Parliamentary Research Branch

PRB 98-8E


Prepared by:
Jean Dupuis
Economics Division
December 1998

Federal and Provincial Tobacco Tax Structure

In the case of tobacco products, the federal government applies both an excise duty(1) and an excise tax. Excise duties are imposed on a specific list of domestic products, the most important of which are spirits, beer, cigarettes and tobacco. The excise duty on cigarettes consists of a specific amount in dollars applied per thousand standard cigarettes (described as weighing not more than 1.361 kilogram or three pounds per thousand cigarettes). The excise duty is higher for cigarettes that contain more tobacco.(2)

Excise taxes are either a fixed dollar amount imposed on a specific quantity of goods or an ad valorem tax applied to a prescribed list of domestic and imported goods and certain specific taxes. These taxes are in addition to the general or retail sales taxes. The specific federal excise tax on tobacco products was indexed annually to reflect increases in the total consumer price index from 1 April 1981 to 1 September 1984. The automatic indexation of these tax rates was eliminated in May 1985 and replaced with legislated increases.

After 1984, cigarettes also became subject to the federal sales tax, the Manufacturer Sales Tax (MST). A 19% rate was imposed, instead of the then standard rate of 13.5%. In 1991, the Goods and Services Tax (GST) replaced the MST at the standard rate of 7%.

All provinces also apply their own particular commodity or excise taxes on tobacco products, usually in the form of a set amount per thousand cigarettes. With the exception of Prince Edward Island, Alberta, British Columbia, Yukon and the Northwest Territories, provinces impose retail sales taxes or value added taxes on tobacco products. Quebec, New Brunswick, Nova Scotia and Newfoundland include the GST when calculating the base for provincial taxes; Ontario, Manitoba and Saskatchewan do not.(3)

Chronology of Tobacco Taxation Measures 1987-1998 (4)

1987: Alberta, Saskatchewan, Manitoba and Nova Scotia raise their tobacco taxes.

1989: Substantial federal government increases on both cigarette and tobacco taxes are emulated by a number of provinces. The combined federal excise tax and excise duty on cigarettes rises on 1 April 1989 to $48.851 per thousand standard cigarettes from the $31.901 imposed on 11 February 1988, an increase of more than 53%. Combined manufactured tobacco taxes more than double, to $ 26.637, over the same period.(5)

1990: While federal taxes remain unchanged, nine provinces and territories increase their tax rates.

1991: The federal government and seven provinces raise their tobacco taxes, prompting concerns over cross border shopping, smuggling and theft. New Brunswick reduces its tobacco taxes and British Columbia abandons its twice-a-year inflation adjustment formula for such taxes. The federal government first implements and subsequently withdraws an export tax on tobacco manufacturers.

1992: Significant increase in tobacco smuggling activities, theft and robberies with violence involving tobacco products. Four provinces raise their tobacco taxes; it is estimated that federal and provincial tax revenues lost to tobacco smuggling amount to $2 billion a year.

1994: In an effort to curtail multi-billion-dollar trade in illegal cigarettes, the federal government reduces its excise tax by $5 per carton. The provinces are invited to match the federal reduction; any amount by which the provincial reduction exceeds the federal reduction will be matched dollar for dollar by the federal government (up to an additional $5.00). Provinces hardest hit by tobacco smuggling activity take up the offer: Quebec, New Brunswick, Ontario, Prince Edward Island, and Nova Scotia. The remainder of the provinces keep their tobacco tax structures unchanged. Other federal tax measures include the re-imposition of an $8 per carton tax on tobacco exports, a $200-million surtax on tobacco companies’ profits, and the introduction of various enforcement and education programs;(6)

1995: Barely a year after the federal and provincial tax cuts, Quebec raises its excise tax by a total $1.32 per carton and Prince Edward Island by $1 per carton. Nova Scotia removes the 11% sales taxes on tobacco products and increases its excise tax proportionately, leaving the overall tax burden unchanged. Tobacco smuggling activity drops substantially.

1996: The federal government raises its tobacco excise tax by $0.70 on 29 November, for cigarettes sold in Quebec, Ontario, New Brunswick and Nova Scotia. These provinces raise their own taxes by the same amount. Two weeks later, the federal government and Prince Edward Island both raise the tobacco excise tax by $0.70.

1998: In February, the federal government announces an increase of $0.60 per carton of 200 cigarettes for retail sale in Ontario, Quebec, Nova Scotia and Prince Edward Island and a $0.40 per carton for retail sale in New Brunswick. Comparable increases in provincial taxes on cigarettes will be implemented concurrently by provincial governments in these five provinces. Other measures include additional federal excise tax increases for cartons of tobacco sticks to be followed with concurrent excise tax increases by some provinces.(7)

Effects of Taxation on Tobacco Industry Performance (8)

Since 1982, the value of tobacco product shipments(9) has advanced annually at about 5%. The rise in the value of shipments results from regular increases in product prices. When adjusted for inflation, the value of shipments actually declines over the sample period as consumption of tobacco products and cigarettes continuously goes down. Public health concerns, pressure from anti-smoking advocacy groups, as well as government regulations on labelling and packaging and continuous rises in tobacco taxes have contributed to reducing consumer demand for tobacco products.

Canadian production of tobacco products is mainly aimed at domestic markets with little external competition. Exports usually stand at around 6% and imports around 3% of total value of shipments. This pattern changed in the late 1980s, however, when Canadian tobacco manufacturers started to export a growing share of production, mainly to U.S. markets, in an attempt to maintain levels of production in the face of accelerating domestic taxes on tobacco products and declining domestic sales.

The number of cigarettes exported, which had been below one billion until 1986, more than doubled in each of 1991 and 1992 and almost doubled again in 1993, reaching an unprecedented 17 billion cigarettes or 37% of total sales.

By 1993, expanding exports had increased the total amount of cigarettes sold for the first time since 1981. National sales totalled 48 billion cigarettes, a rise of 6% from the previous year. Regardless of the increase in sales, however, the value of tobacco shipments dropped to two billion dollars, 2% less than in 1992.

An unmeasured portion of these exports, however, returned to the Canadian domestic market as contraband, rather than being consumed in the country of destination. Total sales volume was little affected by the increases in exports, since these were offset by similar decreases in domestic sales.

In response to the increasing illegal trade in tobacco products and the resulting loss in tax revenues (estimated at $2 billion),(10) the federal government, in co-operation with those provinces hardest hit by tobacco smuggling, initiated in 1994 a series of measures for containing and reducing illegal trade in tobacco products. The measures included a substantial decrease in federal tobacco excise taxes, to be matched concurrently with cuts in provincial tobacco excise taxes, a levy on manufacturers’ tobacco exports and surtax on their profits, along with various legislative and regulatory measures to curtail illegal smuggling activities.

Following these measures, tobacco smuggling activities decreased substantially. The number of exported cigarettes fell from a record 17 million in 1993 to seven billion in 1994 and five billion in 1995. The value of exports fell more than $800 million in 1993 to under $200 million in 1994 and 1995.

In 1994, the year of the excise tax rollbacks, total sales rose to reach 53 billion cigarettes, 12% more than 1993, and the value of total shipments rose by 23% for a total value of $2.5 billion. After 1994, however, the industry resumed its pre-1990 pattern of modest increases in the value of shipments along with declining volumes of total sales and low exports.

Since 1994, the federal government and the eastern and central provinces have implemented a series of comparatively small increases in tobacco taxes which have not, to date, translated into any significant increases in reported tobacco smuggling.(11) However, according to RCMP testimony at the Senate Committee on Social Affairs, Science and Technology,(12) should tobacco taxes continue to rise, such activities can be expected to increase.

(1) Robin W. Boadway, and Harry M. Kitchen, Canadian Tax Policy, Canadian Tax Foundation, No. 63, 1980.

(2) J. Harvey Perry, Taxation in Canada, 5th Edition, Canadian Tax Paper No. 89, Canadian Tax Foundation, 1990.

(3) Non-smokers’ Rights Association (Canada), 17 February 1995.

(4) Tobacco in Canada, Canadian Tobacco Manufacturers Council, various issues.

(5) Finances of the Nation 1988-89, Canadian Tax Foundation, 1989.

(6) Finances of the Nation 1995, Canadian Tax Foundation, 1995.

(7) Department of Finance, Press Release, 13 February 1998.

(8) Statistics Canada, Beverage and Tobacco Products Industries, 1995, Catalogue No. 32-251 XPB.

(9) Value of product shipments are defined as "the summation of the value of shipments of goods produced by the establishment, receipts of custom and repair revenue, as well as the value of goods made under contract. Valuations are on a net basis; that is, they exclude discounts, returns, allowances, sales and excise taxes and duties and transportation charges made by common or contract carriers." Statistics Canada, Beverage and Tobacco Products Industries, 1995, Catalogue Number No. 32-251-XPB.

(10) Revenue Canada, PRESS33, National Action Plan to Combat Smuggling, 8 February 1994.

(11) Senate, Standing Committee on Social Affairs, Sciences and Technology, Proceedings, 2nd session, 35th Legislature, 18 March 1998, p.3.

(12) Ibid. p. 3.