Public Safety Committee on May 14th, 2008

[Roy Cullen, Liberal, Etobicoke North, ON]

Yes.

[François Damphousse]

In Kahnawake there were news reports at one point that the CRA granted something like 10 or 11 licences to manufacturers on the reserve, and they're not operating legally. So why have those licences been granted? It's so easy to get them.

[Roy Cullen, Liberal, Etobicoke North, ON]

Okay. I think that's a good suggestion.

The idea of regulating the supply of raw materials has come up before from other witnesses. When I presented that to the departments, the CRA--especially--and the Department of Finance said it's not very practical because the cigarette papers and the filters are used for other purposes. Do you think that's a legitimate argument against implementing something like this?

[Rob Cunningham]

No, I do not. I think it's viable. You could structure it in a way that would work. We do it for gaming goods and services in Ontario. If somebody is a manufacturer and they're doing so knowingly, you can get them. There are certain product categories that are used for cigarettes only--a package that says “cigarettes” on it, for example, or the tipping paper. Certain things are unique.

I think there's a way it could be done.

[François Damphousse]

Not only that, but the tobacco industry testified on Monday that they would be willing to share the information on where most of these products are coming from. For the authorities it may be a bit more complicated to get that information, but I'm pretty sure it would be fairly easy for them to find out where to get those products. And once you make it illegal for those suppliers and slap them with a stiff fine, it will change their behaviour. It will not be economically interesting for them to supply the illicit manufacturers.

[Roy Cullen, Liberal, Etobicoke North, ON]

Mr. Gadbois, I really like your idea of a campaign, but I hope that you are not suggesting that tobacco taxes go down. In my opinion, that is not the direction in which we should be moving.

[Michel Gadbois]

I know that this would not be popular. Experience has shown, as I pointed out earlier, that it was a successful approach in 1994, even though the nature of the contraband was quite different. The fact remains, though, that its manifestations are the same. The incredible gap from $6… I think it is irresponsible to say that, at $6 a carton, as opposed to $75 or $70 a carton, there is just no point in fighting it and we may as well give up. Even if all the taxes were removed, it would be $6, compared to…

So, I think we need to clearly understand what exactly we are talking about. I see this as a temporary measure that could be taken in order to determine what share of the illegal market we could get back—by reducing the rate of taxation. It's important to understand that there are retailers out there who are suffering, and here we have a market expanding exponentially. Also, we don't want this market to go beyond 50, 60 or 70 per cent. So, something must be done.

We are trying to develop ideas and this is one that could be effective, but it must be temporary. One thing is for certain: without controlling the market, taxation has proved the kind o effect it has on two occasions. It creates a tempting parallel illegal market. I know that is not a popular thing to say, and people are always telling me: “You're not politically correct”. So what! That's the reality. It's not the only option, but as soon as you mention it, everyone says how awful it is, that you can't do that, that it's terrible. But look what happens when you raise taxes: ultimately, you are not even able to control the product entering the country.

So, do consider that among other options; don't just dismiss it. Let us not automatically shut the door, saying that it's impossible. Because, at some point, we will have to get a message out there to our customers and to smokers. Why would they come back to this market? Do you honestly believe that, in three months time, we will be in a position to completely cut off the flow, and that no illegal product will be entering the market anymore? It will take at least a year before we can begin to control the product coming into Canada.

And what is going to be happening in the meantime? How far are we prepared to let the illegal market expand? That is the reality. It's unpleasant to have to say so, as I freely admit, but that is the reality of the market at this time. The market hasn't dropped; it has done nothing but expand for the last three years.

First of all, how far do we think it has to grow? Second, if people don't take this action and we find other solutions, that's great. From the standpoint of the retailer or the manufacturer—or anyone—the higher the taxes, the better the margins for the seller. That is a market reality. So, we are not talking about cutting specific amounts; we are just talking about restoring a legal market.

The logic is as simple and crude as is the reality that stares us in the face every day.

[François Damphousse]

Very quickly, I come from Quebec, from Montreal. One of the disastrous consequences of the tax rollback in 1994 was a doubling of smoking prevalence among teenagers. It went from 19% to 38% in a few years because of that, so that's disastrous.

The government predicted they would lose a couple of hundred million dollars after just one year. They've lost close to $1 billion in revenues, and right after the tax rollback strangely enough everything stopped. Yet provinces out west and in Newfoundland kept their prices high, kept their taxes high. How come there was no smuggling? Automatically, because of those high prices they should have had some smuggling transferred to those provinces. The only reason it stopped is that the tobacco manufacturers decided to provide the products to the illegal market. When they knew that five provinces rolled back their taxes, they said they'd won. They had 70% of the market in which the prices were very low and they made huge profits.

The only one who benefited from the tax rollback was the tobacco industry. It didn't drop its prices. It kept its prices at the same level. Only the provincial governments and the federal government decided to roll back taxes, and we pay the consequences. We've been working very hard for the past ten years. It took us ten years to get back to the levels we were at in 1993. So we'd better not make that same mistake.

[Michel Gadbois]

I just want to add one element here, because I know we disagree and everybody says not to raise it.

The problem is we always say we've succeeded in curbing youth consumption. We did, but in the past three years it's gone up simply because they have access. We have to face reality. If one cigarette costs under 5¢, obviously kids will be drawn to that and to other things. That is what we're living with today.

Tell me tomorrow that we can stop it at the source, with all the propositions they've put on the table, and I would love it. We agree that with high taxes we have better margins on it. But again, the reality at the moment is that teens have access to the product more than they ever had in the past ten years. That's the reality.

[The Chair, Conservative, Garry Breitkreuz]

We'll have to end that round. It's double the time anyway.

Ms. Thi Lac, go ahead, please.

[Ève-Mary Thaï Thi Lac, Bloc, Saint-Hyacinthe—Bagot, QC]

Thank you very much for being here. I am very pleased to have this opportunity to hear your comments and to begin a debate on the whole issue of contraband cigarettes.

Although I realize that the availability of illegal tobacco products is a scourge, my greatest concern relates to prevention among youth. I am part of the generation which was made aware of the harmful effects of tobacco. It is always surprising to hear that, although young people cannot buy their supply of tobacco in convenience stores or regular businesses, they are still the largest consumers of these products.

Consequently, contraband cigarettes are extremely popular with young people. Also, we tend to trivialize the fact that we see young people smoking. Young people are not allowed to buy tobacco products, and yet we see lots of teenagers smoking around the schools. It's really a shame.

We know that certain groups are more vulnerable to contraband tobacco than others. Do you think teenagers are one of those groups, and if so, why?

[François Damphousse]

Your question relates to changing use and the prevalence of smoking, particularly in Quebec or in Canada. According to the Canadian Tobacco Monitoring Survey conducted by Health Canada twice yearly, the prevalence of smoking is continuing to fall among young people.

The only area where smoking has increased in the youth population is with respect to the sale of cigarillos. The Government of Quebec will now be introducing two regulations aimed at controlling the sale of cigarillos, because of the candy flavours being used, and so on.

If the contraband market did not exist, we would be seeing better results in terms of lower prevalence among young people. But there are fears. Because of the availability of cheap cigarettes, because of contraband, the progress observed in Quebec is starting to slow. We don't want to see the trends starting to be reversed. Remember what happened in 1994, when taxes were lowered: surveys were conducted at the time by the Department of Health. The fact is smoking rose dramatically among youth when that occurred.

Does that mean that there is no issue in the youth population as regards contraband cigarettes? No; there is clearly a problem there. And why does this problem exist? Because cigarettes are cheap. Even economic studies have shown this: if you increase the price of cigarettes by 10 per cent, the prevalence of smoking among young people drops by 12 per cent, because they have less spending power. Contraband cigarettes create a problem. That is why the Quebec Ministry of Health and Health Canada must continue their efforts to implement policies aimed at reducing tobacco use among the population as a whole, including young people. However, public education campaigns are also needed to raise awareness of this issue among Canadians.

[Ève-Mary Thaï Thi Lac, Bloc, Saint-Hyacinthe—Bagot, QC]

Thank you very much.

Yes, Mr. Gadbois.

[Michel Gadbois]

I fully agree and support Mr. Damphousse's position.

There again, I have a feeling that people have forgotten that they were once 14 or 15 years old. We know what the reality is; the point is not to ignore it. In terms of the numbers for periods where there is said to have been a drop, that's fine if we know that the legal market corresponds to 100 per cent of the market. However, if we only know about 40 per cent of the market, as was the case in 1994, when we did not know what was happening with 60 per cent of the market—in my opinion, these statistics really don't mean much. That is the first thing.

But there is something else as well. What is terrible for young people these days is a whole series of circumstances. It is not just the fact that they will have access to tobacco or that it's cheap. We need to remember what we were like at that age. How does it work in a group of teenagers? First of all, it's a business. When you're under 18, you can do this, because no one can touch you. And once you get started, you continue to do it with other products; that's perfectly normal. That is the logical connection that is made. Access is open. This is a group fighting for a lot of money. And we are in the process of showing young people that the government is absolutely powerless, and that this is going to continue. They think it's absolutely hilarious. Have you seen them on television? They walk around with their bag and one says he got it for $5; the other, for $6. It's verging on the ridiculous. I talked earlier about the cynicism in society. And that is the stage we have reached now: young people are cynical about our way of enforcing laws.

In addition, we have to consider the network that this creates, and the street gangs. These young people are not learning to work at a steady job in our convenience stores; they think we're a joke. Why work for minimum wage when you can earn $2,000 a week as a runner? And they are untouchable, because they are under 18. That is the reality. That is why I don't like to hear people trying to develop these grand theories. Our values and our mores are appropriate, except that we now find ourselves in a situation where all of that has been distorted. That's why we all have to work together to return things to normal.

When things have returned to normal, there will still be campaigns and taxes, because there have to be. But we have to control this problem. I can assure you that it won't be easy. Because the message we are sending to young people is that there are easy ways of making money, and that smoking is cool and cheap. That is what has been happening in the last two years.

[Ève-Mary Thaï Thi Lac, Bloc, Saint-Hyacinthe—Bagot, QC]

In your recommendations, you say that a certain number of measures are needed, such as an actual tracking and tracing system. What do you mean by that? Could you give us additional details as to what this tracking and tracing system would involve?

[François Damphousse]

I'm sure you are familiar with companies such as Purolator and UPS. When they pick up your package, using the Internet, you are able to find out exactly where your package is in the delivery process. We should be using exactly the same system to trace tobacco products on the Canadian market. When a product is as harmful and deadly as tobacco, it is not right that authorities are unable to trace it.

A new system of marking using stamps—in other words, camouflaged marking—will be introduced. However, it will not include traceability. During the first contraband crisis, cigarettes manufactured by RJR-MacDonald, for example, were seized by the RCMP, and it was obviously impossible to determine where the cigarettes had come from, even though the brand marked on them was “Export A”. Of course, the company was not about to say that they came from its plants. Had a tracking and tracing system been in place, we could simply have used a scanner, looked at the marking on the packages, which is often hidden, and we would have had access to all the necessary information.

[The Chair, Conservative, Garry Breitkreuz]

We'll move over to Mr. Goldring now, please.

[Peter Goldring, Conservative, Edmonton East, AB]

Mr. Gadbois, your position with the Canadian Convenience Stores Association is executive vice-president. How much of a problem is this within your 31,000 retail convenience stores that serve 3.5 million customers every year? Is there under-the-counter traffic in the stores? What do you do to police this type of activity? Do you have a zero tolerance level for it? Is that a problem within the stores at all, or with other retail stores too?

[Michel Gadbois]

It will always be a problem when, as a retailer, you have illegal competition for a product that you legally sell.

[Peter Goldring, Conservative, Edmonton East, AB]

What do you do to try to cope with this?

[Michel Gadbois]

There are two things. One is that we have a program called “We Expect ID”, which I talked about when I made my presentation. It is a program aimed not only at tobacco but also at lottery and alcohol. They are not to be sold to minors. That's one way for us to know that these people who get training and who get their employees involved in the program are serious, responsible, legitimate retailers.

[Peter Goldring, Conservative, Edmonton East, AB]

But this isn't just selling to minors, it's selling an illegal product. Surely these circumstances must have surfaced from time to time. What course of action do you use? Do you withdraw the association membership from the people? What type of motivation do you have to encourage people to do the right thing within your chain?

[Michel Gadbois]

Obviously, the retailers who would be caught would have no place in our association. Now, this is not something we can police easily, because not even the police can police it easily.

Have we been informing our retailers? No, we haven't, simply because we've never had members who were fined or caught. There might be retailers out there who are involved.

[Peter Goldring, Conservative, Edmonton East, AB]

I guess my point is that there seems to be a generalized feeling of acceptance within many of the population, as you said yourself. There are people who are under pressure to pay for the high price of gas and the groceries on the table who don't see it as being a law at all; they see it as being a benefit. If your membership has that too, and if we have a lax approach to it in our organized system of handling it, then it's not surprising we'd see that laxness across the country in other areas too.

[Michel Gadbois]

The feeling the retailers have at the moment is that they are too supervised by rules and regulations in all aspects of their business. For anything they do, they either will get a fine or they can lose their business. For example, with the lottery system, they can lose the right to sell the product. For them, that's like losing their business.