Mr. Speaker, I rise to move second reading of Bill C-32. This is an important bill which will give legislative effect to excise and income tax changes announced over the past four months.
The primary purpose of the bill is to implement a range of measures related to tobacco taxation that were developed to combat the very serious smuggling problem facing Canada. These measures were announced in the House of Commons by the Prime Minister on February 8, 1994 and form an integral part of the government's national action plan on smuggling.
The legislation includes, among other things, first a national reduction in the federal excise tax on tobacco products equal to $5 per carton of 200 cigarettes, $5 per 200 tobacco sticks and $5 per 200 grams of fine cut tobacco as well as a reduction in the ad valorem rate for cigars to 50 per cent.
Second, additional reductions in the federal excise tax on tobacco products marked for sale in a particular province where the province has reduced its provincial tobacco tax.
Third, an excise tax on tobacco products for export with exemptions for legitimate exports for consumption outside Canada.
Fourth, a health promotion surtax that would increase the rate of federal tax paid by tobacco corporations under tobacco manufacturing and processing profits.
The bill also contains changes to the air transportation tax and the goods and services tax that were announced in the budget of February 22, 1994. These changes are intended to improve the fairness and efficiency of the tax system and to raise revenues. The measures undertaken in this respect are:
First, changes in the structure of the air transportation tax to reduce the tax burden on short-haul domestic and transporter flights and to recover a greater proportion of the cost of air facilities and services provided by Transport Canada.
Second, a reduction in the goods and services input tax credit for eligible business meals and entertainment expenses to better reflect the personal consumption elements of these expenses.
I would like to turn specifically to measures to address tobacco smuggling. There was a dramatic increase in tobacco smuggling in 1992 and 1993. Strong evidence indicated that most Canadian tobacco products that were exported to the United States on a tax and duty free basis were smuggled back into Canada and sold illegally without payment of federal and provincial taxes.
By the end of 1993 these contraband products accounted for about 40 per cent of the total domestic tobacco market and represented a revenue loss to the federal government of more than $1 billion and an additional loss of $1 billion to the provincial governments.
The impact of tobacco smuggling goes far beyond the financial costs and the negative impact on the government's ability to deliver needed programs and services. Even more troubling are the social costs associated with the contraband trade. With up to 95 per cent of the contraband tobacco market controlled by organized criminal elements, law-abiding wholesalers and retailers were forced to watch as their legitimate business interests gave way to a climate of increased violence and lawlessness. The proceeds from tobacco smuggling were being used as the foundation for further criminal activity.
The social costs associated with tobacco smuggling are equally troubling from a health perspective. Increased market penetration of cheap contraband tobacco effectively reduced the average price paid for cigarettes and undermines the government's health policy objective of reducing tobacco consumption, particularly among youth.
To respond to these very serious problems the government announced a comprehensive anti-smuggling initiative on February 8, 1994. Within the framework of this national action plan both the RCMP and Canada customs have undertaken increased measures to disrupt the contraband trade in tobacco and other products.
These organizations have been assigned substantially increased resources in terms of both personnel and technical equipment and are deploying these resources to intensify surveillance and detection along the Canada-U.S. border and to more effectively target organized smuggling networks.
To facilitate the increased enforcement efforts the anti-smuggling initiative includes a national $5 reduction in federal excise taxes on tobacco products. This reduction narrows the price differential between contraband and legal tax paid on cigarettes across Canada, thereby weakening demand for contraband and reducing the incentive to smuggle in all provinces.
Recognizing that the smuggling problem is more pronounced in some parts of the country, the government has extended an offer to match any provincial tobacco tax reduction in excess of $5 up to a maximum total tax reduction of $10 per carton of 200 cigarettes. This bill implements the federal tax matching reductions in response to provincial tax reductions undertaken in Quebec, New Brunswick, Ontario, Prince Edward Island and Nova Scotia.
The government is very concerned that tobacco corporations not derive any benefit from the difficult decision to reduce tobacco taxes. Toward this end the bill imposes a new health promotion surtax that will increase by 40 per cent the corporate tax rate in respect of tobacco manufacturing and processing profits. This surtax will apply for a three-year period and will be used to fund the largest anti-smoking campaign in the history of the country.
In response to the role that export shipments have played in the contraband market, the bill reimposes an excise tax on exported tobacco products. An export tobacco tax equal to $8 per carton of 200 cigarettes is designed to more closely control export shipments and prevent any recurrence in the level of shipments that would effectively supply the contraband trade. At the same time the bill makes adequate provisions for manufacturers to undertake legitimate export shipments intended for bona fide consumption outside of Canada.
In addition to these direct changes to excise and income taxes, the bill also contains a number of related measures that are designed to complement the new tax measures and ensure their long term effectiveness. At the time the national $5 reduction in federal excise taxes was announced, the government wanted to ensure that the reduced rates of tax were immediately passed on to consumers at the retail level, complementing enforcement measures by weakening the demand for contraband tobacco products.
Consequently the government has undertaken to pay a full inventory rebate to all wholesalers and retailers in respect of their inventories of tobacco products on February 8, 1994. Where federal excise taxes are further reduced to match a provincial tobacco tax reduction, wholesalers and retailers are eligible for an additional inventory rebate to the extent that their inventories of cigarettes exceed a certain threshold amount.
The use of threshold levels is designed to protect the interest of those persons holding large inventories of cigarettes while limiting the government's total fiscal exposure.
Administration of the rebate program is being conducted by Revenue Canada and is already well under way with retailers and wholesalers from across the country filing their inventory rebate claims and awaiting payment of the appropriate amounts.
Inventory rebates cannot be paid however until such time as this bill which provides the Minister of National Revenue with explicit legislative authority to issue amounts in payment of inventory rebate claims is approved by Parliament and receives royal assent.
Ensuring that retailers and wholesalers receive these amounts as soon as possible is one of the main reasons we are attaching such a high priority to the bill. In view of the variable federal tax reductions undertaken by the federal government in response to specific provincial tax reductions, the bill contains provisions that are designed to ensure payment of appropriate federal excise taxes and also to deter any interprovincial diversion of tobacco products.
First, the bill provides for the collection of federal excise tax differential where tobacco products marked for sale in one province are sold for any purpose other than personal consumption by a consumer in that province. Thus if a wholesaler or retailer sells products to a person in another province, the seller will be required to pay an amount equal to the additional federal excise tax that would apply if there had been no provincial tax reduction.
Second, the bill contains provisions making it an offence subject to a fine for any person to sell or offer for sale tobacco products marked for sale in one province to a consumer located in another province. The amount of the fine is set at no less than $1,000 and not more than three times the additional federal excise tax that would have applied to the tobacco products had there been no provincial tobacco tax reduction.
The combined effect of these two measures will be to substantially impair the potential for interprovincial diversion of tobacco products from low tax jurisdictions. While the collection of the additional federal excise tax can be enforced immediately, the offence provision cannot come into force until such time as the bill receives royal assent.
Also in response to provincial tax reductions, the bill contains provisions to deal with the sale of unmarked tobacco products on Indian reserves in Ontario and Nova Scotia. Both these provinces require that tobacco products sold on reserve free of provincial tobacco taxes not be marked. Matching federal tax reductions on the other hand are based on distinct provincial markings.
To reconcile these different marking requirements and to ensure that unmarked tobacco products sold on reserve to Indians in Ontario and Nova Scotia are taxed at the reduced federal rates that would otherwise apply to marked tobacco products in each province, the bill contains provisions that allow for the sale of unmarked tobacco products at the reduced rates of federal excise tax to specially licensed wholesalers and retailers in each province.
Finally, the bill amends the fines in the Excise Act for possession or sale of tobacco products on which federal taxes have not been paid. Because these fines were based on the previous rates of federal excise tax, this amendment is necessary to maintain the fines at their former minimum and maximum amounts.
These proposed legislative amendments are a very important part of the government's action plan to combat tobacco smuggling. Together with increased enforcement, these measures form an integrated approach that provides the foundation for a long term solution to the smuggling problem.
I would like to turn to other measures in the legislation, the air transportation tax. Bill C-32 also implements changes to the air transportation tax announced in the federal budget of February 22, 1994. The structure of the air transportation tax is being altered to reduce the tax burden for short haul, domestic and transporter flights and to recover a greater proportion of the cost of air facilities and services provided by Transport Canada.
To reduce the tax burden and short haul, domestic and transporter air travel, the current $10 flat tax component will be reduced to $6.
This measure addresses the concerns expressed in recent years by carriers providing short distance air transportation services to smaller communities that the tax places too heavy a burden on short distance travellers. To enhance the cost recovery with respect to air facilities and services the maximum air transportation tax on domestic and transborder air travel is to increase from $40 to $50. The tax on international travel is also increased from $40 to $50 where the transportation is purchased in Canada and from $19 to $25 where the transportation is purchased outside Canada for travel to Canada.
These new rates apply to tickets purchased outside Canada that include an international departure from Canada on or after May 1, 1994 except where the tax has been paid prior to that date and to tickets purchased in Canada on or after May 1, 1994.
A third measure relates to the goods and services tax. The bill also contains an amendment to the goods and services tax. As announced in the February 22 budget, the portion of the goods and services tax paid on business meals and entertainment expenses which may be recovered as an input tax credit is being reduced from 80 per cent to 50 per cent.
This change will better reflect the personal consumption element of these expenses and is consistent with the reduction in the income tax deduction for business meals and entertainment expenses from 80 per cent to 50 per cent. The reduced rate will apply to expenses in respect of meals and entertainment consumed or enjoyed after February 1994.
In conclusion, Bill C-32 is an important bill. It enacts a number of measures related to tobacco taxation that will make a very important contribution to eliminating smuggling as a significant national problem, as well as implementing other excise tax changes from the government's first budget.
While some of the tobacco related measures have been implemented on the basis of a ways and means motion, two very important measures, the ability to pay inventory rebates to wholesalers and retailers and the offence provisions in respect to interprovincial diversions, will not take effect until the bill receives royal assent. I would, therefore, urge my colleagues to give speedy passage to the bill.