Mr. Speaker, I am very pleased to speak in the House today to present Bill C-26. In fact my heart soars with enthusiasm.
Bill C-26, the tobacco tax amendments act, 2001, implements the tax elements of the government's comprehensive new tobacco strategy which was announced on April 5 by the Ministers of Finance and Health and the Solicitor General.
The new strategy is designed to improve the health of Canadians by reducing tobacco consumption, particularly among young Canadians. Briefly, it consists of increasing spending on tobacco control programs, tobacco tax increases to discourage smoking, and a new tobacco tax structure to reduce the incentive to smuggle.
The package has received positive support from health groups, such as the Canadian Cancer Society, the Heart and Stroke Foundation of Canada and the Alberta Tobacco Reduction Alliance.
My remarks today will focus on the new tax structure and tax measures which are contained in amendments to the Customs Act, the Customs Tariff, the Excise Act, the Excise Tax Act and the Income Tax Act. Before I discuss the individual measures in the bill, I would like to take a moment to put the legislation in perspective.
All tobacco products manufactured and sold in Canada have federal and provincial taxes and duties levied on them. Prior to 1994, tobacco products for export were sold on a tax free and duty free basis.
In the early 1990s exports of Canadian cigarettes grew substantially. There was strong evidence to suggest that most Canadian tobacco products that were illegally exported on a tax free and duty free basis to the United States were being smuggled back into the country and sold illegally without the payment of federal and provincial taxes. Two serious problems developed. Organized criminal activities were increasing and the market in Canada for fully tax paid tobacco products was being undermined by the availability of illegal lower cost products. This undermined the government's health objective of using higher prices to reduce smoking.
This is why the government implemented the national action plan to combat smuggling in 1994. That plan included increased enforcement measures, a surtax on the profits of Canadian tobacco manufacturers, a tax on certain exports of tobacco products and reduced tobacco taxes.
It has proven to be very effective in reducing the level of contraband activity and restoring the legitimate market for tobacco sales. As a result, the government has been able to increase excise taxes on tobacco products five times since 1994.
The measures in the bill before us today include a new tobacco tax structure to further reduce the incentive to smuggle tobacco products back into Canada and tobacco tax increases to advance the government's health objectives.
As hon. members know, one of the government's national health objectives is to reduce smoking. Our new tobacco strategy is specifically designed to help reach this objective, particularly reducing smoking by youth.
Allow me to quote from the Minister of Finance when the new strategy was announced. He stated:
The Government's anti-tobacco strategy will help improve the health of Canadians by discouraging smoking. By increasing taxes sharply and introducing a new tax structure for tobacco, we are taking important steps now and positioning ourselves to take further steps as need be.
Canada needs this comprehensive strategy to deal with the broad range of factors that contribute to smoking. The measures in the bill are part of that strategy.
I will now discuss these measures in detail and begin with the new tax structure.
As I mentioned, the new tobacco tax structure is designed to reduce the incentive to smuggle Canadian-produced tobacco products back into Canada from export markets, the main source of contraband in the past.
The key element of this new structure is the replacement of the current tax on exports of tobacco products, effective April 6, 2001, with a new two tiered excise tax on exports of Canadian manufactured tobacco products. Before discussing the measure further, let me provide some background.
As we know, the Canadian smuggling problem of the early 1990s was primarily caused by Canadian exports to the U.S. that were illegally re-entered into Canada. In the 1994 national action plan to combat smuggling, which I discussed earlier, the government imposed an excise tax on Canadian tobacco products. To ensure that Canadian tobacco manufacturers were not denied access to legitimate export markets, several exemptions from the export tax were allowed, including one for exports up to 3% of a manufacturer's annual production. That was reduced to 2.5% of production in April 1999.
Bill C-26 implements the budget 2000 proposal to further reduce the exemption threshold under the tax on exports of tobacco products before April 6, 2001, to 1.5% of a manufacturer's production in the previous calendar year. This 1.5% threshold represents the approximate level of exports required to meet the legitimate demand for Canadian tobacco products abroad, principally in the United States.
Under the new export tax structure, all exports of Canadian tobacco products will be taxed, thereby reducing the incentive to smuggle exported products back into Canada. This new tax will be two tiered. For exports up to the 1.5% threshold, a tax will be imposed at the rate of $10 per carton of cigarettes. To avoid double taxation when these products enter legitimate foreign markets, the tax will be refunded upon proof of payment of foreign taxes.
Imposing a refundable tax on exports of tobacco products allows for a seamless transfer of tax-paid products from Canada to other countries. This reduces the threat of these products being diverted and used for contraband, while allowing Canadian exporters to meet legitimate demand for their products abroad.
Exports over the 1.5% threshold will be subject to both the current excise duty on tobacco products and a new excise tax that together amount to $22 per carton of cigarettes. Imposing a tax at this rate will remove any incentive to illegally bring these products back into Canada. Further, there will be no rebate on this tax. This measure will reduce the potential for smuggling and help set the stage for future tobacco tax increases.
Before moving on, I should mention that discussions are ongoing between Canada and the United States to help achieve the objectives of our tobacco products not being available tax free, while avoiding double taxation of exported products and helping reduce compliance burdens for U.S. importers.
The next element of the new tax structure concerns tobacco products sold at duty free shops and as ships' stores.
As hon. members know, duty-free shops are located at border crossings and international airports across the country. These shops are authorized to sell certain goods, including tobacco products, tax-free and duty-free, to people leaving Canada.
Tobacco products supplied as ships' stores have traditionally been provided for use by crew and passengers and are sold to passengers through on board duty free shops on ships and aircraft with international destinations. Under the new structure, Canadian tobacco products delivered to duty free shops and as ships' stores both at home and abroad will now be taxed at a rate of $10 per carton of cigarettes. In addition, imported tobacco products delivered to Canadian duty free shops will also be taxed. However, this tax will be refunded on the first carton sold to an individual who is not a resident of Canada. Both measures take effect as of April 6, 2001.
Imposing a tax on tobacco products for sale in duty free shops or as ships' stores is an integral part of the government's strategy to reduce tobacco consumption. It demonstrates just how serious the government is about this issue.
Allowing Canadians who travel to continue to have access to low cost, tax free tobacco through duty free shops would be inconsistent with our strategy of raising tobacco taxes domestically to achieve the government's health objective to reduce smoking.
This measure would also reduce the risk that smugglers might seek to access Canadian tobacco products in duty free markets as other sources of untaxed, low cost tobacco products are eliminated. We want all Canadian tobacco products to be taxed, no matter where they are sold, to ensure that they are not smuggled back into Canada.
Another measure in the bill would ensure that tax is paid on tobacco products imported by returning residents. Currently Canadian residents returning to Canada after an absence of more than 48 hours may bring back one carton of cigarettes tax free and duty free as part of a traveller's allowance. Effective October 1, 2001, a new duty of $10 per carton of cigarettes would be imposed on these products when they are imported by returning residents.
To ensure that Canadian residents are not subject to double taxation upon returning to Canada with Canadian tobacco products on which tax has already been paid, neither this duty nor regular excise duties and taxes would apply to tobacco products that bear a Canadian stamp signifying that excise duties and taxes have already been paid. Non-residents would not be affected by the change to the traveller's exemption.
Tobacco tax increases are another key element of the government's strategy to reduce tobacco consumption, particularly among youth. Since the implementation of the national action plan to combat smuggling in 1994, the federal government has worked with the five provinces that implemented matching tobacco tax reductions at that time, namely Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island, to assess the feasibility of regular joint increases in tobacco taxes.
As of April 6, 2001, the federal government has raised tobacco tax rates jointly with these five low tax provinces.
The combined federal-provincial tax increases are $4 per carton of cigarettes sold in New Brunswick, Prince Edward Island, Nova Scotia, Ontario and Quebec.
Bill C-26 would implement the increases in federal excise tax rates on tobacco products. These increases would restore federal excise tax rates to a uniform level of $5.35 per carton on cigarettes for sale in Nova Scotia, New Brunswick and P.E.I. This is equal to the federal tax rate that now applies in the provinces and territories that did not reduce taxes jointly with the federal government in 1994. After this tax increase only Ontario and Quebec would have cigarette excise tax rates below the national excise tax rate.
Taxes on fine cut tobacco and tobacco sticks would also be increased in all provinces and territories. In addition, Bill C-26 would eliminate the reduced rate of federal excise tax on fine cut tobacco for sale in Ontario.
As I indicated earlier, this is the fifth increase in tobacco taxes since 1994. In total, federal and provincial taxes on cigarettes will have increased from $7.40 to $9.80 per carton in these five provinces since 1994.
I am confident that a successful new tobacco tax structure would enable the government to hike tobacco taxes even further in the future. The bill would also increase the surtax on the profits of tobacco manufacturers to 50% from the current rate of 40% effective April 6, 2001.
To help ensure that these measures are effective, we are giving more resources to federal departments and agencies so that they could better monitor and assess the effectiveness of these measures in reducing smuggling.
These resources would be targeted specifically to the RCMP, the Canada Customs and Revenue Agency, the Department of Justice and the Solicitor General of Canada at a cost of $15 million in the first year and $10 million each year after that.
In conclusion, all the proposals in the bill reaffirm the government's commitment to reduce tobacco consumption in Canada while maintaining vigilance in combating the level of contraband.
A new tobacco tax structure will help reduce the incentive to smuggle Canadian produced tobacco products back into Canada and the tobacco tax increases will help advance the government's health objectives.
In addition, the tax measures would increase federal revenues from tobacco products by $215 million per year. I believe that this new strategy demonstrates the depth of the government's commitment to reducing tobacco use.
We know the stakes are high in the campaign against tobacco use. Through the tax measures contained in the bill, we now have the means to conduct the campaign effectively. Tobacco taxation is about health. Health is our priority, especially protecting the health of our young people. These new measures reflect our commitment to reduce smoking.
We have an endorsement from the Canadian Cancer Society. With an endorsement like that, I believe the government is definitely on the right track toward reducing smoking by Canadians, particularly young Canadians. I encourage all members in the House to give their full support to the bill.