FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, May 9, 2001

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this afternoon.

As you know, the order of the day is Bill C-26, an act to amend the Customs Act, the Customs Tariff, the Excise Act, the Excise Tax Act, and the Income Tax Act in respect of tobacco.

We will begin with one of our witnesses, senior policy analyst with the Canadian Cancer Society, Mr. Rob Cunningham. You of course have already appeared before this committee, so you know how it works. You have approximately five to seven minutes to make your introductory remarks. Thereafter, we'll move to the question and answer session.

Welcome.

[Translation]

Mr. Rob Cunningham (Senior Policy Analyst, Canadian Cancer Society): Thank you, Mr. Chairman.

As you said, I'm Rob Cunningham and I'm the Senior Policy Analyst for the Canadian Cancer Society. We would like to thank you for giving us the opportunity to come before you today to speak in favour of Bill C-26.

[English]

In addition to supporting the bill, we'd like to acknowledge the support of all five parties in terms of the second reading vote and the earlier ways and means motion in the House of Commons. We'd also like to recognize the role played by Minister of Finance Paul Martin, Minister of Health Allan Rock, and Solicitor General Lawrence MacAulay with respect to the April 5 announcement, the tax portion of which is being implemented through this bill.

This committee and members of this committee recognize, as do we in the health community, the very important role that higher tobacco prices play to reduce tobacco consumption, including among young people.

This World Bank report entitled Curbing The Epidemic, Governments and the Economics of Tobacco Control in 1999 recommended higher tobacco taxes as perhaps the most effective measure to reduce smoking among young people. We know the very tragic role that smoking has in terms of causing disease, disability, and death in Canada: 45,000 Canadians die each year.

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In this bill there's an increase in cigarette taxes, and $4 per carton was the joint federal-provincial amount to be split with five provinces: Ontario, Quebec, Nova Scotia, New Brunswick, and Prince Edward Island. This will have an impact on reducing smoking, and we certainly support that.

You will have received from the clerk this tax map, indicating the approximate prices in Canadian provinces and in U.S. border states. Even with this increase—and these prices will be in effect after the increase has been implemented—Ontario and Quebec still have the lowest cigarette prices in North America. This is good news in the sense that it leaves room for us for further increases.

It does address very significantly our concerns with respect to contraband. The prices in Ontario and Quebec are lower than in the tobacco belt states of Kentucky, Virginia, and so on, which is not reflected in this map. Even if we had a further $4 per carton joint federal-provincial increase, we'd still have in Ontario and Quebec the lowest cigarette prices in North America—lower than in the tobacco belt states.

The reason prices in the United States are so much higher than in Canada is because in recent years tobacco manufacturers have had to increase their prices dramatically to pay for the massive, multi-billion-dollar out-of-court settlements from litigation, where state governments have sued the tobacco industry for medicare costs.

The bill contains an increase in roll-your-own tobacco taxes of $1 per 200 grams and $1 per 200 sticks across Canada. This is good, but we would encourage much more significant increases for these two types of tobacco products in the future.

I purchased this today, and for $13.78 I have enough roll-your-own tobacco to make 200 cigarettes, a carton of cigarettes. When we have this very low price as compared to the price of a carton of cigarettes, we have a loophole. We have a situation that allows low-priced products to continue to be accessible, that undermines health objectives, and that also undermines revenue objectives.

This is one example of a tobacco stick, which has a different type of categorization. Tobacco manufacturers are ever ingenious. What they've done is produce a preformed tube of tobacco with a little bit of a filter on the end. All the consumer has to do is slip this little filter paper over-wrap over the end, make a cigarette in that way, and they can have.... I purchased this to make 200 cigarettes for $29.38 today. Again, it's a loophole, and it's an opportunity to narrow that gap and to advance both health and revenue objectives in the future.

Cigars are not included in this bill. That is an area we would like to recommend be addressed in the future in terms of higher tobacco taxes.

One very important aspect of this bill we strongly support, one we've urged in the past, is the new $10 per carton cigarette tax on cigarettes sold in duty-free stores. There is really no justification for allowing low-price cigarettes to continue to be sold in duty-free stores, given the health objectives and given our past experience in respect to contraband.

The presence of duty-free channels was the window, the opportunity, whereby contraband dealers could begin the distribution flow and whereby contraband would ultimately end up in the Canadian market. By addressing the duty-free channels, you will put a smuggling prevention measure in place, especially as it's combined with the strength of the export tax contained in this bill.

What the manufacturers did in the early 1990s, exporting vast quantities of cigarettes from Canada to the United States while knowing that those cigarettes would come back to Canada as contraband, cannot be repeated. Not only will this prevent smuggling, but it will also assist in getting further cigarette taxes in place in the short term as opposed to the long term.

Incidentally, with respect to duty-free shops, within the 15-country European Union it's no longer possible for travellers or others to go between countries with duty-free purchases. Momentum internationally to end duty-free sales is growing, and there were active discussions last week in Geneva at the negotiations for the framework convention on tobacco control, where many countries indicated their support for a worldwide ban on duty-free sales.

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A further aspect of this bill we support is the increase in the surtax on tobacco company profits. This was initially announced in 1994 and has been continued a number of times. Recently we've seen how corporate income taxes across the board, for all industries in Canada, have been reduced.

There's not really the same rationale to reducing corporate income taxes for tobacco companies. This increase in the surtax will substantially offset—I don't know the exact proportions, but it will offset that decrease that's been beneficial to other industrial sectors.

On April 5 the government announced significantly increased resources for tobacco control, ramping up to $110 million per year. We support that. It's going to have an impact. At the same time, we want to reiterate our support for Bill S-15, the Tobacco Youth Protection Act.

Overall, this bill is a very positive measure from a public health and cancer prevention point of view. We would urge all members of this committee to give speedy and positive endorsement to the bill.

Thank you, Mr. Chairman.

The Chair: Are there any questions for Mr. Cunningham?

Mr. Epp.

Mr. Ken Epp (Elk Island, Canadian Alliance): I have a bit of a problem with your statement on duty-free purchases. In the summary of the bill it states that there is a tax on tobacco products for sale in duty-free shops. What you have just said seems to contradict that.

Mr. Rob Cunningham: Yes. As a result of this bill there will be a new $10 per carton tax on sales in duty-free shops, and that is a change from the past.

Mr. Ken Epp: Okay.

Mr. Rob Cunningham: We think that's a direction we should go in.

Mr. Ken Epp: But it's not enough? That's what you're saying.

Mr. Rob Cunningham: It will not eliminate sales in duty-free stores in particular because the GST is not charged and because provincial tobacco taxes and provincial sales tax are not charged. But it's certainly a very positive step.

Mr. Ken Epp: Okay.

Did I have another question, Mr. Chairman?

The Chair: I'm not sure.

Mr. Ken Epp: I don't know either. I didn't ask myself. That's the only one that came to mind.

The Chair: Mr. Loubier, do you have a question?

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Yes, I have a few.

As compared to the price in Quebec and Ontario, if a Quebec or Ontario cigarette manufacturer wanted to ship his cigarettes to sell them on the Michigan or New York markets, what is the average price of a carton of cigarettes, taxes and cartage included, once it's in Michigan or New York?

Mr. Rob Cunningham: If you want to sell them in Michigan and in New York, you have to pay the US federal taxes and state taxes. Also, because of the laws in the States, you need another amount that's equivalent to what the American manufacturers have to pay based on the agreements in force because of the litigation. So the prices are approximately those you have on the board.

Mr. Yvan Loubier: Fine. So that means that the price of a Quebec carton, for example, sold on the New York market would be selling for the equivalent of the New York price, taxes included.

Mr. Rob Cunningham: Yes, that's it.

Mr. Yvan Loubier: Fine. It's because I found there were unbelievable differences.

Mr. Rob Cunningham: You're right. Another reason explaining this major difference is the fact that the Canadian dollar has gone down a bit.

Mr. Yvan Loubier: That's for sure.

I didn't understand the demonstration you made earlier with the cigarette filter. I don't know much about that market anymore.

Mr. Rob Cunningham: Tobacco sticks represent about 3% of the Canadian market. In Quebec, it's about 6%. The Quebec government announced on April 5 that it would be making taxes on tobacco sticks and cigarettes just about equivalent. However, where federal taxes apply in Quebec, they don't have an equivalent yet. So that recommendation could be implemented in the future.

Mr. Yvan Loubier: The filter you took off there, it's...

Mr. Rob Cunningham: It's just a little piece of paper. When we talk about a tobacco stick that can be taxed at a lower rate, that's the product. That's what is considered as being a tobacco stick and not a cigarette. So it could be taxed less.

Mr. Yvan Loubier: Unbelievable.

[English]

The Chair: Mr. Loubier, would you want him to table all those?

Mr. Yvan Loubier: No. Okay.

The Chair: Are there any further questions?

[Translation]

Mr. Yvan Loubier: I'm sorry.

You were congratulating me before for my speech in the House, but I used your data. It's the data from the Canadian Cancer Society. Maybe it would be worthwhile to make them even more accessible for the population because you can make discoveries using those data concerning the chemical make-up of cigarettes, the impact it can have, the comparison you can make between those chemical products and other products that are used as fuel or furniture strippers. When you know what's in a cigarette, it's enough to make you sick. I think the population would be helped if it knew more about that.

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Mr. Rob Cunningham: I agree with you. Raising the awareness of our youth is very important. You can be sure that making the population more knowledgeable can have an impact.

Mr. Yvan Loubier: Thank you.

[English]

The Chair: Thank you.

Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you, Mr. Chair.

You brought forward this map showing the tax comparable to the United States, but you did not provide us with any data on taxes in the state of Kentucky and those producing states. Also, are you aware of any interstate smuggling of tobacco in the United States?

Mr. Rob Cunningham: I would have to get back to you with the exact current price in terms of Kentucky. I think it's around $44 a carton in Canadian dollars.

There is some interstate smuggling in the U.S., especially from these lower-price jurisdictions to higher-price jurisdictions. But in terms of the Canadian prices, we're still even below their lowest.

Mr. Gary Pillitteri: I would like to have that, if possible. Some members of the committee were saying that possibly in the future, in our covering of the tax system here in Canada, we could take a look at whether they're doing anything or have done anything to avoid smuggling. I think that would be interesting.

Mr. Rob Cunningham: Can I please get back to you on that?

The Chair: Yes, thank you, Mr. Cunningham. There are no further questions.

On behalf of the committee, I would like to thank you very much for your continuing contribution to the work of the finance committee. It is greatly appreciated.

Mr. Ron Cunningham: Thank you.

The Chair: We'll now pause and let Mr. Willis take a seat to deliver his comments.

Once again I have the opportunity to welcome, from the Department of Finance, the senior chief, excise tax, sales tax division, tax policy branch, Mr. Brian Willis, who I guess will be delivering the comments on behalf of Mr. Cullen.

Mr. Brian Willis (Senior Chief, Excise Tax, Sales Tax Division, Tax Policy Branch, Department of Finance): Yes, thank you, Mr. Chairman.

Unfortunately, as you are aware, Mr. Cullen is tied up in the House on the other bill that came up on short notice, so he asked me to deliver the remarks on his behalf. I will attempt to keep these remarks brief so the committee can move on to questions and other issues relating to this bill.

As honourable members know, one of the government's national health objectives is to reduce smoking.

[Translation]

On April 5, the ministers of Finance and Health and the Solicitor General announced a comprehensive new tobacco strategy designed specifically to help reach this objective, particularly reducing smoking by youth.

[English]

The new strategy comprises increased spending on tobacco control programs, increased tobacco taxes to discourage smoking, and a new tobacco tax structure to reduce the incentive to smuggle products back into Canada. Bill C-26 implements the tax elements of the new strategy.

I'll begin my review of the bill by discussing the new tobacco tax structure. This new structure builds on the success of the 1994 national action plan to combat smuggling in reducing the level of contraband activity and restoring the legitimate market for tobacco sales.

When the government imposed an excise tax on Canadian tobacco exports under that plan, several exemptions were allowed. To ensure that Canadian manufacturers had access to legitimate export markets, exports up to 3% of a manufacturer's annual production were exempt from the tax. This threshold dropped to 2.5% in 1999, and under Bill C-26, is further reduced to 1.5% of production. This represents the approximate level of exports required to meet the legitimate demand for Canadian tobacco products abroad, principally in the United States.

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[Translation]

The key element of the new tobacco tax structure is a new two- tiered excise tax on exports of Canadian manufactured tobacco products, which replaces the current tax on exports of tobacco products effective April 6, 2001.

[English]

Under the new export tax, all exports of Canadian brands of tobacco products will be taxed, thereby reducing the incentive to smuggle exported products back into Canada.

The new tax will be two-tiered. On exports up to the 1.5% threshold, a $10 per carton tax will apply, which will be refunded upon proof of payment of foreign taxes. A refund of tax will be provided on these exports to avoid double taxation of these products when they enter legitimate foreign markets.

On exports of Canadian brands of tobacco products over the threshold, the current excise duty on tobacco products and a new excise tax—in total amounting to $22 per carton of cigarettes—will apply. No refund will be provided with respect to this second-tier export tax.

This measure will remove any incentive to illegally bring Canadian brands of tobacco products back into Canada and will help set the stage for future tobacco tax increases.

The next element of the new tax structure applies to tobacco products for sale at duty-free shops and ships' stores.

[Translation]

Canadian tobacco products delivered to duty-free shops and as ships' stores, both at home and abroad, will now be taxed at a rate for cigarettes of $10 per carton, effective April 6, 2001.

[English]

While imported tobacco products delivered to Canadian duty-free shops will also be taxed, the tax on the first carton sold to a non-resident will be refunded.

Taxing tobacco products sold in duty-free shops or as ships' stores demonstrates just how serious the government is about reducing tobacco consumption. As you will recall, Mr. Cunningham made mention of this as being an important initiate for the government.

Allowing Canadians who travel continued access to low-cost, tax-free tobacco through duty-free shops would be inconsistent with the government's strategy of raising tobacco taxes domestically to achieve its health objective of reducing smoking.

In addition, this measure reduces the risk that smugglers might try to access Canadian products in duty-free markets once other sources of untaxed, low-cost tobacco products are eliminated.

Bill C-26 also changes the traveller's exemption to ensure that returning residents pay tax on tobacco products they bring back into the country.

[Translation]

At present, after an absence of more than 48 hours, returning residents may bring back one carton of cigarettes, tax and duty- free, as part of the traveller's allowance. Effective October 1, 2001, they will be charged a new $10 per carton duty when importing cigarettes.

[English]

Tobacco products with a Canadian stamp indicating that excise duties and taxes have already been paid will be exempt from this duty and from regular excise duties and taxes. This will ensure that residents are not subjected to double taxation when returning with Canadian products on which taxes have already been paid. Non-residents will not be affected by this change.

Again, allowing Canadians access to low-cost, tax-free tobacco would be inconsistent with the government's strategy of raising tobacco taxes domestically to reach its goal of reducing smoking.

Another key element of the new strategy involves tobacco tax increases.

[Translation]

As of April 6, 2001, the combined federal-provincial tax increases by $4 per carton on cigarettes sold in Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island. These are the five low-tax provinces that matched tobacco tax reductions with the federal government in 1994.

[English]

These increases will restore federal excise tax rates to a uniform level of $5.35 per carton on cigarettes sold in Nova Scotia, New Brunswick, and Prince Edward Island. This amount is equal to the current federal excise tax rate in the provinces that did not reduce tobacco taxes jointly with the federal government in 1994. Following these increases, only in Ontario and Quebec will federal excise tax rates on cigarettes be below this national rate.

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Mr. Chairman, this is the fifth increase in tobacco taxes since 1994. In total, federal and provincial taxes on cigarettes will have increased by between $7.40 and $9.80 per carton in these provinces since that time.

I now turn to the tobacco manufacturers surtax. Bill C-26 also increases the surtax on the profits of tobacco manufacturers to 50% from 40%, effective April 6, 2001. Initially introduced on a three-year, temporary basis in 1994 and made permanent in 2000, this surtax currently raises about $70 million annually. With the increase provided in Bill C-26, the surtax will raise an additional $15 million each year.

There are additional measures.

[Translation]

While legislative amendments are not required, I would like to point out to the committee an additional measure directly related to the provisions contained in this bill.

[English]

The government is providing additional resources so that federal departments and agencies can better monitor and assess the effectiveness of the new tax measures in reducing smuggling. The additional $15 million in the first year and $10 million each year thereafter will be targeted to the RCMP, the Canada Customs and Revenue Agency, the Department of Justice, and the Solicitor General.

In conclusion,

[Translation]

Mr. Chairman, the government knows full well that the stakes are high in the campaign against tobacco use. The tax measures in Bill C-26 provide the means to conduct this campaign effectively.

[English]

The new tax structure will help reduce the incentive to smuggle Canadian-produced tobacco products back into Canada, and the tax measures will help advance the government's health objectives. In addition, the tax measures will increase federal revenues from tobacco products by $215 million per year.

The Chair: Thank you, Mr. Willis.

If you would like, Mr. Cullen, we are ready.

Mr. Roy Cullen (Parliamentary Secretary to Minister of Finance): Thank you. I apologize for being late, Mr. Chairman and colleagues.

Mr. Chairman, a successful new tobacco tax structure will enable the government to increase tobacco taxes even further in the future.

This concludes my very lengthy remarks on Bill C-26.

Voices: Oh, oh.

Mr. Roy Cullen: The officials and I are here to answer any questions you might have. Thank you.

Thank you, Brian.

The Chair: Thank you very much, Mr. Cullen, and I must say that the general consensus is that this was the best speech you have ever delivered to this committee.

Mr. Willis, thanks as always for your great contribution.

Mr. Epp, do you have questions?

Mr. Ken Epp: Yes, I have a number of questions.

First of all, it's not related to this bill, but perhaps Mr. Cullen could give us a little bit of light on this. Is it not inconsistent for the federal government to increase taxes on cigarettes in order to reduce smoking while at the same time subsidizing certain parts of the tobacco industry?

Mr. Roy Cullen: What parts of the tobacco industry?

Mr. Ken Epp: Well, for example, Sue Barnes often mentions that there are, I think it is....

A voice: In Ontario.

Mr. Ken Epp: Yes, in Ontario the tobacco farmers get subsidies.

Mr. Roy Cullen: Mr. Chairman, as far as I know, there are some programs to help with the agricultural sector, tobacco, partly covering a number of areas. One is to reduce in terms of research the amount of—and I don't know what the scientific word is—the kind of nicotine content—

Mr. Ken Epp: Carcinogens.

Mr. Roy Cullen: There are also programs, I understand, to help in terms of transition, moving away from tobacco. The other thing I think we need to keep in mind is that there are—I know it's sort of a debatable point or a contentious issue—people who are smoking all over the world, and we're still exporting tobacco products.

Mr. Ken Epp: Yes. Okay, I'll move to my next question.

Besides the increase in the tobacco taxes, your opening statement says that a new tobacco tax structure will reduce the incentive to smuggle products back into Canada. Now I think I understand this. You're now imposing a tax right at the manufacturer's level, regardless of the destination of the cigarettes. Is there something on the packaging that indicates that the tax is being paid? Is there a stamp on it? There's some reference to that, and I don't really quite understand what you mean by the structure also being geared toward reducing the use of cigarette products.

• 1600

Mr. Roy Cullen: Yes. Thank you, Mr. Epp. I'll just make a few opening remarks, and then Mr. Willis can continue.

A big part of the problem we had before in terms of contraband was that there was always an economic incentive to obtain cigarettes through back channels, where the tax was not included, and bring them back into Canada. So the taxes were not on those cigarettes. So there was a big economic incentive. What this legislation does is bring in a two-tier duty and excise tax structure. It means that, for cigarettes that are being exported—apart from the 1.5%, which is a legitimate amount of exports that can go into the U.S. market—there's an arrangement with the U.S. customs to refund so that there's not a double taxation.

Apart from that, there's a non-refundable export tax so that the cigarettes that find themselves in the U.S. market are going to have the tax included. We believe this will go a very long way to removing the economic incentive to bring those cigarettes back into Canada. By also including the duty-free shops and the ships' stores, we have taken that additional measure to ensure that we don't get the potential for leakage through those channels as well. It's a very comprehensive approach—a two-tier structure.

Maybe Mr. Willis or Ms. Legare could comment further, describing how this structure is two-tiered and how that works in more detail.

Mr. Brian Willis: Certainly I think Mr. Cullen has given a very good explanation of the concept here. Essentially, what happened before was that product that was not taxed was being smuggled back in. This structure is imposing some form of levy before the product leaves the manufacturer's door. It will have either a $10 export tax on it, or it will have a $22 export tax, or it will have a $10 tax on products for sale in duty-free stores or at ships' stores.

Mr. Chairman, one of the questions was: how will we differentiate between those products? We currently have in place a system of stamping and marking in Canada for all products that are tax-paid or not tax-paid. A stamp on a tobacco product indicates that the duties and taxes have been paid, and a mark is the indication that the duties and taxes have not been paid. The words will be: “Not for Sale in Canada” or “Canadian Duties Not Paid”. What will happen under the new structure is that there will be some changes in that so that whenever the $10 tax is paid on the products for sale in duty-free stores, those will have a stamp on them, because that's essentially equivalent to our total duties and taxes.

If the $22 export tax is paid, the product will also have a stamp on it because there will be no refund. So the only product on which there will not be a stamp, where we will continue to have a mark that says “Duties not Paid”, will be those products that are exported from Canada under the 1.5% threshold, and where the $10 tax is paid on export, but there will be a refund paid when foreign taxes are paid on those products. Those products will be marked as no duty paid, not for sale in Canada, because we will be refunding that $10 tax up to the 1.5%. So the products will be clearly identified as to whether duties or taxes have been paid.

Mr. Ken Epp: That was my next question. With respect to the percentage of production that is actually exempt from the tax going down from 3% to 1.5%, why would you exempt any part of it? I don't really quite understand the reasoning for that because that's put some of the product out there without the taxes being paid on it.

Mr. Roy Cullen: Well, Mr. Epp, there is a certain amount of exports, a very small amount that is legitimately going to legitimate export markets. The 1.5% is just such a small volume that it would never even make a difference in terms of the broader issue, but there is a certain percentage of production that is going to legitimate markets. Another point is that the $10 tax applies to the 1.5% as well, and that gets refunded depending on what taxes have been paid in the U.S. so they're not double taxed.

Mr. Ken Epp: But your terminology confuses me, because you're saying that up to 1.5% can go there duty-free or tax-free because it goes to a legitimate market. Now, that implies that you're putting a tax on the stuff that goes to an illegitimate market. I'm just wondering.... I don't understand what you mean by that.

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Mr. Roy Cullen: I guess maybe my language was not totally precise. In the past there obviously were cigarettes going into the U.S. without taxes on them and coming back into the Canadian market as contraband. Maybe Mr. Willis could describe a bit more specifically the kinds of legitimate markets, if I can use that phraseology, in the U.S. that would cover the 1.5%.

Mr. Ken Epp: You can use the phrase, but explain what it means, because I wonder about legitimate and illegitimate markets.

Mr. Brian Willis: Perhaps I can go back, Mr. Chairman, to the previous export tax. The export tax that was put on in 1994 had an exemption threshold of 3%, and that was an exemption; there was no tax that would apply. That tax only applied to volumes over and above 3%. That 3% was reduced to 2.5% in 1999, and this bill will reduce that threshold to 1.5% as of April 1 of last year, because it was a measure proposed in the budget of 2000.

What is happening in this bill, though, is that besides implementing that reduction to a 1.5% threshold under the old export tax, this bill replaces the old export tax with a new one that has the two tiers in it. Under the new export tax, the $10 tax will apply from the first carton exported. There will be no exemptions on Canadian brands of tobacco products. That $10 up to 1.5% of production of a manufacturer will be refunded to a foreign importer and the domestic manufacturer when the foreign importer provides proof of payment of the foreign taxes.

For example, on products exported to the U.S., the importer into the U.S. will enter those goods into the U.S. domestic economy and will pay the $3.40 U.S. tax. That's approximately the equivalent in Canadian funds of about $5 Canadian.

Mr. Ken Epp: I was just going to say $10 Canadian.

Mr. Brian Willis: It's about $5 right now.

That amount will be refunded to the foreign importer when he provides proof of having paid U.S. levies. The additional $5 will be refunded to the domestic manufacturer in Canada.

Two things happen there: first, we ensure that the products are not exported from Canada without this $10 on it; and secondly, we ensure that they are entered into the U.S. domestic economy, where U.S. taxes are paid, and they then fall under the control of the U.S. federal administration as well as the states, who are interested in ensuring that those products don't then get diverted and avoid their taxes. We are confident that this will control the problem we have.

Mr. Roy Cullen: Mr. Chair, I would just add something.

First of all, if you look at Canadian cigarettes in the U.S. market, it's not a huge demand. There are some people who fly south, and the local drugstore might like to have them available, but there's not a huge market for Canadian cigarettes in the U.S. market. What was happening was the volumes previously were much higher, and of course they were finding their way back into the Canadian market because the taxes weren't paid.

The point I was really trying to make is that what has been done here has been quite revolutionary in the sense of trying to deal with the issue of contraband.

Often people will say to me, what about the price of the cigarettes in the United States? In essence, it's not that relevant at all, because Canadians generally smoke Canadian cigarettes. There are some who will smoke American cigarettes as well. But if the price differential and the economic incentive is not there to bring cigarettes back in, then we think we're going to make a big dent in taking out the incentive for contraband, plus closing down any potential leakage through these other channels.

The bottom line is we understand that people can be very creative and will turn themselves upside down, etc., but we believe strongly that this gives us a really great opportunity to put this in place, see how it works, and if there's any contraband or any kind of slippage, try to make those adjustments. But if it's working as we expect it will, then we have room to move further.

The Chair: Yes, Ms. Barnes.

Mrs. Sue Barnes (London West, Lib.): Just before we move on too far, I want a point of clarification. The comments attributed by Mr. Epp to me were not mine. Thank you. That's just for the record.

Mr. Ken Epp: I probably mixed you up with another member. My apologies.

I have one more question, and it's with respect to the percentage, the 1.5% of production. Is it true that only about 1.5% to 3% of Canadian production of tobacco products is exported? Is the rest all used domestically?

• 1610

Mr. Brian Willis: Mr. Chairman, that is correct.

I can separate the exports into two categories, perhaps, to clarify. There are some products and some exports that are not of Canadian brands. They might be a flavour or a brand or a blend that is not sold in Canada and is not of a Canadian taste. There are some exports of that. Those would amount to perhaps 2% to 3% of total Canadian production.

Basically, that production is trying to find ways of utilizing excess capacity in a plant in Montreal or southern Ontario. So they'll take contracts for Africa or Thailand and produce it at marginal cost. So there's a small percentage of exports of that type, and they're not covered by these measures. They're not products that are smuggled. They're not products that Canadians smoke. But of the brands that Canadians smoke, the Canadian brands, the numbers for the last year were under 1.5% for the industry as a whole. I think they were hovering in the range of about 1% of production.

The reason for that is that Canadian brands are not popular outside of Canada, particularly in the U.S. There's a different blend of tobacco. It's a burly blend of tobacco that's smoked predominately in the U.S., versus a Virginia blend here. So Canadians tend to smoke Canadian brands of cigarettes, and Americans smoke their brands. So there really isn't a market for Canadian cigarettes, other than for expatriate Canadians and Canadian travellers. That market is served by a number of small wholesalers in the U.S., who will arrange for mail delivery, or will actually supply it in stores where there's a high enough concentration of Canadian residents.

Mr. Ken Epp: One more question.

The Chair: Final question.

Mr. Ken Epp: It says the effective date of this tax is April 6, 2001, which is a little over a month ago. Is that tax being collected already, because it says that is the effective date, or are we going to go back to these manufacturers and give them a retroactive bill on it?

Mr. Brian Willis: There are two parts to this. You'll notice that where products were already in bonded warehouses of manufacturers, those products are grandfathered. They are not subject to the change. So that means there is some supply in the hands of manufacturers in Canada, in warehouses in the U.S., and in duty-free shops in Canada and in the U.S. that would not be subject to the higher tax. Our taxes are imposed at the manufacturer's door.

For products that are produced after April 5, yes, the higher tax does apply. The manufacturers are familiar with that process. It is routine in consumption taxes of this type to propose that the measures come into force from the day of the announcement.

Mr. Ken Epp: So they were aware of it.

Mr. Brian Willis: Yes, they are.

Mr. Ken Epp: I think that finishes me for now, Mr. Chairman. Thank you.

The Chair: Mr. Loubier.

[Translation]

Mr. Yvan Loubier: Thank you, Mr. Chairman.

As far as I am concerned, I find the transborder system very effective and watertight. It was the main problem we had: we were exporting, reimporting and all this smuggling was going on.

However, the situation is not as clear for the border regions inside Canada itself. For example, the average price of a carton of 200 cigarettes is $37.86 in Quebec but it is $42.88 in New Brunswick, and it has a border with Quebec. I think the problem will be happening inside our Canadian borders, actually. The same thing goes for Ontario, where the same carton goes for $37.36 while in Manitoba, it is $48.43.

If there are additional funds to be put into it, I think we would have to put them into fighting against domestic smuggling. I may be wrong, but it seems to me there is danger there because there is no uniformity. I am not saying that all the prices should be the same, but at least, the prices including the cost of transport should be similar. I can see that there are unbelievable differences.

The Chair: Mr. Willis.

Mr. Brian Willis: Yes, you are right. We probably have a domestic smuggling problem in Canada. The smugglers buy the cigarettes in Ontario and Quebec and cart them to British Columbia, for example, where the price is almost $50 a carton. It is a huge problem, a problem that replaced the international smuggling problem in 1994. Before 1994, the smuggling was going on between the U.S.A. and Canada.

Mr. Yvan Loubier: Yes.

Mr. Brian Willis: But you are right about the future of domestic smuggling.

Mr. Yvan Loubier: What can we do about that? I know that you negotiated and discussed a lot with your provincial counterparts before setting the taxes and doing the harmonization between the federal and provincial governments. What more can we do to have more harmonious prices domestically, in Canada, to be able to really fight effectively both within and without our borders?

• 1615

Mr. Brian Willis: This bill establishes a first step to decrease the differences. As you have noted, the tax increase is $4 a carton in Ontario, Quebec and the Eastern provinces. There is no increase in the other provinces. This measure will decrease the gap between the prices in Ontario and the Western provinces.

The Finance Department officials have had meetings with all their provincial counterparts. One of the goals we share with the provinces is to find ways to decrease the difference in the price of tobacco in the different provinces. Our goal for the future is to continue increasing prices in those provinces where the taxes were decreased some six or seven years ago. So the gap is going to narrow. For the time being, there is only the RCMP using a few provisions to control smuggling federally and at the provincial level.

Mr. Roy Cullen: There is another reason, Mr. Loubier, for harmonizing taxes between provinces.

Mr. Yvan Loubier: Listen, I am not in favour of total tax harmonization, but when we are talking about a hard fight...

Concerning taxation, I remember that in 1994, we had reached and even gone beyond a certain ceiling, and the effect of that was to encourage smuggling because of the American prices and the value of the Canadian dollar at that time. And as there was nothing concerning reimportation, it was the leakiest sieve. I see that you have settled the problem, but if we really want to get together somewhere, it has to be our concern domestically. You have just told me that narrowing the gap was your concern.

However, I have another concern, Mr. Cullen. You said—and you were smiling when you said it—that it meant $215 million more for the government yearly. However, you are only putting $15 million more this year and $10 million more next year into the fight against smuggling. With those 215 million new dollars a year, no additional measure is being provided for inasmuch as the amount will be recurring every year, and that is a minimum amount, as your objective is to add even more taxes.

I find that is very little, very slim as the amount being ploughed back into the fight against tobacco addiction and smuggling. I was very concerned by the statistics from the Canadian Cancer Society showing that the situation has stabilized for young teenagers. There are no more smokers than 10 or 15 years ago, but the fact that the situation has stabilized is, in itself, already a failure as since that time, the awareness campaigns that normally should have affected the youngest population group were ongoing. As for young adults, young men and young women, we are seeing an increase in tobacco addiction.

So, the situation is somewhat urgent and we must implement something to bring about more awareness and to fight against smuggling even more. I am surprised to see that of the $215 million in additional revenue, only $15 million are being allocated this year. Next year, we will be hauling in another $215 million because that is a recurring amount and we are only going to be ploughing $10 million of that into fighting smuggling; we are not even talking about fighting tobacco addiction. What is your answer to that? I think it would have been better to put more money into that problem.

Mr. Roy Cullen: Thank you very much, Mr. Chairman.

Mr. Loubier, I am not the one who said that, it was Mr. Willis. I was not here.

Mr. Yvan Loubier: You were not here?

Mr. Roy Cullen: For the presentation.

Mr. Yvan Loubier: Yes, but you signed it. You said on page 5 that 15 million more dollars the first year and 10 million more dollars in the following years would be given to the RCMP.

Mr. Roy Cullen: Mr. Willis is the one who said that. He is the one who smiled.

More seriously, as you know, Mr. Loubier, there is no relation between the taxes and the investments made by the Department of Health in educating teenagers in health matters. It is a different matter.

[English]

As in many things, the government has many demands, many priorities. The Ministry of Health, in their wisdom, looked at an amount, an investment. I think it's $100 million per year over five years, or thereabouts. We think that's a considerable improvement over where we are today. But the tobacco tax bringing in another $250 million a year and what is being spent in Health Canada are not related.

• 1620

On the issue of the amount for smuggling, we're hopeful that with the measures and this two-tiered tax system, it will be important, perhaps, to augment those resources. If it works the way we would expect it to work, we won't see a big increase in contraband. But we know that people can be creative and imaginative, so we want to make sure we try to cover off these eventualities as best we possibly can.

[Translation]

Mr. Yvan Loubier: Mr. Cullen, we are certainly not in the habit of managing things in that way, in other words collecting taxes in one sector and reinvesting them in the same one. However, in this very specific case, in my opinion, we need an enriched awareness campaign comparable to those we have had in the past because this involves the health of our young people and of future generations. It seems to me we could make a bit of an exception. We could say that it is true that we are collecting 215 million dollars... There is some discontent in the population, and, as you know, there are still people who smoke, unfortunately. So there is some discontent because we are told that the 215 million dollars will be used for other things. That is what I have heard recently.

Curiously enough, most smokers I know and have met since this bill was introduced all agreed on the fight we should undertake to protect the health of our children and teenagers. They also agreed we should fight smuggling. They agreed with all the high-minded principles, but we still get back to these 215 million additional dollars. I did not know it was 215 million dollars. I calculated it would be 150 million dollars. We are wondering why more of those 215 million dollars should not be reinvested to make people more aware and fight smuggling. It takes my breath away and even more so because I heard the speeches of your colleagues in the House, more notably our Health Minister, Mr. Rock. The fight against tobacco addiction was an unbelievable priority for him and it must be a priority.

The statistics just threw me for a loop. I thought we had improved things. We improved things in the adult category, but that is not the case for the young people and teenagers. That is where we are going to determine how much it is going to cost us in health care, mortality, tremendous social costs in future years. I wonder how we could go about suggesting using more than 10 or 15 million of those 215 million dollars that will be dropping into the State's coffers thanks to this policy.

Mr. Chairman, if we were in a situation like five or six years ago, I could understand the government trying to get more revenue to decrease the deficit and control our public finances. But the public finances have been under control for some three years now. The surplus is three times higher than forecasted. Even taking into account this year's tax reductions, all the March reimbursements and so forth, we still come up with a surplus three times bigger this year. Next year it will be the same thing.

So, we are not scraping the bottom of the barrel. I think we are not putting enough money into fighting tobacco addiction and smuggling.

Mr. Roy Cullen: Thank you very much, Mr. Chairman.

Mr. Loubier, we agree that we must face the problem or the challenge posed by smokers and tobacco addiction.

[English]

One of the things the government has to be concerned about is that, as I said earlier, the amount that Health Canada would be putting into education and promotion in this area is not really related to this tax. Health Canada would be much better to speak to the investments they are making. I would just comment that we need to be concerned—you as a taxpayer and the Government of Canada—that moneys that are put into health education and promotion are wisely spent, that they are effective in reaching their objectives. You know, you can put a lot of money into these types of programs, but I think Canadians expect their government to invest very smartly, very wisely, making sure they're getting value for their money.

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As the price increases and we can have more flexibility in the future to do more, notwithstanding the concern from smokers like my colleague and others, we can increase taxes further. The data supports the fact that a higher price has an impact in terms of reducing incidence of smoking. It's really a two-pronged approach. The tactics are not connected, but they're coordinated and they interact and reinforce what the government is trying to achieve.

[Translation]

Mr. Yvan Loubier: I agree with you, Mr. Cullen, but it would be so much more acceptable for the population and so much more beneficial for your government—I am working for the government here—if you were to have some proportionality between how much you are collecting in new taxes and the new measures brought in to fight tobacco addiction. In any case, I think the matter bears thought.

I have another concern: employment adjustment policies. There are workers in the tobacco sector, especially in Quebec and Ontario companies, that did not choose that industry at the beginning of their careers as workers. With the fight against tobacco addiction, they will doubtless wind up unemployed.

The same goes for the farmers, in some areas of Quebec and especially Ontario, who produce flue-cured tobacco. Has anything been provided for as additional employment adjustment measures not only for the people working for tobacco producers, but also for farmers specialized in tobacco growing?

Some years ago, some things had been done or some conversion efforts had been made in some areas with sandy land that could be used to grow asparagus and potatoes, but it was not much of a success. With the additional revenue coming from your taxes, will there be anything for employment adjustment and agricultural producers?

[English]

Mr. Roy Cullen: Mr. Chairman, I'll start it off and perhaps Mr. Willis would comment in more detail.

In general terms, it's perhaps too early to tell what kind of dislocation there will be, if any. We're in an economy today where there's a huge transformation going on. Workers are moving from one sector to another. With the advent of technology, communications, and biotechnology, industries are changing rapidly. The employees are being redeployed. That's why the government has placed such an emphasis on training and retraining, lifelong learning, and a whole host of programs and measures like that.

In terms of this particular sector, there are programs available, as you know, through Human Resources Development Canada and other agencies and arms of the government that would be assisting if this type of dislocation did occur.

Mr. Willis, perhaps you could comment. Is that going to happen? How are we prepared to respond?

[Translation]

Mr. Brian Willis: I can say two things to answer the question you put.

First, there was a program for farmers in the 90s; it was a program that bought up the farmers' quotas. Some farmers accepted the government's offers but most refused because it was impossible to grow anything else on their land, according to them, and because their crop was so profitable they could not accept the government's offer. So the program ended without reaching its goal simply because not enough farmers were ready to accept the offer.

The situation is a bit different for the workers. There were decreases in the employment level in the industry during the last 10 years, but the decreases forecast in the level of tobacco addiction in the Canadian economy are so small that it is going to take years to eliminate tobacco from our country. The decreases are something like 2 or 3% per year. So the companies and the workers will have lots of time to adapt to the future situation. There might be small problems from time to time, but most of the time the decreases will be small and ongoing. So the workers will be able to find other options. Maybe normal decreases in the plants will also serve to settle the problem.

• 1630

[English]

The Chair: Thank you, Mr. Loubier.

Mr. Pillitteri, followed by Mr. McCallum.

Mr. Gary Pillitteri: Thank you, Mr. Chairman.

A question was asked by Mr. Epp about subsidies and farmers. On this table over here, most people think that I just grow grapes. But I am a farmer. There are no special subsidies in agriculture in a tobacco-related industry other than subsidies that are given in total to every farmer in agriculture.

There's more than one part of Canada that produces tobacco. In Quebec they also produce tobacco, and also in British Columbia.

As of late, talking about subsidies, I do understand that the Province of Ontario injected another $20 million into the tobacco industry because of the tobacco industry wanting to eliminate the carcinogen. In order to dry the tobacco, it would take approximately $80 million to change all of the kilns, the drying process, in Ontario. Ontario has put in some $20 million.

Another question should be asked of Mr. Loubier. We're talking about subsidies. There's a far greater subsidy in agriculture in the province of Quebec than in Ontario. That is related to the provincial sector. There's much more—

Mr. Yvan Loubier: On tobacco?

Mr. Gary Pillitteri: In all segments of agriculture in Quebec. I'm not saying tobacco now.

Yes, much was done in diversification in the province of Ontario. It has gone out of tobacco and into the raising and growing of peanuts. Perhaps some of you don't remember, but we are almost producing more peanuts in Ontario than they now produce in Georgia.

So I think we should be looking back to the provincial governments that are giving subsidies to agricultural components and contributing to this effect of tobacco.

Mr. Yvan Loubier: Peanuts.

Mr. Gary Pillitteri: Yes.

Mr. Willis, perhaps you have something to add to that.

Mr. Brian Willis: No, thank you, Mr. Chairman.

The Chair: And bananas too?

Mr. Gary Pillitteri: Not yet, no. We're not raising bananas, but there's always a possibility. I understand with the warming of the climate, it could be possible in my area, that is, Niagara-on-the-Lake.

Thank you.

The Chair: We just have to get more monkeys.

Mr. McCallum, go ahead.

[Translation]

Mr. John McCallum (Markham, Lib.): Thank you, Mr. Chairman.

I would like to tell Mr. Loubier that I am a smoker myself, but that I quite agree with an increase in taxes. I am also an economist, however and, wearing that hat, I am quite opposed to the principle of linking the level of taxes with the level of expenditures, whatever area we may be talking about.

[English]

Whether it's the expenditure on cigarette campaigns, anti-smoking campaigns, employment insurance premiums, or highways, all of those should be determined on their merits in competition with other priorities, as opposed to the level of EI premiums or tobacco taxes or gas taxes. So that's my opinion.

My first question has perhaps already been answered. Given this huge gap between Canada and the U.S., why don't we raise taxes more? I think the answer I heard is we will later, as long as we see there are no glitches with this.

Secondly, why don't we raise the Quebec and Ontario federal excise tax so that it's the same across the country? That would reduce the gap in cigarette prices and reduce smoking in Quebec and Ontario. So why don't we equalize that federal excise tax across the provinces?

The Chair: Mr. Willis.

Mr. Brian Willis: Mr. Chairman, the response to that question comes out of the 1994 reductions.

In 1994 the Prime Minister announced the federal reduction in tobacco taxes of $5 a carton across Canada. He indicated to the provinces that he was prepared to further reduce federal taxes on tobacco products up to an additional $5 a carton in any province that chose to match the federal reductions, both the first $5 and then beyond that.

• 1635

Since that time, as a result of that offer, Quebec, Ontario, Nova Scotia, New Brunswick, and P.E.I. have accepted the federal government's offer to varying degrees. We had reductions in taxes in Quebec of $11 a carton, and federally $10 in total. The lowest reduction was in New Brunswick and Nova Scotia, of $7 each. Since that time we have worked jointly with the provinces in harmonizing our movement on this and in seeking accord on how much the market will bear in respect of the increases. That has got around a problem that developed in the late eighties and early nineties, when the two levels of government were effectively competing for this tax room and in doing so ended up driving the tax beyond what the market would bear.

So in the discussions with the provinces, the amount was agreed upon as a reasonable amount that everyone could live with. It was also an amount that the police forces advised us was a reasonable amount that they felt would allow them to continue to control the contraband problem. There was concern that if the federal government and the provinces were to jointly increase the tax rates too much at one time, it could cause a shock in the market and encourage the contraband players to start moving cigarettes into Canada again, and we'd lose control of the situation.

So there's a desire to move slowly, to test the system, to put new structures in place, and ensure that those are effective, and then to move further and not lose control of the problem.

To go back to a comment that Mr. Loubier, I believe, mentioned, the problem is that if you lose control of contraband, you damage your health objective. The biggest increase in youth smoking was immediately prior to 1994, when schoolyards were full of contraband tobacco. Students were buying them for very little, far below the legal price. So it's important that the government maintain control, Mr. Chairman, of this situation.

Mr. John McCallum: So if I understand your answer, the federal government failure to raise the taxes in Quebec and Ontario to equal all the other provinces is not because of a federal-provincial disagreement, but it's because the federal government is afraid that if it did something so dramatic, the smuggling problem would reappear. Is that the answer?

Mr. Brian Willis: Mr. Chairman, there really are two answers. First, there was an agreement with the provinces on the amount. The provinces were comfortable with the amount we went to, the $4 per carton jointly, as were the police forces that give us advice, that give ministers advice, on this issue. Second, the federal government was comfortable with this amount, as being a very substantial increase, much more than the increases in previous years, while not so much that we would risk losing control.

This is not a perfect science, hence caution is required. There certainly is a view that down the road we will put in this bill the framework that will allow governments to go well beyond this.

Mr. John McCallum: Finally, would it be the medium-term objective of the federal government to at some point have equal excise taxes in all provinces?

Mr. Brian Willis: Yes.

Mr. John McCallum: Thank you.

The Chair: Thank you, Mr. McCallum.

We just have Ms. Guarnieri, Mr. Gallaway, then I'm going to go back to Mr. Loubier.

Ms. Albina Guarnieri (Mississauga East, Lib.): I have a very brief question as a follow-up to Mr. Loubier's point and Mr. McCallum's questions.

Both Mr. Willis and Mr. Cullen were good enough to highlight the government's commitment to the reduction of consumption of tobacco. We place high excise tax on cigarettes, we ban advertizing, we start law suits aimed at affecting tobacco profits, and yet, as Mr. McCallum has highlighted, there is a concern that tobacco companies maintain their profitability. I wonder if you're aware of any efforts, for instance, to make tobacco companies operating in Canada contribute directly to health care costs, in much the same way as cable companies contribute 5% of their profits to the Canadian Television Fund. What would be the obstacles, for instance, to having the tobacco companies follow suit, contributing, let's say, to the Canadian Lung Society?

Mr. Roy Cullen: As you know, Ms. Guarnieri, there's a bill in the Senate as we speak that probably would propose something like that. Mr. McCallum expanded on this concept of a dedicated tax. We have taxes, fuel taxes, we have a whole range of taxes that go into consolidated revenue, and they're not dedicated for any particular purpose. So the government is really opposed to a dedicated tax.

• 1640

I think it would be fair to say the government's objective is not to see the ruination of tobacco companies, it's to try to decrease the incidence of smoking. In fact, this bill increases the surtax from 40% to 50% of the corporations tax on profits from tobacco manufacturing under the Income Tax Act. So there is a surtax and it's been increased with this act.

But as for dedicated taxes, I think it's fair to say the government's position is that we don't support them.

Ms. Albina Guarnieri: We supported them for the cable companies with the television fund. Maybe we should poll all the smokers and see if they want a reinvestment into their lungs.

Mr. Roy Cullen: Actually, Mr. Chairman, with the cable company issue, whether it was a benefit to the industry is certainly an interesting point. It went on the blank tapes to the artists, and so there is a definitional question concerning what industry benefited, the artists or the.... We would see the bill in front of the Senate right now as being a fairly clear-cut dedicated tax, which the government has some real reservations about.

Ms. Albina Guarnieri: I appreciate your nuance.

The Chair: Thank you, Ms. Guarnieri.

Mr. Gallaway. Then we'll go to Mr. Loubier for a final question.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): I wanted to ask about the potential impact of the increase on duty-free operators. The duty-free notion was a federal creation. I believe in 1982 the government of the day allowed them to come to our borders and into our airports to operate, and they are indeed licensed by what is now CCRA. Was there any consultation with the operators association as to the imposition of this tax? And was there any consideration of the impact of this tax on rents, because, as you know, they're percentage operators at airports and land crossings, so they're paying a percentage of rent on a tax?

Mr. Roy Cullen: Mr. Chairman, if I can start it off, the answer to your question is yes, there was consultation. Basically, the duty-free shop owners, as long as there is still a spread, which there will be, with this particular fee or tax, as long as they have a competitive advantage in the marketplace, were quite happy with this outcome, and in fact, they're generally supportive.

Mr. Willis, do you want to add anything?

Mr. Brian Willis: Yes. One of the things that has happened in recent years is that as we have raised tobacco taxes, the profitability of duty-free shops from tobacco has increased quite substantially. The policy of trying to raise the price of cigarettes to discourage consumption is, in a sense, undermined by having low-cost cigarettes available in any supply source, including duty-free shops. What this bill does is narrow the range of difference between products sold in duty-free outlets and those sold in the fully taxed economy, but as Mr. Cullen has indicated, it does leave a margin for duty-free that probably isn't substantially different from the margin they had prior to the very large run-up in cigarette taxes in the late eighties and early nineties. So they still have a business opportunity, while at the same time we've got the prices up a little bit to work towards the government's health objective of discouraging smoking.

Mr. Roger Gallaway: Could you tell me, Mr. Willis, which group or groups were consulted? As I understand it, there are two in Canada.

Mr. Brian Willis: Consultations were held with both the Frontier Duty Free Association, which represents the land border duty-free shops, and with the airport duty-free shop representatives—there are two major companies in that, which also have an association. Discussions were held with both groups about some of the ramifications and some of the issues they thought would be important for the government to address in doing this.

• 1645

For example, one of the things that came out of the consultations was they pointed out that the system had to be fair, that there had to be a level playing field for all, on both sides of the border, both in Canada and outside, and with respect to travellers bringing cigarettes back into the country, so that we didn't simply undermine their business and leave another source open. That's something this bill strives to achieve. Those were the two main groups we consulted with.

Mr. Roger Gallaway: One brief question. If a person is leaving the country on an Air Canada flight and buys cigarettes on board, is the $10 tax imposed?

Mr. Brian Willis: The $10 tax on duty-free cigarettes produced in Canada? Yes, it is imposed. All cigarettes that are produced in Canada, Canadian brands that leave the manufacturing premises, whether for sale in duty-free shops or for sale as ships' stores—and that's the category that is sold on board an aircraft; it's not a ship but it is ships' stores—

Mr. Roger Gallaway: I didn't know that.

Mr. Brian Willis: Those products are subject to the $10 tax when they leave the manufacturer's premises, and that occurs whether they're sold in Canada or outside of Canada.

The only type of product that would not be taxed on an aircraft would be non-Canadian products, which, as I explained earlier, are very rarely smoked by Canadians. We are not imposing any tax on ships' stores of a non-Canadian origin.

Mr. Roger Gallaway: Thank you.

The Chair: Thank you, Mr. Gallaway.

There are no further questions, so I'm going to ask Mr. Cullen.... If you want to go back to your seat, we'll proceed. Officials, please stay, because we'll go right into clause-by-clause.

Pursuant to Standing Order 75(1), clause 1 is postponed.

(Clauses 2 to 8 inclusive agreed to)

(On clause 9)

The Chair: Mr. Cullen, G-1 under clause 9.

Mr. Roy Cullen: Mr. Chairman, this is to clarify that in terms of the “in bond”, as soon as it leaves the manufacturer's premises the tax is applicable, not when it leaves the country. It is just a clarifying point.

The Chair: We're actually dispensing with reading the amendment, right? That's clear.

(Amendment agreed to—[See Minutes of Proceedings])

The Chair: On G-2, Mr. Cullen.

Mr. Roy Cullen: Mr. Chairman, this particular change corrects a drafting error, and it deals with a grandfathering provision on transition. So for product that was in bond at the time of the announcement of the measures, there's a grandfathering provision to ensure that that happens in line with the policy intent.

(Amendment agreed to—[See Minutes of Proceedings])

(Clause 9 as amended agreed to)

(Clauses 10 to 31 inclusive agreed to)

(On clause 32)

The Chair: Mr. Cullen, there's an amendment to clause 32, I believe.

Mr. Roy Cullen: Yes, Mr. Chairman. This basically is a relieving provision. It maintains the status quo. There was an inadvertent wording error, and there could have been some ambiguity about whether a person who had to complete a part III return and a part IV return...whether they would be done separately. This says the returns would be done together. It's a very unusual circumstance where this would happen because part III is tobacco and part IV is wine, although maybe Mr. Pillitteri would be diversifying at some point. Who knows? So it's a relieving provision to maintain the status quo.

The Chair: Shall the Pillitteri amendment carry?

(Amendment agreed to—[See Minutes of Proceedings])

(Clause 32 as amended agreed to)

(Clauses 33 to 44 inclusive agreed to)

The Chair: Shall clause 1 carry?

Some hon. members: Agreed.

The Chair: Shall the title carry?

Some hon. members: Agreed.

The Chair: Shall the bill carry?

Some hon. members: Agreed.

The Chair: Shall I report the bill to the House as amended?

Some hon. members: Agreed.

• 1650

The Chair: I want to first of all thank the officials for their excellent work, as always, but particularly today I want to thank Mr. Loubier and Mr. Epp for understanding that there is a conflict, as you know, between the debate taking place in the House, as a finance issue, and this debate. As you know, as bills leave our committee, they end up in the House, and sometimes we do have to debate them. But we're going to do our best to try to avoid that. As you know, many bills have gone through in the past couple of weeks. These kinds of conflicts may come up again, but we'll certainly do our best not to have them.

Mr. Roy Cullen: Mr. Chairman, I'll just add my thanks. Thank you for your indulgence.

The Chair: Thank you.

The meeting is adjourned.