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Ottawa, April 5, 2001
2001-039

Government Announces Comprehensive Strategy to Discourage Smoking

Related documents:

• Backgrounder - A New Tobacco Tax Structure in Canada.
• Federal Cigarette Excise Tax Rates Since 1993.
• Legislative Proposals Relating to Tobacco Products - Notice of Ways and Means Motion and Explanatory Notes.
• Statement by the Honourable Paul Martin, Minister of Finance for Canada, on the Government’s Comprehensive Strategy to Discourage Smoking.
• Backgrounder - Health Canada
• Speaking Notes for Allan Rock, Minister of Health - To launch the Tobacco Control Strategy - Health Canada

Health Minister Allan Rock, Finance Minister Paul Martin and Solicitor General Lawrence MacAulay today announced a comprehensive strategy to improve the health of Canadians by reducing tobacco use.

The Government’s strategy consists of increased funding for tobacco control programs as well as tobacco tax increases to discourage smoking. Under this strategy, tax increases are linked to a new tobacco tax structure to reduce the incentive to smuggle.

"This initiative demonstrates the Government’s strong commitment to reduce smoking and promote good health," said Minister Rock. "It will help reach young people and fight the marketing practices of the tobacco industry."

Health Canada will invest more than $480 million in a comprehensive, integrated and sustained tobacco control strategy over the next five years. Approximately $210 million of that total will be directed towards anti-tobacco mass media campaigns, with a particular emphasis on youth and other high-risk groups. The campaigns will be carried out in partnership with stakeholder organizations outside the federal government.

"The Government’s anti-tobacco strategy will help improve the health of Canadians by discouraging smoking," said Minister Martin. "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."

As of April 6, 2001, a combined federal-provincial tax increase of $4 per carton of cigarettes is proposed to take effect in New Brunswick, Prince Edward Island, Nova Scotia, Ontario and Quebec.

An excise tax increase of $1 per 200 grams of fine-cut tobacco and $1 per carton of tobacco sticks will similarly take effect on the same date.

Minister Martin also announced that, effective April 6, 2001, the surtax on the profits of tobacco manufacturers will increase to 50 per cent of corporate income tax payable from the current rate of 40 per cent.

Solicitor General Lawrence MacAulay emphasized the need to create strong disincentives to tobacco smuggling. "There is a link between tobacco prices and smuggling," he said. "The amount of today’s tobacco tax increase was arrived at in consultation with law enforcement agencies to avoid the risk of an increased level of tobacco smuggling," Mr. MacAulay stated.

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 main element of this new tax structure is an export tax on Canadian tobacco products, which is proposed to take effect as of April 6, 2001. The export tax will be two-tiered, with a $10-per-carton rate applying to exports up to 1.5 per cent of a tobacco manufacturer’s annual production and a $22-per-carton rate on exports that exceed the 1.5-per-cent threshold.

Canada is engaged in discussions with the United States to better achieve the objective of Canadian tobacco products not being available tax-free and to avoid double taxation of exported Canadian products. The two countries working together would not only facilitate the achievement of Canada’s objectives, but also reduce compliance burdens for U.S. importers.

The new tobacco tax structure also includes a tax on Canadian tobacco products delivered to duty-free shops in Canada and abroad, as well as on tobacco products sold as ships’ stores. In addition, there will be a tax on imported tobacco products delivered to Canadian duty-free shops. Both of these measures are proposed to take effect as of April 6, 2001.

Furthermore, effective October 1, 2001, the traveller’s exemption will be amended to ensure that tax is imposed on tobacco products imported by Canadian residents returning to Canada.

To help ensure that the tax measures are effective, additional funding will be provided to federal departments and agencies to monitor and assess the effectiveness of these measures in reducing tobacco smuggling. These resources will be targeted to the Royal Canadian Mounted Police, the Canada Customs and Revenue Agency, the Department of Justice Canada and the Department of the Solicitor General.

Backgrounders providing further details of this strategy are available.

Minister Martin today tabled a Notice of Ways and Means Motion to implement these tax changes.

The Notice of Ways and Means Motion and explanatory notes are available free of charge on the Department of Finance Web site at the address shown below. Printed copies of the Notice and explanatory notes are available for $9 from the Department of Finance Distribution Centre at (613) 943-8665.

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Backgrounder – 
A New Tobacco Tax Structure in Canada

The Government has introduced a comprehensive package of tax measures designed to improve the health of Canadians by reducing tobacco consumption.

This package of proposed tax measures includes:

• a new tobacco tax structure that reduces the incentive to smuggle Canadian-produced tobacco products back into Canada from export markets; and
• tobacco tax increases to advance the Government’s health objectives.

Changes to the tobacco tax structure include:

1. a revised export tax;
2. a tax on Canadian tobacco products delivered to domestic and foreign duty-free shops or sold as ships’ stores, and on imported tobacco products delivered to Canadian duty-free shops; and
3. a change to the traveller’s exemption to ensure that tax is levied on the previously exempted quantities of tobacco products.

Tobacco tax increases include:

4. a federal-provincial tax increase of $4 per carton of cigarettes in New Brunswick, Prince Edward Island, Nova Scotia, Ontario and Quebec;
5. a federal excise tax increase of $1 per 200 grams of fine-cut tobacco and $1 per carton of tobacco sticks in all provinces and territories; and
6. an increase in the surtax on tobacco manufacturers’ profits.

More resources are being provided to federal departments and agencies so that they can:

7. better monitor and assess the effectiveness of these measures in reducing smuggling activity.

The tax changes proposed will increase federal revenue by $215 million per year. Further details on these measures follow.

1. A Two-Tiered Export Tax

The Government has announced a new tobacco tax structure 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 main element of this new tax structure is an export tax on Canadian tobacco products, which will take effect as of April 6, 2001.

The export tax will be two-tiered, with a $10-per-carton rate applying to exports up to 1.5 per cent of a tobacco manufacturer’s annual production and a $22-per-carton rate on exports that exceed the 1.5-per-cent threshold. This threshold represents the approximate level of exports required to meet the legitimate demand for Canadian tobacco products abroad, principally in the United States.

To avoid double taxation of these products when they are entered for consumption into legitimate foreign markets, a refund of the tax will be provided to the foreign importer and domestic Canadian manufacturer upon proof of payment of foreign taxes.

The following example illustrates how the refundable export tax will operate. All figures quoted in the example are in Canadian dollars.

Export Tax and Refund Example

The two-tiered export tax will also apply to tobacco sticks and fine-cut tobacco. The following table summarizes the rates for all products.

Export Tax Rates

By reducing the potential for smuggling, this measure will help set the stage for future tobacco tax increases.

Canada is engaged in discussions with the United States to better achieve the objective of Canadian tobacco products not being available tax-free and to avoid double taxation of exported Canadian products. The two countries working together would not only facilitate the achievement of Canada’s objectives, but also reduce compliance burdens for U.S. importers.

2. Taxation of Sales to Duty-Free Shops and as Ships’ Stores

Tax will apply to sales of Canadian tobacco products to duty-free shops at home and abroad. Tax will also apply to tobacco products sold as ships’ stores (that is, for inventory sold to airlines and cruise ships).

This measure will help to reduce tobacco consumption. It also complements the export tax by helping to prevent the cross-border movement of tax-free Canadian tobacco.

To ensure consistency with the tax treatment of Canadian tobacco products sold in domestic duty-free shops, imported tobacco products delivered to duty-free shops in Canada will also be taxed.

Effective April 6, 2001, the tax will apply at the following rates:

• $10 per carton of cigarettes;
• $7 per carton of tobacco sticks; and
• $6 per 200 grams of fine-cut tobacco.

For Canadian products, the manufacturer will pay federal excise duty (equivalent to $5.50 per carton of cigarettes) at the time of production. The balance – excise tax of $4.50 per carton – will be payable upon delivery to the purchaser.

For imported tobacco products, tax will be payable by the duty-free operator at the time it takes delivery of the goods. Canadian duty-free operators will be able to claim a tax refund in respect of the first carton of foreign-produced cigarettes sold to a non-resident.

The taxation of tobacco sales to duty-free shops will mean higher prices for consumers. Nonetheless, it will still be cheaper to buy tobacco products in duty-free shops than in regular retail stores.

3. Traveller’s Exemption

Currently Canadian residents returning to Canada after an absence of more than 48 hours may import one carton of cigarettes, one carton of tobacco sticks and 200 grams of fine-cut tobacco free of all taxes and duties.

Effective October 1, 2001, the traveller’s exemption will be amended to impose a new tax on these products when they are imported by returning residents. This measure is intended to reduce tobacco consumption and ensure equal treatment with Canadian tobacco products.

The tax will apply at the following rates:

• $10 on the first carton of cigarettes;
• $7 on the first carton of tobacco sticks; and
• $6 on the first 200 grams of fine-cut tobacco.

The tax will be payable by the traveller at customs upon arrival in Canada.

To ensure that Canadian residents are not double-taxed when they return to Canada with Canadian tobacco products on which tax has already been paid, the amount of tax already paid will be credited against the new tax.

Non-residents will not be affected by this change to the traveller’s exemption.

4. Federal-Provincial Tax Increase on Cigarettes

As of April 6, 2001, a joint federal-provincial increase of $4 per carton of cigarettes will take effect in New Brunswick, Prince Edward Island, Nova Scotia, Ontario and Quebec.

When combined with the goods and services tax (GST) and provincial sales taxes, the $4-per-carton increase in federal excise tax and provincial taxes on cigarettes will result in a total tax increase of $4.60 per carton in Ontario, New Brunswick and Nova Scotia.

Since tobacco products are not subject to provincial sales taxes in Prince Edward Island and Quebec, only the 7-per-cent GST will be added to the federal-provincial tax increase – resulting in a total tax increase of $4.28 in those provinces.

The following table uses typical cigarette prices to show the impact of these tax increases at the consumer level. It is important to note that the prices shown in the table are illustrative only and that prices may vary.

Impact on Consumer Prices (Carton of Cigarettes)

In Ontario and Quebec the $4-per-carton increase will be shared equally between the federal and provincial governments.

In the other three participating provinces the $4-per-carton increase breaks down as follows:

• Prince Edward Island – $1.35 federal and $2.65 provincial.
• New Brunswick – $0.30 federal and $3.70 provincial.
• Nova Scotia – $0.10 federal and $3.90 provincial.

The federal excise tax increases in the latter three provinces will bring the federal excise tax rate in those provinces to a uniform level of $5.35 per carton of cigarettes. 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.

5. Federal Excise Tax Increase on Tobacco Sticks and Fine-Cut Tobacco

A federal excise tax increase of $1 per 200 grams of fine-cut tobacco and $1 per carton of tobacco sticks will take effect as of April 6, 2001. This increase will apply in all provinces and territories of Canada.

The reduced rate of federal excise tax on fine-cut tobacco for sale in Ontario will also be eliminated.

6. Surtax on Tobacco Manufacturers

Effective April 6, 2001, the surtax on the profits of tobacco manufacturers will be increased to 50 per cent of corporate income tax payable from the current rate of 40 per cent.

7. Enhanced Monitoring and Assessment

The Government’s tobacco strategy provides additional resources to federal departments and agencies to improve their ability to monitor and assess the effectiveness of tobacco tax changes in reducing smuggling. These resources will enable the Government to assess the effectiveness of the new tax structure and determine the size and timing of future tax increases.

• The Canada Customs and Revenue Agency (CCRA) will receive $32.7 million over five years for monitoring and assessment and to administer some of the tax changes announced in this package.
• The Department of the Solicitor General will receive $3.2 million over five years to strengthen enforcement partnerships.
• The Royal Canadian Mounted Police (RCMP) will receive $9.5 million over five years to enhance its capacity to monitor and assess the effectiveness of tobacco tax changes in reducing smuggling.
• The Department of Justice Canada will receive $9.6 million over five years for its Fine Collection Initiative.

The following table shows the total yearly cost of these measures over five years. The additional $5 million in 2001-02 is for one-time costs.

Cost of Enhanced Monitoring and Assessment

Federal Cigarette Excise Tax Rates Since 1993

(Dollars Per Carton)

Note: The rate of federal tobacco duty has remained at $5.50 per carton in all provinces and territories since May 1989.