal cultivation in Canada. Stakeholders must push the boundaries to properly assess multiple factors relevant to a specific economy. To further reiterate and highlight the need for diligent analysis, in our research, we came across excessive energy use taxes being implemented in certain United States communities that have reportedly resulted in drastic declines in personal cultivation operations, which would lead to low personal cultivation statistics and render the results ineffective for comparison purposes. Accordingly, failing to recognize the unique characteristics of particular markets, such as tax gaps and energy taxes, may lead to incorrect and costly policy decisions. As our government moves towards the legalization of marijuana, its task force must diligently explore all issues that may potentially impact legalization. Similarly, stakeholders need to monitor regulatory changes and the resulting industry economics meticulously before they are left holding the bag.

Authored by Johnny Jaswal, Managing Director of the Jaswal Institute. The Jaswal Institute is a law firm that provides exceptional legal services and a full range of related investment banking advisory services. If you require further information, please contact Johnny Jaswal.

Many people would be surprised to hear that, in 1985, the federal government announced an agreement that would effectively exclude the federal government from lotteries and lottery schemes. For 100 million dollars, to be directed towards the 1988 Winter Olympics, and reaffirmation of an agreement to make annual payments of 24 million dollars, indexed to the CPI, the federal government agreed to amend the Criminal Code, no later than December 31, 1985, to grant the provinces exclusive authority, either alone or in conjunction with the government of another province, to conduct and manage lottery schemes in accordance with any laws enacted by the legislature of that province.

The abovementioned arrangement is substantial for several reasons. The expressions lottery and lottery schemes are legally interpreted broadly and incorporate additional forms of gambling and games of chance including betting on sports, bingo, card games such as poker and, potentially, fantasy sports if the activity is eventually caught by the Canadian Criminal Code as a game of chance or a game of mixed chance and skill. In addition, buried with agreement and amendments is now section 207(4)(c) of the Criminal Code, which gives the provinces exclusive jurisdiction to conduct and manage lotteries or games of chance on or through a computer. Despite the significance and implications of the agreement and amendments, they received, and continue to receive, little attention and public discussion. It is the Jaswal Institute’s view that coming developments, outlined below, are going to bring significant examination of the current state of gambling laws.

The Current State of Online Gambling – Foreign Operator Principle

With respect to online gambling in Canada, provincial gambling corporations have been unable to effectively dissuade the population from gambling on non-government websites. In the view of the Jaswal Institute, though provincial governments consider non-government offerings illegal, the legality of websites operating outside of Canada has been established through the foreign operator principle, allowing operators to successfully compete against provincial gambling corporations. In summary, the foreign operator principle is fundamentally a jurisdictional position based on section 6 of the Canadian Criminal Code, which generally holds that no person shall be convicted of an offence committed outside of Canada. By minimizing or eliminating connections with Canada, for example via locating download, database and gaming servers outside of Canada in gambling friendly jurisdictions, foreign operators take the position that they are not susceptible to the gambling provisions in Part VII of the Criminal Code given the legal nexus required to attract jurisdiction of the Criminal Code is not present. The foreign operator principle derives practical support from the Starnet case as the case demonstrates prosecutorial willingness to target operations with a legal nexus to Canada and an analogous lack of interest in engaging entities that minimize or eliminate connections with Canada. In Starnet, following a plea agreement, the business made changes to its corporate structure to minimize connections with Canada that allowed it to avoid further targeting by Canadian authorities. The foreign operator principle was emphasized in the Observations to the Fourth Report of the Standing Senate Committee on Legal and Constitutional Affairs (Bill C-13). In response to concerns expressed by a witness of the potential extra-territorial application of a clause of Bill C-13, which dealt with the transmission and reception of information relating to book-making, betting and wagering, among other things, the Committee clarified that the intent of the clause was not to extend jurisdiction and thus the clause would not have extra-territorial application. Though the commentary relates to a specific amendment, it provides insight with respect to Parliamentary intent regarding gambling laws.

The Future of Online Gambling

There is no doubting the significant financial opportunities in the online gambling space as it has progressed into a multibillion-dollar global industry with significant upside. To that end, as governments are unable to compete with non-government offerings and are realizing that online gambling is a source of revenue that is eluding them, they are making major moves that will significantly alter the gambling landscape in Canada. The developments can be inferred from Quebec’s 2015-2016 budget and a report by the Working Group on Online Gambling, created by Quebec’s former Minister of Finance Raymond Bachand and chaired by Dr. Louise Nadeau. Though the report deals primarily with Quebec, Jaswal Institute relationships suggest that other provinces are working with Quebec to implement similar structures, which should sound alarms internationally and across Canada.

In summary, the report by the Working Group on Online Gambling recommended taking the necessary steps to amend the Criminal Code to enable the Canadian provinces to issue online gambling licences to private operators. Jaswal Institute research suggests that Quebec Finance Minister Carlos Leitao has contacted other provinces to consult on amending the Criminal Code and issuing private operator licenses. However, given the challenges linked to the amendment of the Criminal Code, in the short term, the report recommended exploring the possibility of offering the games of private operators to online gamblers exclusively through a government website/portal, a recommendation which will be implemented in the near future according to Quebec’s 2015-2016 budget. As highlighted in the report, in this model, the government will establish and operate a portal through which it will exclusively offer the online games of chance and gambling games of private operators to provincial gamblers under a contractual agreement with private operators. As an example of how this would work, the websites of contracted private operators, for example PokerStars, would be deemed “illegal.com” to provincial gamblers and those provincial gamblers would be redirected to the government portal, which would offer the games of PokerStars. To add policing capacity to efforts to control online gambling, the report discussed the filtering of illegal sites as evidence suggests that a portal alone is insufficient in respect of the online gambling market. Accordingly, as a subsidiary measure to the portal model, through tabled legislation, Quebec has decided to move forward with a plan to order Internet service providers to block a list of unlicensed gambling websites to be drawn up by Loto-Quebec, which will shut down those that are not invited to the provincial portal party. Through this brilliant structure, provincial governments will absorb competitors and force player migration to the provincial portals, thus significantly increasing provincial gambling revenues. As discussed above, given the fact that other Canadian provinces are reportedly following Quebec’s lead, this should ring the alarm internationally and across the nation.

Stakeholders – Foreign Operators, the Federal Government and First Nations Communities

Though the provincial measures arguably bring clarity to the grey areas of the Criminal Code, the provincial plans have significant consequences and serious implications for stakeholders in the online gambling space; most notably foreign operators, the federal government and First Nations communities. As we have discussed foreign operators above, we will discuss the federal government and First Nations communities.

As discussed above, given the fact that the federal government traded away its gambling jurisdiction to the provincial governments for cash payments, its stake in online gambling has essentially been reduced to collecting annual payments of 24 million dollars, indexed to the CPI; which according to our calculations, amounted to approximately 70 million dollars in 2015. In our view, the federal government traded away significant future revenue potential for relatively nothing; a trade that reminds us of a tragic day in Toronto history, the trade of Vince Carter, a.k.a. Air Canada, a.k.a. Vinsanity, a.k.a. Half-Man, Half-Amazing. For those not familiar with the trade, which in our view was the worst trade in NBA history, the Raptors traded away the future of the franchise to a division rival for a package of inconsequential players and draft picks, including a player that refused to report in Toronto, forcing the Raptors to buy out his contract. In the same way the Vince Carter trade haunted the Raptors franchise, the federal government’s trade of its gambling jurisdiction to the provinces, for what relatively amounts to petty cash, will soon haunt the federal government as the extent of the lopsided trade will soon become painfully apparent as the federal government watches the provincial dollars roll in.

The next stakeholders in the online gambling space are First Nations communities, operating on First Nations land, that assert their rights to self-govern as sovereign nations. An example is the Mohawk community of Kahnawake, on the South Shore of Montreal, which has established the Kahnawake Gaming Commission (“KGC”) to regulate online gambling. The Mohawk community of Kahnawake, via the KGC, has become a model enterprise through, for example, its establishment of comprehensive gambling regulations and an advanced server park.

It is important to highlight that though First Nations communities assert their rights to self-govern as sovereign nations, according to the Government of Canada’s Federal Policy Guide to Aboriginal Self-Government, the inherent right of self-government will not result in sovereign independent aboriginal nation states as the inherent right of self-government does not include a right of sovereignty in the international law sense. In contrast, the Government of Canada recognizes the inherent right of self-government as an existing aboriginal right under section 35 of the Constitution Act, 1982. Accordingly, it can be argued that section 35 recognizes the inherent right of the Mohawks of Kahnawake to govern themselves in relation to gambling as a matter that is internal to their communities, integral to their unique cultures, identities, traditions, languages and institutions, and with respect to their special relationship to their land and their resources.

Though it has been argued that the inherent right of the Mohawks of Kahnawake to govern themselves in relation to gambling is recognized as an existing aboriginal right given the failure of both the federal and provincial governments to challenge this activity, Canadian authorities have stated that they do not recognize the KGC regulatory agency. As stated in the report by the Working Group on Online Gambling, the KGC appears to have “operated with impunity” since its creation, leading to several allegedly “illegal online gambling websites” hosted in the territory of Kahnawake. To that end, given the KGC licenses and regulates websites operated through servers physically located on First Nations land, based on the position of Canadian authorities, the Mohawks of Kahnawake are allegedly violating the Criminal Code and are thus potentially leaving themselves open to action by provincial and federal governments.

We hypothesize that delayed action against the Mohawks of Kahnawake may be attributed to the inaction with respect to Amaya, whose operations are legally tenuous given its physical presence in Canada. In other words, it would be an uneven application of the law to challenge the operations of the Mohawks of Kahnawake if the same pressure is not applied to Amaya. However, given the fact that the portal proposal – in which the government will establish and operate a portal through which it will exclusively offer the online games of chance and gambling games of private operators to provincial gamblers under a contractual agreement with private operators – will effectively greenlight Amaya’s operations given Amaya’s rumored VIP invitation to the government’s portal party, the Mohawks of Kahnawake will no longer have Amaya as shield. Accordingly, the Mohawks of Kahnawake, and other First Nations communities, should anticipate a movement to challenge their operations.

Regarding the legal hurdles and strategies below, First Nations communities have the option to negotiate or enforce their inherent right of self-government through the courts, as the Government of Canada acknowledges that there are different views about the nature, scope and content of the inherent right. However, this option is highly political, lengthy and costly. We will focus on more general options and strategies that apply to all stakeholders.

Legal Hurdles and Strategies

The stakeholders discussed above, specifically foreign operators and First Nations communities, have several hurdles to overcome. The first hurdle is the provincial government’s planned filtering of illegal sites. As discussed above, Quebec has decided to move forward with a plan to order Internet service providers to block a list of unlicensed gambling websites to be drawn up by Loto-Quebec, which will shut down those that are not invited to the provincial portal party. The filtering of websites will face significant legal challenges on free speech and jurisdictional grounds as telecommunications regulation is the exclusive jurisdiction of the federal government. Further, as noted by Dr. Michael Geist, a law professor at the University of Ottawa, the legal challenge may not be limited to constitutional issues as the Quebec bill regarding website blocking may also be barred by the Trans-Pacific Partnership (“TPP”), which requires countries to treat service providers equally, irrespective of which country they are from. As Canada did not carve out an exception for gambling, similar to Australia, Singapore and Mexico, due to the fact that gambling falls under provincial jurisdiction, the website blocking plan, as a protectionist mechanism to increase local service provider revenues, would have difficulty overcoming the TPP barriers.

Assuming that the website blocking legislation is withdrawn or successfully challenged, stakeholders should anticipate a second wave. As stated above, the online gambling space has progressed into a multibillion-dollar global industry with significant upside. To that end, the Jaswal Institute expects the provincial governments will be ready and willing to go to war to assert their legal monopoly over online gambling. We anticipate this wave would focus on attacking the foreign operator principle. As stated above, by minimizing or eliminating connections with Canada, for example via locating download, database and gaming servers outside of Canada in gambling friendly jurisdictions, foreign operators take the position that they are not susceptible to the gambling provisions in Part VII of the Criminal Code given the legal nexus required to permit jurisdiction of the Criminal Code is not present. Though this position has been practically supported in Starnet, the Libman Supreme Court decision rules that the Canadian courts have jurisdiction when a significant portion of a given offence is committed in Canada. To that end, the requisite legal nexus for an offence under the Criminal Code may be established, for example, via a court concluding that a significant portion of an offence has been committed in Canada due to a provider aiming offerings at Canadian gamblers, a provider accepting bets from Canadian gamblers or the fact that games are being played on computers of Canadian gamblers. This wave will be tougher to overcome so a prudent approach for stakeholders would be to fill their legal war chests.

To that end, the Jaswal Institute thought that it would be an opportune time to resurrect an old argument that is highly relevant today; what was old is new again. We would like to thank Judith A. Osborne, Colin S. Campbell, Timothy F. Hartnagel and Garry J. Smith, whose articles were used as a foundation for our analysis, and Peter W. Hogg, a leading constitutional law scholar, whose writings were helpful in shaping our constitutional position.

In essence, the legal position is based on the questionable constitutional validity of the agreement, announced by the federal government in 1985, which effectively excluded the federal government from lotteries and lottery schemes. For 100 million dollars, to be directed towards the 1988 Winter Olympics, and reaffirmation of an agreement to make annual payments of 24 million dollars, indexed to the CPI, the federal government agreed to amend the Criminal Code to grant the provinces exclusive authority, either alone or in conjunction with the government of another province, to conduct and manage lottery schemes in accordance with any laws enacted by the legislature of that province. Leaving aside the public policy, ethical and moral concerns with respect to the federal government making Criminal Code amendments and decriminalizing otherwise criminal actions for cash from the provinces, as the regulation of lotteries and gaming is the responsibility of the federal government, did the transfer of regulatory control of gambling to the provinces constitute improper use of federal criminal law power and, if so, should this result in section 207 of the Criminal Code being struck down?

The Jaswal Institute suggests that the transfer of regulatory control of gambling to the provinces constituted improper use of federal criminal law power and, accordingly, the invalid actions should result in section 207 of the Criminal Code being struck down. Section 91 of the Constitution Act, 1867, which deals with the legislative authority of the Parliament of Canada, states that criminal law is within “the exclusive Legislative Authority of the Parliament of Canada”, which would support the view that inter-delegation of powers between the Parliament and a provincial legislature is prohibited. Nevertheless, the courts have carved out exemptions, for example referential and conditional legislation, to allow cooperation between the Parliament and provincial legislatures. To summarize the applicable exemptions created by the courts, “there is no unconstitutional delegation involved where there is no enlargement of the legislative authority of the legislature, but rather acts or the mere borrowing of provisions which are within provincial competence, which have independent provincial validity and significance and which the acting or referring legislature could have performed or validly spelled out for its own purposes” (Abel, Campbell, Hogg, Osborne). As gambling is exclusively within the jurisdiction of federal criminal law power, the section 207 gambling laws of the Criminal Code enlarge the legislative authority of the provincial legislatures and but for the terms of section 207 – which explicitly grant the provinces exclusive authority, either alone or in conjunction with the government of another province, to conduct and manage lottery schemes in accordance with any laws enacted by the legislature of that province – enacting laws and creating exemptions from the general prohibitions are not within provincial competence and do not have independent provincial validity and significance; further, the provincial legislatures could not have acted or validly spelled out provisions for their own purposes. In other words, the provinces acquired powers not constitutionally authorized. To that end, we would argue that section 207 constitutes an invalid inter-delegation which should be examined by the Supreme Court.

Given our position regarding an invalid inter-delegation, there is the potential of provincial litigation against the federal government based on a clause in the 1985 agreement, in which federal government traded away its gambling jurisdiction to the provincial governments for cash payments, which states “[the] agreement may only be amended or terminated by the unanimous consent of the Provinces and the Government of Canada”. If it does get to this point, there is an excellent argument summarized by Judith A. Osborne & Colin S. Campbell that, based on the legal opinion of counsel sought by the Senate Committee, the 1985 contract was not legally binding and merely a political arrangement.

Conclusion

Our legal position above highlights an option for stakeholders that may soon find themselves out of business in Canada. The position is simple. If you are not invited to the provincial portal party, why not crash it and shut it down by challenging the delegated provincial jurisdiction to regulate gambling. If you are lucky, in the aftermath, you may find a new party with a better spot on the dance floor.

Leaving the invalid inter-delegation and questions regarding the constitutional validity of section 207 aside for the moment, similar to our support with respect to the legalization of marijuana, the delegation of gambling jurisdiction to the provincial governments should weaken the notion of gambling as a matter under criminal law jurisdiction. As we have argued in the past, and do not mind repeating, our government must clarify laws and pursue policy objectives that increase innovation and attract competitive businesses to our country. Clarifying the legal grey areas with respect to online gambling would create innovative businesses that attract capital to Canada. Similarly, given the federal Liberals have promised to allow recreational use of marijuana, the recreational marijuana industry is another example of a new and innovative market that can be created through liberalization and legalization. As Canada has established a progressive regulatory environment for marijuana, we have the opportunity to be an international leader in the marijuana space; thus, similar to online gambling, creating innovative businesses that attract capital to Canada and promote innovative environments.

We need liberalization with respect to industries such as gambling and marijuana, which would increase innovative goods and services and, consequently, growth and competitiveness. Not only would this lead to better living standards for our nation’s citizens, but it creates the possibility of the emergence of strong Canadian global players, who could then expand into foreign countries, increasing the sovereign power of our nation. As the distinction between countries gets smaller and we increasingly move towards a borderless state, it is vital that Canada act and compete before the world makes the decision for us and renders us unable to emerge as the dominant nation we are.

Authored by Johnny Jaswal, Managing Director of the Jaswal Institute. The Jaswal Institute is a law firm that provides exceptional legal services and a full range of related investment banking advisory services. If you require further information, please contact Johnny Jaswal.

This article was also published on CalvinAyre.com and can be found at http://calvinayre.com/2016/03/14/business/the-illegality-of-current-gambling-laws-in-canada/.