and Provincial Tobacco Tax Structure
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)
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
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%.
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)
Saskatchewan, Manitoba and Nova Scotia raise their tobacco taxes.
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)
federal taxes remain unchanged, nine provinces and territories increase their tax rates.
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
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
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.
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.
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)
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.
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.
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.
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.
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.
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.
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.
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
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
(4) Tobacco in Canada, Canadian Tobacco
Manufacturers Council, various issues.
(5) Finances of the Nation 1988-89, Canadian Tax
(6) Finances of the Nation 1995, Canadian Tax
(7) Department of Finance, Press Release, 13
(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
(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.