Is it Time to Scrap the Tobacco Allocation System in Ontario?

Robert St. Pierre 

In my younger years, I can remember travelling with a friend of mine to a Six Nations Reserve in Ontario to make a specific purchase. My friend was an avid smoker on a tight budget, and had been tipped off about a place where he could buy a large quantity of name brand cigarettes on the cheap. At the time, I thought little of this – it was just like any other bargain-hunting trip. When we got there, I waited patiently in the car while he went in to make the purchase, and my jaw dropped in astonishment upon seeing him strut back to the vehicle. He was carrying a couple of cartons, each containing 200 cigarettes. I understood that nicotine was addictive, but to the point that one person had to buy that many cigarettes at once? I asked him as much when he sat back down in the driver’s seat. He smiled wryly, saying something to the effect of the means justifying the ends in this scenario.

He covered the carton in a towel and stuck it under the driver’s seat – I didn’t ask, my youthful naïveté believing that perhaps this was the best way to preserve the freshness of that many cigarettes. What I didn’t realize was that he had participated in an illegal transaction, and furthermore, I had just seen the tip of the iceberg representing a much larger inter-jurisdictional issue in Ontario.

Under the Indian Act, personal property of a status Indian is exempt from taxation. This means that, in Ontario, a First Nations individual can purchase an “allocation” cigarette from a designated retailer on reserve that is exempt from the federal GST, provincial sales tax, or provincial tobacco tax. Such cigarettes are demarcated with a peach stamp. The allocation system has existed in Ontario since 1993 as a means of controlling this arrangement. The Ministry of Finance calculates how many cigarettes are permissible per reserve each year according to a quota, informed by smoking habits and population statistics. Those cigarettes are then available to be purchased tax-free by on ministry-authorized on-reserve retailers, and then in turn sold tax-free to status First Nations.

The allocation system was under formal review in 2015, which resulted in the publication of a report written by Kathleen Lickers and Peter Griffin, both legal experts in multi-party disputes involving First Nations’ groups and government. The stated goal of the review was to “modernize and improve” the allocation system. It was delivered on March 1st of this year. In engaging with First Nations’ leaders and retailers, the review uncovered some very interesting findings:

Retailers report a lack of integrity of the allocation system

Having cooked up the allocation system, one would expect that the provincial government would at least supervise the quota distribution. Nevertheless, according to the allocation review, retailers report several problems with the quotas. They are sold between retailers without repercussions, given to individuals who do not have proof of being a ministry-authorized retailer, and, in some bizarre cases, given to people carrying the proofs of deceased individuals. Furthermore, retailers reported that both quotas and retail authorizations can be rebuked without explanation. The allocation system seems to be fraught with misuse from the regulator to the distributor, which translates to further misuse by retailers. The result is that allocation cigarettes can be easily stockpiled and indiscriminately sold by certain retailers without penalty. In turn, allocation cigarettes may not necessarily be plentiful enough for their intended recipients, and, as explained below, this trend has also contributed to the emergence of tobacco production on-reserve.

First Nations report disdain with the allocation system

Many First Nations leaders in Ontario expressed disdain with the allocation system from the offset in 1993, feeling that it is an imposition on their rights of tax exemption. The sentiment is that reserves should have the right to extend tax exemption to whomever they want in their jurisdiction, and thereby resemble more of a duty free zone. As it stands, retailers are obligated to collect provincial taxes from non-First Nations consumers if they sell tobacco products (allocation or otherwise), a position most of them are loathe to accept or enforce. One particular retailer said that if they were to apply any regulatory scheme on reserve, it would be by their own design. As an incentive to comply with and enforce the rules of a retail agreement, including the prohibition of sales to non-First Nations, the province offers a band council a 20 per cent increase in allotment cigarettes. First Nations leaders expressed displeasure with this agreement as well, since many of them aren’t equipped to fully ensure compliance without being offered additional resources. I personally believe an incentive of more cigarettes seems counter-intuitive. Moreover, the relationship fostered by such agreements is perceived as being paternalistic and lacking of respect, which further disincentivizes compliance.

The Allocation System has contributed to the emergence of First Nations’ manufactured cigarettes and counterfeit “yellow-stamp” markets

For First Nations’ economic development, interaction with non-First Nations consumers is necessary. In part due to the imposition of the allocation system, some reserves have begun manufacturing their own cigarettes with the hopes of being able to sell these products to non-First Nations consumers. However, this business opportunity was quickly quashed by federal government in omnibus bill c-10, the infamous Safe Streets and Communities Act that also introduced mandatory minimum sentencing and received royal assent in 2014. Having tobacco products going untaxed by federal and/or provincial governments is certainly not amenable for health policy in the country, and some expressed concerns for – and perhaps overstated anxieties that – such manufacturers might be linked to organized crime. Another practice that has proliferated in part due to the allocation system is the practice of counterfeit yellow stamps being put onto either allocation or contraband cigarettes. Yellow stamps denote that all provincial and federal excise taxes have been paid, meaning non- First nations consumers can transport them around without wrapping them in a towel and keeping them hidden from police under the driver’s seat in their car. With both of these practices, the allocation review finds that participants are being motivated by the lure of black market opportunities because of the restrictions that the allocation system places on economic opportunity for First Nations’ retailers and entrepreneurs.

While the allocation system was introduced to apply a particular tax scenario for First Nations individuals, in Ontario, it has not been thoroughly enforced and seems to lack a sense of integrity from the Ministry of Finance down to the retailers themselves. What this has meant is a few things: a loophole for non-First Nations to avoid full excise taxes, thereby causing overconsumption of cigarettes and further burdening our healthcare system; creating a paternalistic relationship between government and First Nations reserves through the imposing of a quota, and a loosely monitored one at that; and finally, the contentious emergence of an on-reserve “black market” tobacco economy. Finding a happy medium between ensuring the respect of First Nations’ rights of self-governance, while ensuring tobacco consumption is effectively discouraged through excise taxing is very difficult to do. On the basis of the Allocation Review, what seems clear is that the current allocation system is not ideal for the government of Ontario, First Nations leaders, and retailers. It has, until this point in time, failed to make the most of any potential common ground between all parties.

A successful agreement might look like the Cowichan reserve in British Columbia, under which the reserve and the province have an agreement in which the reserve can charge a First Nations tax in lieu of GST. The revenue is then used for local community development. Ontario should do more to work with reserves who are interested in capturing revenue by taxing a small amount on cigarettes. There are already some reserves that have centralized distribution of allocation allotments in order to ensure that cartons can’t be counterfeited with a yellow “provincial taxes paid” stamp. Nevertheless, as this editorial demonstrates, experiences are varied throughout First Nations communities and retailers in Ontario, and when it comes to enforcement of who can buy which smokes, the province largely turns a blind eye. A report by the Canadian Taxpayers Federation estimates that the government foregoes as much as $1.1 billion annually in tax revenue because of contraband tobacco and non-enforcement of consumption regulations as stipulated by the allocation system.

Clearly, the allocation system and its flaws are proving problematic for both the province and First Nations communities. Nevertheless, opportunities for common ground to be reached abound, but will Ontario be bold enough to have a nation-to-nation discussion on the matter, rather than resorting to its traditional role as the “gatekeeper” of on-reserve tobacco sales?

I have a dream that, one day, my friend with whom I travelled to the reserve all those years ago will quit smoking. But until then, if he is going to be sold allocation cigarettes despite the fact that he is not a status First Nations person, wouldn’t it make sense that allocation holders could at least hold a revenue benefit off his bad habit to a similar degree that the province does?

The good news is that the authors of the review recommend this approach, while Ontario has begun a pilot project on two particular reserves to create self-regulatory models. Progress, however, has been slow and not widely shared. In any case, though, it is important to recognize the heterogeneity of all reserve communities in carrying through such an approach. A one-size-fits-all solution, akin to the allocation system, will not take into account unique and localized preferences, likely dooming it to failure.

Robert St. Pierre is a Master’s of Public Policy Candidate of 2017, having previously graduated with a B.A. in Global Studies from Wilfrid Laurier University in 2012. He is interested in social policy, foreign policy, and aboriginal affairs, as well as travel, sports, and gardening. In fact, he has embarked upon a life-long quest to produce the perfect zucchini and recently set a record for most pears consumed in one month from his friend’s pear tree in Kitchener-Waterloo, in September 2015.  

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