Good afternoon, ladies and gentlemen.
First of all, thank you for this opportunity to address you on behalf of the Canadian Tobacco Manufacturers' Council.
Over the past three years we've drawn attention to the alarming growth of the illegal tobacco trade and its disastrous economic and social consequences. I'm heartened by the fact that this committee has called for hearings on such a serious matter. Given that we're discussing illegal activities, I've asked Don McCarty, vice president of the law division and general counsel of Imperial Tobacco Canada, to join me.
Before we get to the potential solutions, I'd like to give you an overview of this illegal market and its consequences. We've circulated a document to pre-read, as well as a CD, which provides detailed information from various different studies commissioned by Imperial Tobacco Canada, the Canadian Tobacco Manufacturers' Council, as well as others, such as the Canadian Convenience Store Association. I'd be happy to answer any questions you have on these studies, or indeed on any other matter concerning this important subject.
In the interests of time, I'll limit my points to the key conclusions. First of all, illegal products represented 22% of the Canadian market in 2007—and over 30% in Ontario and Quebec. Those data were from the last major study conducted, and the findings and the methodology of this study have been widely reviewed and accepted. Even health groups, such as Physicians for a Smoke-Free Canada, recognize it as the most extensive survey available.
In volume terms, illegal products reached 10 billion cigarettes in 2007, and all the indications since then are that it has continued to grow rapidly. The illegal trade has now overtaken Rothmans, Benson & Hedges, and JTI-MacDonald to become the second largest supplier of tobacco products in Ontario and Quebec. It's well on course to becoming the leading supplier nationally—ahead even of Imperial Tobacco, which manufactures 14 billion cigarettes a year.
Now, of that 22% that the illegal products represent, 93% originate from first nations reserves. I have with me here some examples of such products. These products violate a wide range of laws and regulations, including the Excise Act, the Tobacco Act, and the Consumer Products Labelling Act, amongst others. The remainder of that 22% is attributable to cigarettes smuggled in from other countries, and only 1% is attributable to counterfeit—basically the illegal copies of recognized brands, typically smuggled in from countries such as China.
While this is still a sizeable proportion of cigarettes purchased from smoke shacks, the largest and fastest growing means of purchase of illegal cigarettes is through contacts, namely, the criminal networks who distribute illegal products outside the reserves. In many cases, these sales are taking place directly to consumers, and indeed directly to children.
Whereas legal tax-paid cigarettes cost between $65 and $85 a carton—according to the price category in the province—illegal cigarettes are sold at prices as low as $6 for a bag of 200. In other words, they are sold at 3¢ a cigarette. An analysis of cigarette butts outside schoolyards in Ontario and Quebec suggests that the penetration of illegal cigarettes amongst children is running at 30%. In some municipalities it reaches as much as 50% in Ontario and even 70% in Quebec.
The illegal trade in tobacco products is widely seen as a low-risk and victimless crime that hurts only big tobacco and big government. It is true that the legal manufacturers lose several hundred millions of dollars per year in revenues. It's also true that other industry partners are suffering, whether they be wholesalers, retailers who lose an average of $120,000 a year, or the tobacco growers in Ontario whose livelihoods are threatened. And governments in Canada—or more accurately the Canadian taxpayer—are being defrauded to the tune of $1.6 billion every year. But as if that were not enough, it's the disastrous social consequences that demand urgent and effective action.
Canada justifiably prides itself on having the most highly regulated and one of the most highly taxed tobacco markets in the world. These regulations encompass the manufacturer, labelling, testing, marketing, and sale of tobacco products.
Given the inherently risky nature of our products, the major tobacco companies support reasonable regulation and indeed the use of taxation to discourage kids from smoking. We ask only that these laws and regulations be enforced uniformly and that they achieve their purpose. Sadly, neither is true today.
As you can see from the studies, children now have access to cigarettes at pocket-money prices, and criminals do not ask for proof of age. What is more, according to the RCMP and provincial police, many of the networks involved in illegal tobacco distribution also deal in alcohol, drugs, and firearms, with consequent risks to Canadian youth.
More broadly, all Canadians must be concerned that a culture be allowed to develop of casual law breaking.
So there you have it. From a highly regulated legal tobacco market to an illegal, unregulated, and untaxed market.... And we have yet to see the impact of the tobacco display bans, which come into effect in Ontario and Quebec at the end of this month and which will create fertile conditions for the illegal tobacco trade.
Before coming to the potential solutions, let me make clear that I am not calling for a tax rollback. While tax rollbacks have worked in the past, I understand the political pressures that one would bring. But the laws of Canada must be enforced uniformly and effectively or else governments will leave themselves no alternative other than chaos or a tax rollback.
I should also stress that there is no single solution, no silver bullet, to this problem. Any lasting solution will require a combination of measures that must involve and be supported by the first nations leadership. While I can't speak on behalf of the first nations, all the contacts and information we have had confirm that the first nations themselves are very concerned at the damaging effect of illegal tobacco trade on their own communities. Far from being beneficiaries, they have become the victims of crime from outside.
I'm pleased to see that certain first nations leaders have chosen to attend this hearing, and I hope their voices will be heard.
Effective measures to deal with illegal tobacco should include more effective enforcement of all relevant laws, not just taxation but also those covered by the Tobacco Act, amongst others. Proper enforcement would not only drive up the costs and reduce the demand for illegal products, but it would also help tobacco control policies from unravelling.
The announcement last week of the RCMP's 2008 contraband tobacco enforcement strategy is a very positive development, but as Assistant Commissioner Raf Souccar stated last week, enforcement alone will not suffice.
The creation of a national task force is a much needed initiative to coordinate government strategies and actions for the diverse government bodies that can play a role in fighting illegal tobacco. This range includes the Canada Revenue Agency, the RCMP, the ministries of Public Safety, Finance, Indian and Northern Affairs, Agriculture, and Heath. Such a task force should consult the different stakeholders, including the tobacco companies, for such information and recommendations as may be required.
There are areas beyond enforcement that can help to deal with the problem. For example, the supply of specific machinery and materials associated with tobacco manufacture should be properly monitored and controlled. To our knowledge, more than 20 tobacco manufacturing licences have been issued by the federal government over the past few years with very few, if any, inspections. The tobacco companies could also play their part by working with suppliers to the industry to ensure that they apply “know your customer” policies.
Finally, and perhaps most importantly, the introduction of a first nations tobacco tax comparable to the provincial tobacco tax should play a pivotal role. The proceeds could be used to fund the much-needed development programs for the first nations. This concept has proved effective with Seneca territories in the U.S. It's encouraging to hear that here in Canada several first nations leaders are advocating this as part of the solution. There are similar examples of very effective self-regulation in tobacco in first nations reserves such as the Cowichan Reserve in Duncan, British Columbia, where the provincial tobacco tax is enforced, collected, and retained by the first nations.
As you've seen, the situation is dire and has already spiralled out of control. I hope the political leadership--federal, provincial, and first nations--will seize this opportunity to put in place lasting solutions for the benefit of all Canadians. My company, together with the industry I represent, is committed to help wherever we can.
Thank you very much for your time.