Canada: Controlling Illicit Tobacco Trade (2019)

Author: Robert Schwartz

Abstract

The tobacco industry instigated illicit tobacco trade in Canada in the 1990s in response to tobacco tax increases at both the federal and provincial levels. To illegally avoid these taxes, tobacco companies exported tobacco products over the border to the United States and engaged some Indigenous communities adjacent to the border in smuggling these products back into Canada and selling them untaxed. The tobacco companies admitted to this activity in an out-of-court settlement with the Canadian government and paid fines totaling $1.7 billion. To curb illicit tobacco activity in the 1990s, Canadian governments lowered taxes considerably, resulting in confirmed substantial increases in youth initiation and tobacco consumption. The involvement of some Indigenous communities makes Canada’s illicit tobacco market distinctive. Nation-to-Nation sensitivities between Indigenous communities and Canadian governments and the exemption of First Nations people from paying sales taxes on tobacco products constitute an important backdrop against which the illicit tobacco market operates. The Royal Canadian Mounted Police estimates that some 80 percent of illicit tobacco originates in border reserves in the provinces of Ontario and Quebec, while most of the remainder is counterfeit product shipped from ports in Asia to the province of British Columbia on Canada’s west coast. Government estimates of the size of the illicit tobacco market are sporadic and outdated. After control efforts all but eliminated illicit tobacco trade following the initial spike in the 1990s, independent estimates suggest that a substantial increase in illicit tobacco use occurred between the early 2000s and around 2008, followed by a gradual decline. Official estimates from Statistics Canada indicate that illicit tobacco reached 39 percent of total tobacco sales in 2008/9 and decreased to 32 percent in 2010/11. More recent estimates from independent non-governmental sources suggest that illicit tobacco has decreased to somewhere around 15 percent of the market in recent years. Federal and provincial governments have implemented a panoply of policies to curb illicit tobacco, including: licensing; marking/labeling; export taxation; allocation/quota and refund/rebate systems for reserves where First Nations people are exempt from sales taxes on tobacco; tax harmonization agreements with reserves; and, enforcement efforts. While anti-illicit tobacco measures have done much to reduce and contain the problem, illicit tobacco continues to constitute a substantial share of the tobacco market. The tobacco industry uses fears of stimulating illicit activity to dissuade Canadian governments from substantial tobacco tax increases and from advancing other tobacco control policies. Canadian governments have been hesitant to adequately address illicit cultivation, manufacture, and sale of tobacco products by some Indigenous communities. This is apparently due to understandable sensitivities around Nation-to-Nation relations and fears of sparking violent confrontations. More can be done by Canadian governments to curb the illicit tobacco market, including: instituting tax refund/rebate systems for on-reserve retailers in Ontario and Quebec to replace the allocation/quota systems; working with affected Indigenous communities to develop alternative sources of revenue; enforcing existing stipulations in cooperation with the leadership and enforcement arms of relevant Indigenous communities; implementing an effective track-and-trace system not influenced by the tobacco industry; and publishing annual reports on the size of the illicit market and on measures to combat illicit tobacco.
 
Read more: World Bank Group