Public Safety Committee on May 14th, 2008

[The Chair, Conservative, Garry Breitkreuz]

I'd like to bring this meeting to order.

This is meeting 30 of the Standing Committee on Public Safety and National Security. We're continuing our study of contraband tobacco.

We'd like to welcome, from the Canadian Coalition for Action on Tobacco, Mr. Rob Cunningham and François Damphousse; and from the Canadian Convenience Stores Association, Michel Gadbois.

The usual practice at this committee, as you probably know, is to allow an introductory statement of approximately ten minutes. We'll let all the witnesses have that privilege before we begin questions and comments.

If you're ready to begin, go ahead, sir.

[François Damphousse, Director, Quebec Office of the Non-Smokers' Rights Association, Canadian Coalition for Action on Tobacco]

Thank you very much, Mr. Chairman and members of the Committee, for giving us this opportunity to present our views on this important health and public safety issue.

My name is François Damphousse. I am Director of the Quebec office of the Non-Smokers Rights Association.

I have two basic messages for you today. First, it is important to reiterate that taxation is the most effective means of reducing tobacco use. That is why we are asking you today to do whatever you can to protect that public health policy.

Second, it is untrue that high taxes on tobacco products automatically result in contraband. The problem is much more closely linked to a lack of effective measures to control illicit sources of tobacco. To illustrate that point, I would like to refer to events that occurred in the early 1990s. Tobacco smuggling did not continue in the western provinces and Newfoundland and Labrador, despite the fact that they had not followed the lead of the federal government and other provinces, which drastically lowered their tobacco taxes in February of 19994.

We now know that the problem was due, to a much greater extent, to the fact that the three main tobacco manufacturers in Canada were, at the time, freely and deliberately supplying the contraband market, and that they simply stopped doing that once taxes went down in 1994.

In our view, it was a lack of action to control manufacturers' activities that caused an explosion of controls and activity, which has had serious negative impacts in terms of public health and government revenues. I am not exaggerating when I say that it took many years of sustained effort on the part of the federal government and the health community to recover from that crisis.

The current situation is no different now, other than the fact that, as mentioned last week by the RCMP, contraband cigarettes are no longer being produced by the major tobacco manufacturers; rather, the source is illegal manufacturing operations located in a number of different Indian reserves.

Once again, we are seeing that contraband products are more readily available in Quebec and Ontario, compared to other provinces, which have much higher levels of taxation. If the problem has continued to expand in the last six years, it is because more effort was focused on intercepting contraband cigarette runners, rather than on the real source of the problem.

Without appropriate action on your part, the contraband problem will continue to compromise much of the work that has been carried out—both yours and ours—to reduce smoking in Canada.

It is also important to point out that the effects of the contraband market are even more serious in Aboriginal communities, where smoking rates are already two or three times higher than in the rest of Canada. For several years now, we have been asking for a comprehensive package of measures to be developed to control the problem.

To talk about what that could include, I would now like to turn it over to my colleague, Rob Cunningham.

[Rob Cunningham, Senior Policy Analyst, Canadian Cancer Society, Canadian Coalition for Action on Tobacco]

Thank you, Mr. Damphousse.

I, too, would like to extend my thanks to the Committee.

My name is Rob Cunningham. I am a lawyer and senior policy analyst with the Canadian Cancer Society.

Tobacco contraband is an absolutely enormous problem. Urgent action is needed. We do wish to recognize that some measures have been taken by enforcement authorities and in the 2008 federal budget and some provincial budgets. We also wish to applaud the May 7 announcement by Public Safety Minister Stockwell Day. This represents the government recognition of the seriousness of the situation and a strong political commitment to move forward.

Perhaps I could invite the committee to grab our brief and turn to the final page. On the final page you have a graph with provincial and territorial tobacco tax rates. Ontario and Quebec have the lowest tobacco taxes but the highest rate of contraband. This shows that contraband is not a problem of higher taxes or demand, but rather of source of supply.

The key to success to controlling contraband is to target the source. We know the sources: illegal manufacturing operations on Kahnawake, Six Nations, Tyendinaga, and especially the U.S. side of Akwesasne in New York State near Cornwall.

Our recommendations for actions are as follows.

First, because by far the most important source is found on the U.S. side of Akwesasne, eliminating this source must be the top priority. The federal government must immediately persuade the U.S. government to shut down the illegal, unlicensed factories located there. The Americans must act. Indeed, it is in the interest of the U.S. to act for reasons of border security and national security. Criminals who exploit the Akwesasne territory by bringing cigarettes into Canada return to the U.S. with drugs, weapons, and sometimes people. If the situation were reversed and the U.S. were flooded with illegal cigarettes from Canada, costing U.S. federal and state governments more than $10 billion annually by comparison, the U.S. government would insist that Canada take immediate action.

Note that the Mohawk Council of Akwesasne and the Akwesasne police, both on the Canadian side, should be praised for their on-reserve enforcement and collaboration with the RCMP and others, which is a positive distinction.

Second, prohibit the supply of raw materials, including cigarette packaging, filters, and paper in addition to leaf tobacco to anyone without a tobacco manufacturer's licence. By way of illustration, in Ontario the Gaming Control Act prohibits the supply of goods or services for gambling to anyone without a provincial gaming licence. For the Americans, control of raw materials headed to the U.S. side of Akwesasne would also be desirable, for example, by targeting leaf tobacco from North Carolina.

Third, establish a minimum bond of at least $5 million to obtain a federal tobacco manufacturer's licence. At present, the current federal bond ranges from just $5,000 to $2 million. It is possible for a new, apparently small company to get a licence for only $5,000 and begin manufacturing cigarettes in this country. This is a joke that needs to be changed. A meaningful bond would give the government financial leverage to encourage compliance. Breach of laws would mean that the bond would be forfeited in whole or in part.

Fourth, revoke licences of manufacturers acting illegally, including for violation of provincial tobacco tax laws.

Fifth, establish a full tracking and tracing system to monitor product shipments, as do Purolator Courier or Federal Express, and identify points of diversion.

Sixth, promote the opportunity to implement a first nations tobacco tax equal to provincial tobacco tax. There's very little awareness that this is already authorized by the federal Budget Implementation Act, 2006. First nations would require an agreement with the province in which they're located and first nations would keep the revenue from this tax. In terms of contraband prevention, there will be benefits in the long term, but realistically not much benefit materially in the short term.

Cowichan First Nation on Vancouver Island has a tobacco tax through different specific legislation, and under this 2006 legislation the Whitecap Dakota First Nation in Saskatchewan has a new liquor tax. The retail price is the same as off reserve, and the band council of the first nation receives the revenue. They're examples to consider.

For contraband prevention measures, there's a role for provinces, as some measures can only be implemented at the provincial level. Our seventh recommendation would be for provinces to implement a provincial refund system whereby cigarettes are shipped to reserves at a price that includes an amount equal to provincial tobacco taxes. After a sale to an eligible status native on a reserve, the on-reserve retailer then applies to the province for a refund, perhaps every two weeks. Five provinces currently have such as rebate system.

In Ontario, which doesn't have this system, it would help deal with the situation of products of Grand River Enterprises being found illegally in large numbers on the contraband market. Mr. Montour testified that he didn't want that and that laws should be toughened; he didn't specifically say what laws, though.

Our eighth recommendation is that there should also be a provincial quota system that limits the quantity of tax-exempt cigarettes shipped to each reserve, based on reserve population. Five provinces do this.

The ninth recommendation is that there should be distinct markings to distinguish between when provincial tobacco tax is paid and when it is not paid and the cigarettes are intended for on-reserve tax-exempt sale. Four provinces do this. It's easier to tell what is legal and what is not.

Immediate action and a comprehensive strategy are essential. Delays in taking action will mean that the problem will get worse, adversely affecting aboriginal and non-aboriginal health.

On a final note, aboriginal smoking rates are scandalously high. The most important explanatory reason for this is access to cheap cigarettes, including contraband cigarettes. Contraband is addicting aboriginal kids and non-aboriginal kids, and everyone agrees this should not continue. We must tackle contraband and complement this with the restoration at Health Canada of an effective aboriginal tobacco strategy.

Contraband is a population-wide problem of public health, public revenue, and public safety. This committee is to be commended for initiating this study. We look forward to any questions you may have.

Thank you.

[The Chair, Conservative, Garry Breitkreuz]

Thank you very much.

We'll now go over to our next witness. Please introduce yourself and explain that you are not just with the Canadian Convenience Stores Association. I think that will be helpful for us.

Thank you.

[Michel Gadbois, Executive Vice-President, Canadian Convenience Stores Association]

My name is Michel Gadbois. I'm the senior vice-president for the Canadian Convenience Stores Association. At the same time, I'm the president of the Quebec convenience stores association.

I will be doing my presentation in French simply because I'll be more precise and it will be swifter, but at the same time I'm very comfortable dealing with the questions in French or English.

Thank you.

On behalf of the Canadian Convenience Stores Association, or CCSA, I want to begin by thanking you for giving convenience store owners an opportunity to weigh in on the issue of contraband tobacco. In the next ten minutes, I will be addressing the following four issues: who we are and how contraband tobacco affects us; the responsibilities of both convenience stores and the government as regards the sale of tobacco; the repercussions of the current crisis; and, possible solutions.

First of all, who are we? The Canadian Convenience Stores Association represents 33,000 owners and managers of convenience stores across Canada, in the four main regions of the country: the Maritimes, Quebec, Ontario, the Prairies and Western Canada. We have four divisions for the country as a whole.

Who is a typical convenience store owner? It could be a mother or a father, often a newcomer to Canada. It would also be someone who is dynamic and hardworking, who may devote more than 60 hours a week to the business. It is someone with close ties to his or her community and the desire to serve that community. It is someone who employs young people, who often acquire their very first work experience at a convenience store.

The economic impact of convenience stores in Canada is considerable in every way. For example, we employ some 220,000 people in Canada. We pay out $3 billion in annual salaries and, of course, we collect $9.2 billion in taxes for the government every year—in other words, three times more than the salaries we pay—and that figure does not include gas. That amount does not, in fact, include gas taxes; only taxes on tobacco. Of course, in Quebec and other provinces as well, convenience stores also sell alcohol.

Convenience stores are among the rare businesses to still be managed within the family. In our opinion, it is very important that there continue to be room in Canada for this type of family business.

How does contraband affect convenience stores? First of all, retailers are in a very good position to have observed the astonishing increase in contraband occurring in Ontario and Quebec. They see this, first of all, through price changes; secondly, through lower sales; and, thirdly, through increased sales to minors.

For example, with respect to pricing, the price of a carton of contraband cigarettes has dropped from $18 or $20, two years ago, to $5 or $6 today, compared to $70 or $75 on the legal market. That clearly shows that supply is continuing to increase and that the product is more and more available and accessible.

As regards lower sales at our end, according to an internal study of convenience stores in Quebec, for the last two years, individual convenience stores have lost some $2 million in revenues since contraband products began to appear. Of course, contraband was not always as prevalent a problem as it has become; it started slowly.

In 2007, based on an illegal market representing 30 per cent of the overall market, on average, in Ontario and Quebec, foregone sales amounted to $2 billion. I repeat: $2 billion! With respect to increased sales to minors, we have provided you with a copy of a study carried out in the youth segment to identify cigarette butts in schoolyards. In English, the name of the study is catchier than it is in French: it is the “Butt Study”; in French, because the word for butt is “mégot”, the title isn't funny. However, the results published in the fall of 2007 show that some 11,000 cigarette butts from 105 schools in Ontario and Quebec were analyzed. Incidentally, methods were used to determine whether the butts were from legal or illegal products. The result was that 24 per cent of the butts in Ontario, and 35 per cent of them in Quebec, were contraband tobacco products.

That rate is similar to the one for the illegal market during the same period. It's huge. What that means is that the market is extremely prevalent in the youth segment, which represents a highly vulnerable client group. The figures show that the median—not the average—is around, or possibly higher than, 50 per cent. According to the figures presented in the study, in some schools, it is as high as 75 per cent, especially in lower income neighbourhoods.

I would now like to address the question of what the responsibility of convenience stores is in this regard. Owners have three major responsibilities when it comes to tobacco: to collect and remit taxes to the government; to enforce specific regulations regarding the sale of tobacco, particularly with respect to product displays; and, to prevent the sale of prohibited products to minors, whether it be tobacco, alcohol or lottery games.

Because the highest taxed products are sold in our stores—alcohol, tobacco, gas and products that are almost exclusively made up of taxes, such as lottery games—convenience stores remit some $9 billion in taxes every year, as I mentioned earlier, not including gas.

In terms of product displays, what is happening now is ironic: even as the uncontrolled, illegal tobacco market is expanding with disastrous consequences, a number of provincial governments have recently introduced new regulations which will require convenience stores to rethink all their product displays, at their own expense, in order to hide products sold legally in their stores.

Despite the current context of illegal competition, the CCSA has undertaken to help its members comply by suggesting quick and effective solutions. Yet most convenience stores are going through a period where they are losing their income, and it is costing them between $2,000 and $5,000 to hide these products. That harkens back to the days of the Commission des liqueurs du Québec. Some of us are old enough to remember that time. Alcohol was hidden behind the counter, and handed over in brown paper bags. That hasn't changed, and I think people react badly to that kind of regulation.

In terms of sales to minors, we have deployed, all across the country, an innovative program for checking customers' ages called: “We Expect ID”. This is a rigourous program whereby customers are asked for ID—a driver's permit, in Ontario. On-line training and certification is provided to retailers. There is also a mystery buyer program that allows us to see whether our members are in compliance or not.

Now let us look at the government's responsibilities with respect to contraband. The government has important responsibilities in this regard. The first and most obvious one is to ensure that people are complying with the law; the second is that the market is fair; and, the third is reducing smoking, particularly among young people.

In terms of law enforcement, a group specialized in smuggling control has been set up. Without prejudging its effectiveness, we can certainly say that its impact on this scourge will, at best, be extremely marginal and, at worst, be absolutely negligible, given the volume of traffic involved and the very low fines mentioned earlier.

In terms of market equity, the very high price differential between the legal product and contraband tobacco remains the primary cause of increased contraband. It is important to remember that 75 per cent of the cost of a carton sold is taxes—nothing but taxes.

Between 1999 and 2002, the Canadian and Quebec governments increased taxes on a carton of cigarettes by almost $20 over a period of only three years. It was at the end of that period that contraband really took off, exceeding at the time—and even now, five years later—the highest levels noted in Quebec in 1994, during the period when contraband was at its peak.

As regards the prevention of smoking in young people, current contraband is gradually wiping out all the prevention efforts undertaken over the years, because tobacco has never been more accessible or affordable for young people than it is now.

What are the consequences of the current crisis? Well, history is repeating itself. In the early 1990s, after contraband reached the critical threshold of 30 to 40 per cent of the overall market, it proceeded to rise dramatically over a two-year period, reaching levels of 60 and 70 per cent. That is perfectly normal, and it would happen in any industry: once your distribution network is in place, the market is there and there is no competition, growth is exponential. Now it has reached a critical threshold. If current trends continue and contraband reaches levels such as 50, 60 or even 70 per cent, we can expect the following consequences.

First of all, criminal groups will engage a power struggle to control this huge and lucrative market, and because they'll be fighting over the same territory and customers, violence will increase in Canada and in street gangs. Young people will be smoking more and more, governments will see their tax revenues fall dramatically, and citizens will become increasingly cynical, in terms of their attitudes towards their government and its inability to enforce the law.

Our message is simple: we must all take our responsibilities when it comes to fighting contraband.

Convenience store owners have taken their responsibilities by launching an extensive campaign to mobilize people across the country, a campaign which includes the following: an anti-contraband advertising campaign in convenience stores across the country that will be launched in early June; the creation of a national coalition to fight contraband, that will bring together all groups and organizations concerned about contraband tobacco at the national, provincial and regional levels; on May 26, we will begin a tour of seven major cities in Quebec; and finally, we will be getting convenience store owners on board to carry out a campaign all across the country aimed at federal and provincial elected officials, and even senators.

In closing, I would like to emphasize, once again, the role of government and its responsibilities. There is not only one solution; there are many. There is an obvious need to review tobacco taxes as a whole, including the very interesting areas mentioned earlier. I am going to say something now which may hurt: it may be necessary to lower taxes temporarily in order to bring back the market or, at least, return us to a situation where we can prevent the exponential growth we are seeing today. Something must be done, and that is one of the temporary measures that could be taken.

As well, there is a need to start a constructive dialogue with the Aboriginal nations, to tighten up enforcement measures and increase police resources at the federal and provincial levels, particularly on the U.S. side. That is the most significant source of the problem we are currently experiencing. We must make the public aware of the dangers of contraband tobacco, which is something we will be starting to do in a comprehensive manner all across the country.

In closing, leadership and political will on the part of the government are the key to success when it comes to eliminating contraband. We believe that retailers, social groups and governments can work together to rid us, a second time—and for the last time, we hope—of the national scourge which contraband tobacco has become.

Thank you.

[The Chair, Conservative, Garry Breitkreuz]

Thank you very much.

Now we'll begin a round of questions and comments.

We'll begin with the Liberal Party. Mr. St. Amand, please.

[Lloyd St. Amand, Liberal, Brant, ON]

Thank you very much, Mr. Chair.

Thank you, gentlemen, for your very cogent presentations to us.

The problem, which is a significant problem, was identified long ago. I think all the committee members appreciate your recommendations or suggestions on how to deal with this.

I have a couple of questions that merit short answers and then a question that merits, I hope, a more fulsome answer.

I appreciate that these are best estimates only, but with respect to the quantity of cigarettes manufactured in the United States, which end up of course illegally here in Canada, what percentage are manufactured in the U.S. relative to what is being manufactured illegally here?

[Rob Cunningham]

On one occasion the RCMP said 90%. On another occasion they said it's by far the biggest source. So there's not a precise number, but it's very big.

[Lloyd St. Amand, Liberal, Brant, ON]

The vast majority, though, it seems.

[Rob Cunningham]

Absolutely.

[Lloyd St. Amand, Liberal, Brant, ON]

I believe it was you, Mr. Cunningham, who indicated that the rate of smoking among aboriginals is, in your phrasing, “scandalously high”. Relative to non-aboriginals, what is the approximate ratio?

[Rob Cunningham]

The Canadian average is 19%. There are different surveys. It's 44% to 60% among the aboriginal population. It's more difficult to measure, but it's two to three times the Canadian average.

[Lloyd St. Amand, Liberal, Brant, ON]

I've more than a passing interest in this, because my riding of Brant includes Six Nations of the Grand River, on which live approximately 11,500 individuals, but on which are being operated over 300 smoke shops or smoke shacks.

I've heard stories, and correct me if I'm wrong, that non-aboriginals come to Six Nations and essentially buy their year's supply of cigarettes, load up their truck or their van. Within 90 miles of Six Nations probably are four million to four and a half million people. Is what I'm hearing correct, that non-aboriginals are clearly complicit in the outrageous purchasing of these illegal products?

[Rob Cunningham]

Yes. In very large numbers non-natives are abusing the tax exemption rights of status aboriginals, and that's a problem. It's not only purchases on reserve, but taking large quantities off reserve for informal, illicit distribution to workplaces and homes. Yes, it's an enormous problem.

[Lloyd St. Amand, Liberal, Brant, ON]

With respect to your last recommendation, Mr. Cunningham, to enable first nations to impose their own tobacco tax, do I understand that as it is now they would have the authority to do that and that it has, in fact, been implemented in some communities?

[Rob Cunningham]

There are 29 that implement the goods and services tax. But just in terms of a tobacco tax equal to provincial...there is one, Cowichan on Vancouver Island, and one is done for alcohol.

[Lloyd St. Amand, Liberal, Brant, ON]

With respect to Cowichan, what has been the result?

[Rob Cunningham]

It's been in place roughly for a decade, and where the band has had the revenue from purchases on their territory, their experience has not been sufficiently documented, in terms of quantifying the revenue or measuring smoking rate changes, for example. But clearly the higher prices will have a beneficial impact on decreasing smoking.

[Lloyd St. Amand, Liberal, Brant, ON]

But there would be no requirement that the tax imposed by a first nations community be commensurate to or equivalent to the provincial rate?

[Rob Cunningham]

In fact, it must be identical. That is the only option.

[Lloyd St. Amand, Liberal, Brant, ON]

All right.

I won't say your first recommendation is a weak one—I don't mean to speak disrespectfully—but “persuade the U.S. federal government to shut down illegal manufacturing operations...”? I'm sure they've already been cajoled, coaxed, begged to do that. Or is it your view that the efforts so far by Canadian governments—over the years they have been clearly less than persuasive—have not been forceful enough, or is it your view that we've made token requests only of the United States?

[Rob Cunningham]

I don't know what details may occur in private, but the public indications are that there have not been, at the ministerial level or at the secretary member of cabinet level, sufficient representations.

My understanding is that there are not adequate enforcement resources in the area. There's a recognition now that there's a problem, but the products are going north to Canada, so I think they're less sensitive to the importance of moving quickly, and I don't think there's necessarily a full appreciation of the magnitude.

I know there are different fora where members of Parliament or government representatives can raise this. I believe that when the full story is told, the Americans will agree that it's very much in their interest to find a solution to it. They have different enforcement options, they have different technologies, there are different approaches, and the Americans can help figure out what would be an appropriate way, including consultation, to deal with this.

[Lloyd St. Amand, Liberal, Brant, ON]

In terms of the enforcement in Canada, and again getting back to my example of a non-aboriginal who goes onto a reserve and buys however many hundreds of dollars worth of illegal product, what efforts, if any, have been made to intercept that individual as he or she drives home with the illegal cigarettes?

[François Damphousse]

Most of the time the RCMP comes out with press releases showing that they seized actual runners purchasing these products in large quantities on the reserves and distributing them across the provinces. That's a big problem, but the thing, for us, is that spending much of the resources trying to intercept the runners is not, in our opinion, an effective way of dealing with the contraband problem.

If they get caught, they get caught, which is why we've been advocating dealing with the source of the problem. In our opinion, that would be much more effective. We know where the sources are. We've been proposing measures that would address the issue outside the reserves by blocking off the supplies of raw materials to these illicit manufacturers. We believe that would be the much better strategy to deal with this issue, instead of going after just runners, who are going a little bit everywhere. The RCMP even testified in front of the Standing Committee on Health that they don't have the resources to go after all the runners with their products.

[Lloyd St. Amand, Liberal, Brant, ON]

Thank you, Mr. Chair.