Jennifer Yi

In 2014, Statistics Canada reported that 18.1 per cent of Canadians are smokers. Ontario was below the national average at 17.4 percent coming in third only to Manitoba and British Columbia. Smoking in Ontario is at an all-time low that has seen a consistent decrease by 0.8 per cent year over year since 2011. In a Forum Research poll, more than half of the respondents between the ages of 18-24 claimed to be non-smokers.  If the polls are to be believed, smoking has declined among all Ontarians, particularly among young people, thanks to a comprehensive provincial initiative for smoking cessation.

While slowly and surely, smoking rates have declined, contraband tobacco is an issue that has become noticeably worse over the decades. Smuggled Canadian brand cigarettes began to appear on the market in 1990 when duty-free cigarettes destined for the United States made their way, illegally, back to Canada. In 1994, a drastic cut in excise tax (50 per cent) by the federal governments and (67 per cent) by the provincial governments prompted smuggling of contraband tobacco to decline. Yet, as taxes rebounded from the rollback, sales of legal cigarettes dropped by 10 percent in 2002 and continue to fall steadily. Illegal cigarettes, on the other hand, climbed upwards at point in 2002 when the RCMP had reportedly seized nearly one million cartoons of illegal cigarettes. Some experts estimate that contraband cigarettes make up about 10 per cent of the Canadian market while other experts contend that this figure is higher than one third of the cigarettes within Ontario. There are no readily available statistics on the numbers of illicit cigarettes in the market, but the Ontario government believes the loss in tax revenue adds up to an estimated $1.1 billion annually. Cigarettes that are illegally sourced are sold either in clear plastic bags with no-name brands or have no federal stamps containing safety features.

While this is an important policy area, minimizing contraband cigarette use in Canada is a difficult problem to address, partially because of the special status granted to First Nations communities under Canada’s Indian Act. In recognition of that,  Ontario’s Tobacco Tax Act allows a registered or status First Nations individual living on a reserve to be exempt from paying taxes on tobacco purchased for his/her exclusive use. There are no regulations on the specific maximum quantity a First Nations person can purchase. Historically speaking, First Nations individuals have the right to trade tobacco products and ensure they have the supplies of materials they need. Manufacturers are exploiting this jurisdictional loophole by operating out of Aboriginal reserves and territories, such as Ontario’s Six Nations of The Grand River and the Akwesasne Mohawk Territory in Cornwall. Most of the illegal cigarettes found in Ontario have come from these reserves, which have benefited from straddling the borders between New York, Ontario and Quebec, allowing an ease in transferring raw leaves and finished products.

The Fraser Institute has released a paper on combatting the contraband tobacco trade in Canada with six policy recommendations to overcome the challenges. The institute put forward suggestions such as creating a tax agreement between Aboriginal communities and the Canadian government, campaigning for educational awareness, and improving tracking and record keeping process. One of the policy recommendations that has consistently cropped up across news outlets, message boards, and forums is a partial tax reduction to bring down the retail price of cigarettes in Canada. The drop in taxes renders the regulated cigarettes more competitive with the bootlegged ones.  Proponents of this approach cite tax rollbacks in 1994 as a critical turning point in putting a stop to smuggling and illicit sales. The Fraser Institute also brings up this point and believes that the main determinant of illicit tobacco trade is the tax hike.

A partial tax reduction would mean lowering the price of cigarettes on the market, therefore dropping the threshold for youth and teens to access cigarettes in terms of price. Teens and youth are repeatedly found to be most sensitive to price change, while those individuals who are less responsive to price changes are found to be older and more entrenched in their addiction to cigarettes. While the potential solution can help drive out illegal tobacco sales, it undermines the integrity of the Smoke Free Ontario strategy. As such, this is an inherently difficult problem, given that it spans multiple agencies and ministries and crosses different levels of governments, with no easy solution about how to maintain a balancing act.

Jennifer Yi is a 2017 Master of Public Policy student candidate at the School of Public Policy and Governance. She earned a Bachelor degree in Political Science from the University of Toronto. Jennifer has worked in advertising, academic sectors and non-profit companies. Her policy interests are in technology, research and development, municipal finances and consumer services.