Thank you Mr. Chair.
Good morning everyone.
Thank you for giving me the opportunity to make a presentation before the committee.
My name is Eric Gagnon, and I am the head of corporate and regulatory affairs for Imperial Tobacco Canada, the largest legal tobacco manufacturer in Canada. I stress the word “legal” because there is a thriving illegal market in Canada today.
I will start by saying that there are important health risks associated with smoking. You may agree or disagree with tobacco consumption. However, cigarettes are still legal in Canada, and I think we can all agree that, if adult consumers choose to smoke, we are all better off if they buy their products legally.
Unfortunately, over the last half of this year, industry data suggests that there has been a major spike in illegal tobacco activity in Canada and in Ontario in particular. That should concern this committee because illegal tobacco is already costing governments $2 billion in lost tax revenue annually.
Let me remind you of some of the basics of the size and the scope of illegal tobacco in Canada. According to the RCMP, there are over 50 illegal cigarette manufacturers in Canada and more than 300 smoke shacks manufacturing and selling tobacco outside existing legal, regulatory, and tax frameworks. There are over 175 organized crime groups that are dealing contraband tobacco across the country. Illegal tobacco rates are in the 15% to 20% range in Atlantic Canada, in the 30% to 40% range in Ontario, and in the 12% to 15% range in the west. To put things in perspective, if Ontario were a country, it would have the third-largest illegal tobacco market in the world.
You should be very concerned about policy decisions in Ontario that are making this situation much worse, including a reckless move earlier this year to increase tobacco taxes by $10 per carton over the next three years. As the biggest market in the country, when illegal tobacco rates rise in Ontario, it means even more lost tax revenue for the federal government. The only province making significant inroads in this is Quebec, where aggressive enforcement actions have reduced the illegal tobacco rate from 40% to less than 15%.
With that in mind, we offer three recommendations to fight illegal tobacco. In so doing, I will draw parallels for each of the government's approaches to marijuana legalization.
First, Canada needs a predictable framework for tobacco taxation. International experience shows that a moderate, annual increase that's tied to a variable like inflation is the best approach, like the model that was put in place last year for alcohol.
There is also a need for federal-provincial coordination on tobacco taxation like the finance minister has proposed for marijuana. While the tax framework proposed for marijuana is designed to match the black market price and kill the illegal market, with tobacco it seems to be the exact opposite, with repeated tax increases pushing legal prices to well over $100 per carton in most provinces compared to as little as $15 for the illegal equivalent.
Second, a whole-of-government approach is needed for tobacco in which taxation, regulation, and enforcement are considered in the context of a thriving illegal trade. The government is designing a marijuana framework to drive organized crime out of that business, but it is ignoring the illegal tobacco trade. However, the same organized crime groups are behind illegal tobacco and marijuana, so you really need to ask whether Canada is better off if you drive organized crime out of marijuana but then they gain an even stronger footing in tobacco.
Third, the government needs to reconsider its plan for plain and standardized packaging of tobacco and the standardization of cigarettes themselves. In Bill S-5, which is before the House, Health Canada has given itself the regulatory authority to mandate that every tobacco package and every single cigarette must look exactly the same. If that happens, it will be impossible for consumers, retailers, and law enforcement to tell a legal product from an illegal product, and the contraband problem you have now will be exacerbated by a flood of counterfeits.
Health Canada claims that excise stamps and health warnings will distinguish legal products from illegal products; however, those are already appearing on clear, illegal products, including baggies of cigarettes. The stamping system is something this committee needs to look at. It is completely broken. There are products being produced by unlicensed manufacturers that are sold with a federal excise stamp. Since no one will explain to us how this is happening, perhaps you can ask for answers, because it undermines the integrity of the whole tax and regulatory regime for tobacco in Canada. In the meantime, it is reckless to continue down the path of plain and standardized packaging when there are already no controls over the means to differentiate the existing products.
The government seems to recognize the risk of plain packaging. The parliamentary secretary to the ministers of health and justice, Bill Blair, said in August that some level of branding will be allowed on marijuana to help fight the illegal market, yet when we made the same argument for tobacco, we were ignored. There is a need for consistency between marijuana and tobacco on taxation, packaging, and the focus on getting organized crime out of the business.
If you are willing to invest in fighting illegal tobacco, as Quebec has done, there is billions in lost revenue that can be recouped.
Thank you for your time. I look forward to your questions.