Contraband tobacco is a booming black market in Canada and it could be costing billions of dollars in lost tax revenues, according to a new report by the Convenience Industry Council of Canada.
“Efforts to curb smoking are actively undermined by a thriving contraband market, all while taxpayers are being short-changed, and legal retailers are competing with organized crime,” said Anne Kothawala, President & CEO of CICC.
The 72-page report was released last week and it revealed that a downward trend in legal tobacco sales has been happening since 2019, while the demand for illegal tobacco sales has risen dramatically.
“In an effort to reduce smoking rates, federal and provincial governments have increased taxes on legal tobacco products,” said the report. “The result? Many smokers have sought cheaper tobacco on the illicit market instead.”
“The major driver of the explosive growth of illegal cigarettes in Canada: the significant price difference between tax-paid legal cigarettes and contraband cigarettes.”
“Contraband cigarettes may be purchased for only about 40 per cent of the price of legal, tax-paid cigarettes,” the report continued.
The Convenience Industry Council of Canada reviewed tobacco sales in three provinces – British Columbia, Ontario and Newfoundland and Labrador – to find that there was a combined loss of $2.47 billion dollars in taxes.
“These cigarettes are illegally sold, tax and duty free, without any Health Canada regulations or inspections and retail for a fraction of legal tobacco prices,” said the report.
The report’s findings claim that there is more money being made in the sale of illegal cigarettes than there is in that of illicit drugs, however the penalty if caught with contraband tobacco remains less severe than with other drugs.
Between 2019 and 2022, the report estimates that B.C. lost anywhere between $215 million and $1.8 billion in tax revenue. Ontario lost an estimated $990 million to $1.8 billion, while Nefoundland lost somewhere between $25 million and $81 million.
The report suggests losses similar to Newfoundland could be expected in other provinces as well.
Ontario’s illegal cigarette trade may account for as much as 67% of the province’s total tobacco market. In B.C. and Newfoundland that number drops down to 45% and 44% respectively.
Lead author of the report Fred O’Riordan said that “gauging the exact size of the contraband market is difficult, but the evidence in this report clearly shows it is growing and now easily represents at least one-third of the total market in these three provinces, and possibly much more,” O’Riordan is also EY Canada’s Tax Policy Leader.
The manufacturing and sales of tobacco on First Nation reserves also complicates the contraband tobacco market because it provides “a confusing legal framework.”
According to the report, “organized crime groups exploit this demand with low-cost cigarettes manufactured on reserve, and then traffic these products to non-status individuals.”
“It is illegal for non-reserve residents or individuals that are not First Nations to purchase tax-free, First Nations produced tobacco products,” said the report.
A 200-cigarette carton in B.C. will sell legally for around $155 but one can be bought for anywhere between $30-$50 contraband. Individual packs of 20-cigarettes sell for $15-$21 legally and $5-$7 illegally.
According to the report, taxes account for 70% of the retail price of cigarettes sold in Canada.
The report is making five recommendations to combat the illegal sale of tobacco, including demanding stronger federal and provincial penalties for offenders and increasing police resources for this issue.
The Convenience Industry Council of Canada is a not-for-profit organization that represents the interests of the industry at all three levels of government.
