Chapter I: Introduction
Following the publication of the Royal College of Physicians & Surgeons' report on Smoking & Health in 1962, Canada began its first tobacco control and public education campaign in an attempt to decrease smoking rates and tobacco related illness and deaths (Health Canada, 2008a). In 1986, multi-year federal strategies were implemented, leading to the creation of the National Tobacco Control Strategy (NTCS) in 1999. The NTCS, which was supported and enforced by both the federal and provincial/territorial levels of government, emphasized smoking prevention, smoking cessation, protection from environmental tobacco smoke, and denormalization of tobacco products and tobacco industry practices. The NTCS further set forth five strategic directions which included: policy and legislation; public education; industry accountability and product control; research; and, building and supporting capacity for action (Health Canada, 2007a).
Tobacco control advocates, health professionals, policy makers, researchers, and stakeholders generally agree that a number of initiatives set out by the NTCS have been particularly effective. These include education programs; provincial and national legislation restricting tobacco sales to youth; control of second-hand smoke through workplace and public area smoking restrictions; graphic warning labels on cigarette packages; and the introduction of provincial telephone help lines (Public Health Agency of Canada, 2004). Since the initiation of the NTCS, Canada has successfully decreased the population prevalence of tobacco use in those 15 years of age and older from 25% in 1999 to 18% in 2008 (Health Canada, 2009a). In Ontario, smoking prevalence for the same age group has decreased from 23% in 1999 to 17% in 2008 (Health Canada, 2009a)
Despite this success, numerous tobacco control issues remain. In 2007, Health Canada introduced new goals in the Federal Tobacco Control Strategy (FTCS) announcing a greater emphasis on decreasing smoking rates among youth, young adults, First Nations, Inuit, and other Aboriginal groups (Health Canada, 2008b). Additionally, contraband tobacco became an area of focus with monitoring contraband activities becoming one of six objectives outlined in the FTCS.
Currently, the Canadian and Ontario governments continue to focus on young adult smoking rates, and both levels of government are busily working toward immediate action strategies for this population. Contraband tobacco also remains under close scrutiny as tobacco control advocates, law enforcement officers, and politicians draw attention to the growing availability of inexpensive contraband tobacco products, particularity in the provinces of Ontario and Quebec. However, despite government attention to young adults and contraband tobacco, large gaps remain in our understanding of the prevalence of contraband tobacco use by young adults.
In an attempt to better understand the issue of contraband tobacco, this study examined to what extent contraband tobacco was used by young adults attending post-secondary schools in Ontario.
Chapter II: Literature Review
Legal Tobacco
Federal regulation of tobacco growing, manufacturing, transportation and
sales in Canada
Growing tobacco. In 2008 the Canadian federal government announced a Tobacco Transition Program (TTP) designed to financially assist farmers wishing to leave the tobacco industry. Prior to the TTP farmers were not required to have a license to grow tobacco (Canada Revenue Agency, 2003a), but were required to keep records of the amount of tobacco they grew, received and disposed of, as well as the type and source of their tobacco manufacturing equipment (Department of Justice Canada, 2009a). New regulations now state that farmers who do not participate in the TTP must apply for a license if they wish to continue producing tobacco (Agriculture and Agri-Food Canada, 2009). Further regulations state that tobacco farmers can only sell their raw tobacco to licensed tobacco packers and/or manufacturers (Canada Revenue Agency, 2003a).
Manufacturing Tobacco Products. Canadian tobacco packers and manufacturers must be licensed. The Canadian Revenue Agency (CRA) is responsible for issuing this license. The license covers all steps associated with preparing tobacco for sale, including packing, stemming, converting and packaging (Department of Justice Canada, 2009a; Canada Revenue Agency, 2003b). To comply with regulations of this license, manufacturers must mark packaged tobacco products with either a tear tape (used on packaged cigarettes) or a rectangular stamp (used on other tobacco products) to indicate that Excise Duty has been paid (Canada Revenue Agency, 2005). All regulations pertaining to packaging and stamping of tobacco products by tobacco manufacturers are contained in the Excise Act and the Stamping and Marking of Tobacco Regulations (Department of Justice Canada, 2009a; Canada Revenue Agency, 2005). In 2008, the Canada Revenue Agency announced a new excise stamping regime for tobacco products, due to be implemented in 2010 (Canada Revenue Agency, 2008).
Selling Tobacco Products. The Federal Tobacco Act (FTA), which is administered and enforced by the Health Canada Tobacco Control Programme, "regulate[s] the manufacture, sale, labelling and promotion of tobacco products" (Health Canada, 2008c). The FTA regulates substances in tobacco products, their emissions, information displayed on tobacco packaging, signage required in tobacco retail space and several other aspects of product design and sale (Department of Justice Canada, 2009b). FTA regulations also require that any person and/or organization wishing to purchase bulk tobacco intended for resale must apply for a Wholesalers Permit, which is obtained through the individual's provincial government (Ministry of Revenue, 2009). Provincial Regulation of Tobacco Sales in Ontario Tobacco Product Sales and Taxes. In Ontario, the Tobacco Tax Act (TTA) outlines regulations associated with the sale and tax of all tobacco products including cigarettes, cigars, loose tobacco, chewing tobacco, leaf tobacco and blunt wraps (Ministry of Revenue, 2008a). Ontario retailers wishing to sell tobacco must apply for and be granted a valid Retail Sales Tax Vendor Permit, which is distributed by the Ontario Ministry of Revenue (Ministry of Revenue, 2008b). This vendor permit allows retailers to sell tobacco that has been purchased from an Ontario-registered tobacco wholesaler (i.e., individuals or organizations holding a valid Wholesalers Permit). It is the responsibility of the retailer to ensure that the wholesaler is in fact registered. In Ontario, tobacco which meets the legal regulations of the Tobacco Tax Act can be identified by the presence of a yellow tear strip on the packaging (see Figure 1) (Ministry of Revenue, 2008a). Tobacco packaging with a peach coloured tear strip is intended for sale in some duty free stores to the general public or on reserves to First Nations people. Any tobacco without the yellow tear strip on the packaging (or peach in duty free stores or on reserves), or with any other colour of tear strip on the package is illegal. Cigarettes sold in clear plastic bags with no tear strip are also illegal (Ministry of Revenue, 2008a). Contraband Tobacco
Definition and Examples of Contraband Tobacco
Definition. Contraband tobacco can be defined as "any tobacco product that does not comply with the provisions of all applicable federal and provincial statutes" (RCMP, 2008). This non-compliance can occur any time during the importation, stamping, marking, manufacturing, distributing and payment of duties and taxes (RCMP, 2008).
There are a variety of ways that contraband tobacco is produced, enters the market and is purchased by consumers. These are described below.
Smuggling. Large scale/wholesale cigarette smuggling. Large scale or wholesale cigarette smuggling "involves the illegal transportation, distribution, and sale of large consignments of cigarettes and other tobacco products, generally avoiding all taxes" (Joossens, Chaloupka, Merriman & Yurekli, 2000). This illegal activity is commonly run by large organized crime networks allowing cigarettes to be smuggled over large distances and distributed widely (Joossens et al., 2000; Luk, Cohen & Ferrence, 2007).
ONTARIO - CANADA DOTY PAID - DROITACQUITTE - ONTARIO - CANADA DUTY PAID -DROIT
Figure 1. Yellow tear strip found on cigarette packages in Ontario, indicating Excise Duty paid.
Adapted from "Summary of Tobacco Tax Rules for Retail Dealers". Ontario Ministry of Revenue. Retrieved July 22n , 2009 from http://www.rev.gov.on.ca/english/bulletins/tt/l_2008.html
In Canada during the early 1990s, availability of contraband tobacco was largely a result of wholesale smuggling (Luk et. al, 2007). During this time an increase in the excise tax assigned to domestic cigarettes, and the lack of taxes assigned to tobacco destined for foreign countries, prompted Canadian tobacco manufacturers to export billions of domestic cigarettes to United States wholesalers (Cunningham, 1996). Through the use of organized crime networks, these Canadian cigarettes were then smuggled back into Canada through First Nations Reservations along the Canada-U.S. border from where they were then distributed to wholesalers, retailers, street vendors and ultimately, to consumers (Luk et al, 2007, Schneider, 2000).
Officials report that contraband tobacco is still being smuggled through First Nations Reservations, however the tobacco is no longer mainly Canadian-manufactured. Instead, American First Nations manufacturers supply the majority of Canada's contraband tobacco. In Ontario this supply of contraband tobacco comes mostly from the Akwesasne Reserve (which straddles the borders of Ontario, Quebec and the U.S.) and the Tyendinaga and Six Nations reserves. In Quebec the supply emanates from the Kahnawake reserve. (Figure 2 and figure 3 show the locations of these reserves). The U.S. side of the reserves act as the major point of entry for smuggling these illegal products into Canada (Health Canada, 2007b).
Bootlegging. Bootlegging occurs when cigarettes are smuggled from a low-tax jurisdiction to higher tax jurisdiction and typically involves areas within close proximity to each other such as neighbouring jurisdictions or countries (Joossens et al., 2000). Due to the small scale and low investment requirements of bootlegging, it is commonly organized by small groups of individuals (Joossens et al., 2000).
Kahanwake
AkwBSasrte {U5 Side)
Tyendlnada
Six Nations
Figure 2. Locations of First Nations reserves identified as largest sources of illegal tobacco in Canada
Adapted from Central Canada: Brock University Map Library. Available: Brock University Map Library Controlled Access ht^L//wv/w.brocku.ca/maplibrary/^ August 23 L 2009).
Figure 3. Locations of Akwesasne, Tyendinaga. and Si* "Nations reserves
Adapted from Southern Ontario: Brock University Map Library, Available: Brock University Map Library Controlled Access httpi//www.bmcku.L3/maplibrary/ma^^ August 23t 2009)L
Like wholesale smuggling, bootlegging also occurred in Canada during the early 1990s. In some cases cigarettes exported from Canada to the U.S. retail outlets were purchased by individuals and small gangs who took advantage of the low U.S. tax rate. These individuals then smuggled the cigarettes back into Canada where they sold them for profit (Luk et al., 2007). Cross provincial smuggling also occurred in Canada throughout the 1990s when the price of tobacco varied greatly across provinces (Square, 1998).
To avoid discovery, bootleggers sometimes use counterfeit tax stamps, allowing contraband cigarettes to be sold alongside legal tobacco in the higher-tax locales (Thursby & Thursby, 2000).
Casual smuggling. Casual smuggling occurs when individuals either travel to or use the internet to purchase cigarettes for personal use from a low-tax state or province (Joossens et. al, 2000; Luk et al., 2007). For example, during the early 1990s individuals living in Windsor, Ontario crossed into Detroit, Michigan and purchased cigarettes that included all applicable state and U.S. taxes but were still cheaper than cigarettes in Ontario (Joossens et. al, 2000).
Illegal purchase and manufacture.
GST/HST relieved and provincial tax exempt tobacco. Currently in Canada, status Natives are exempt from paying provincial taxes and the federal GST/HST on tobacco purchased on a First Nations Reserve. Non-native Canadians are not exempt, no matter where or from whom they purchase tobacco. Nevertheless many non-native individuals are now getting illegally sold tax-exempt cigarettes from smoke-shops on reserves
(Canadian Cancer Society, 2008; RCMP, 2008). These cigarettes are purchased for persona] use as well as for resale (Luk et al., 2007).
Illegal tobacco manufacturing plants. The majority of contraband tobacco entering the Canadian market is coming from American First Nations manufacturing sites on the US. side of Akwesasne reserve as well as from illicit and licit manufacturers on reserves in Canada, including the Kahnawake reserve in Quebec and the Tyendinaga and Six Nations reserves in Ontario (RCMP. 2008). These manufacturing sites range "from small ad-hoc operations to fully equipped manufacturing plants" (RCMP, 2008).
Counterfeit, international and criminally-obtained.
Counterfeit and international tobacco. In Canada, both counterfeit and international tobacco products are being smuggled into the country through sea containers. Counterfeit products involve both domestic and international brands. The majority of these counterfeit and international products are coming from China though some specialty tobacco products such as water-pipe tobacco are being imported from United Arab Emirates, Jordan, Egypt, and Saudi Arabia (RCMP, 2008).
Criminally obtained tobacco. Some of the contraband tobacco in the Canadian market is also being acquired through illegal activity such as convenience store and cargo thefts (RCMP, 2008). For example in Vaughan, Ontario a truck driver was shot and the $200,000 worth of cigarettes he was transporting were stolen (RCMP, 2008).
Tobacco Taxes and Contraband
Patterns of availability of contraband tobacco.
History of contraband tobacco in Canada. In 1951, the federal government of Canada increased tobacco taxes by three cents (Cunningham, 1996). This increase, combined with an additional two cent increase from manufacturers, resulted in a large difference in cigarette prices between Canada and the United States. The significantly higher price of Canadian cigarettes led to an increase in the smuggling of lower-priced tobacco from the United States into Canada. The flow of contraband tobacco into Ontario and Quebec during this time marked the first real surge in Canada's contraband tobacco market (Cunningham, 1996). Ultimately, it led to the Finance Minister's decision to roll back tobacco taxes in 1952, and again in 1953 in hopes of bringing an end to the cross border smuggling (Cunningham, 1996). Reducing taxes on Canadian cigarettes did produce the desired consequences of eradicating the cross-border smuggling. The higher prevalence of cigarette smoking during the 1960s and 1970s suggest that the low cost of cigarettes also contributed to the widespread use of tobacco by Canadians (Cunningham, 1996).
As the years progressed, the incomes of Canadians grew, but tobacco prices (i.e., taxes) were not equivalently maintained. As a result of this situation, the Canadian tax rate prior to the 1980s was the lowest among wealthy countries (Sweanor, 1994) making cigarettes in Canada relatively inexpensive. Health and medical organizations responded to this situation by persistently and loudly pointing to the relationship between cost and consumption of cigarettes, and by calling on Canadian governments to raise the price of cigarettes. Through a combination of federal and provincial tax increases, cigarette prices were raised by a total of 170% during the ten years spanning from 1982 to 1992 (Sweanor, 1994). The higher taxes were associated with decreased tobacco consumption, particularly among youth (Cunningham, 1996; Sweanor, 1994), and also increased government revenues.
Despite these positive consequences, however, the availability and use of contraband tobacco also increased during this time (Kelton & Givel, 2008). It is now known that, to avoid the increased taxes being charged to cigarettes intended for the domestic market, Canadian tobacco manufacturers began taking advantage of low export taxes assigned to cigarettes destined for foreign countries. They did so by legally exporting their cigarettes to the United States and then illegally smuggling them back into Canada (Breton, Richard, Gagnon, Jacques & Bergeron, 2006; Schneider, 2000; Kelton & Givel, 2008; Cunningham, 1996). The large majority (80%) of this contraband tobacco entered Canada through the Akwesasne reserve (which straddles the United States-Canada border) and was then distributed to major Canadian cities for sale (Cunningham, 1996). Other points of entry included the Kahnawake reserve located in Quebec and the Six Nations reserve in Ontario (Cunningham, 1996).
In response to the increasing exportation and smuggling of Canadian tobacco, the federal government imposed an export tax of $8 per carton of cigarettes in February of 1992. This increase in the export tax effectively decreased Canadian export shipments by 67% (Sweanor, 1994). After strong protests by the tobacco industry and threats of moving their manufacturing to the United States, the Canadian government conceded to the industry's pressure and removed the tax, a mere two months after its implementation (Cunningham, 1996).
This wave of tobacco smuggling into Canada peaked in 1993- a year after the government backed down from its initial stance against smuggling (Cunningham, 1996). According to Sweanor (1994) a combination of factors contributed to the relative ease of smuggling tobacco into Canada during the late 1980s and early 1990s. For example, tobacco smuggling was facilitated by the high volume of the Canadian population living within a two hour drive of the Canada-U.S. border and the frequency of border crossings between the two countries. This situation afforded Canadians many opportunities to engage in casual smuggling and bootlegging. The unique Canada-U.S. border, which is the longest undefended border in the world, may have contributed to larger scale, organized smuggling. Along these lines, there is no doubt that the AJkweasne Indian Reservation which includes parts of Ontario, Quebec and New York State became a prime location for large-scale movement of contraband tobacco from the USA into Canada (Sweanor, 1994). By 1994, it was estimated that 25% of the Canadian market share was held by contraband tobacco (Sweanor, 1994).
Due to the criminal element of smuggling, and the deceptive practices of the tobacco industry, the government sought to reduce cross-border smuggling of tobacco (Cunningham, 1996). In an attempt to stem the flow of contraband tobacco, in 1994 the federal government reduced federal taxes on tobacco by five dollars a carton immediately and promised to match provincial-reductions to a maximum of five dollars (Cunningham, 1996, Sweanor, 1994). In the provinces of Ontario and Quebec, the retail costs of cigarettes decreased by more than half (Cunningham, 1996). This tax rollback decreased smuggling from the United States into Canada as the legal price for cigarettes in Canadian provinces such as Ontario and Quebec was lower than in neighbouring states (Cunningham, 1996). Of interest, not all provinces reduced their taxes though, and this led to further smuggling, this time interprovincial, as lower priced cigarettes from Ontario and Quebec were exported and sold in provinces that had maintained higher taxes (Square, 1998).
Despite the desired effect on smuggling, a significant health price was paid for the decrease in tobacco taxes. Tobacco consumption increased across the country, particularly in the youth population (Joossens & Raw 2000). Provinces with greater tax cuts had higher proportions of smoking initiation among young adults (Zhang, Cohen, Ferrence, Rehm, 2006). On top of the health burden created by increased tobacco use, 1.2 billion in taxation revenue was lost by the government (Joossens & Raw 2000). These issues led to an agreement between the federal and provincial governments to gradually and simultaneously increase tobacco taxes until they reached levels that existed prior to the rollback (Canadian Coalition for Action on Tobacco, 2007). By 2002, the excise taxes and duties on tobacco had returned to the levels they were prior to the 1994 decrease. While federal taxes have not changed since 2001, provincial tax increases have continued since then (RCMP, 2008).
Not unexpectedly, given the historical pattern of rising tobacco prices triggering more smuggling activity, Canada is once again experiencing growth in the contraband tobacco market. In the 1990s, smuggled tobacco represented the majority of contraband product. Smuggling operations were supported and orchestrated by the tobacco industry. Today the majority of contraband tobacco in Canada is still being smuggled through the Akwesasne First Nations Reserve from the United States (Health Canada, 2007b), the Kahnawake reserve in Quebec, and the Six Nations reserve in Ontario. This time, however, the tobacco industry does not seem to be involved. The 2008 Contraband Enforcement Strategy issued by the RCMP states that "the current trend of manufacturing, distributing and selling contraband tobacco products, which has developed exponentially over the last six years, involves organized crime networks exploiting Aboriginal communities." Despite the change in suppliers of contraband tobacco, it is clear that growing availability of contraband tobacco is associated with higher prices of legal cigarettes.
Criminal aspects of contraband tobacco. According to the RCMP (2008), there are four main sources of contraband tobacco in Canada at this time. First, the largest source of illegal tobacco in Canada is manufacturing operations on the U.S. side of Akwesasne reserve, the Kahnawake reserve, the Tyendinaga reserve, and the Six Nations reserve. These operations supply the largest portion of contraband tobacco in Canada. Second, counterfeit products (mainly from China) and international tobacco products are being smuggled into Canada via sea containers. Third, tax exempt tobacco products meant for sale on First Nations Reserves to status Natives are being illegally purchased on reserves by non-natives and illegally diverted for sale in cities. Fourth, a portion of the current contraband tobacco on the market is being obtained through criminal activity such as convenience store and cargo theft.
Arrests, confiscation. Health Canada (2007b) states that the most commonly confiscated illicit tobacco product in Canada is bags of cigarettes in quantities of 200, which originate from a variety of manufacturing locations found on First Nations reserves. This information is repeated in the 2008 Imperial Tobacco report which found that 63.3% of the illegal tobacco examined in their study was loose cigarettes (GfK Dynamics, 2008).
According to the report "Health Concerns: Report to the Conference of the Parties on the Implementation of the Framework Convention on Tobacco Control." (Health Canada, 2007b) in 2005, a total of 135,895 cartons of cigarettes were seized at marine ports of entry by the Canada Border Services Agency (CBSA). The majority of these cartons were either counterfeit or Chinese brand cigarettes. A total of 71 postal/courier seizures, 75% of which originated from China, were also made in 2005. Additionally, 105 seizures of Egyptian water type tobacco were made in 2005. Between ports of entry, 233,376 cartons were also seized by the RCMP in 2005. In the first 9 months of 2006 the number of counterfeit and Chinese brand cigarettes entering marine ports had already doubled what was seized in 2005. Overall, 6% of RCMP seizures made in 2006 were foreign tobacco products (RCMP. 2008).
Recently, stories of arrests and seizures of contraband tobacco have flooded the news. In May, 2009 alone Ontario RCMP officers reported the following seizures of contraband cigarettes: 23,750 bags from a tractor trailer in Cornwall Ontario (RCMP, 2009a); 1,000 bags from a driver in Cornwall, Ontario; 1000 bags from a driver in South Glengarry, Ontario (RCMP, 2009b); 14,250 bags from a van in South Stormont Ontario (RCMP, 2009c); and 65,700 cartons or resealable bags from a tractor trailer in South Stormont, ON (RCMP, 2009d).
"We believe we intercept about 15 contraband cigarette crossings per week, while there is an average of 110 per day, seven days a week" says RCMP officer Sgt. Michael Harvey when discussing contraband tobacco crossing from the US side of the Akwesasne Mohawk reserve into Cornwall, Ontario (Doucet, 2009).
Beyond just illegal tobacco, there is a growing concern surrounding the amount of other criminal activity associated with contraband smuggling. The 2008 Contraband Tobacco Enforcement Strategy put out by the RCMP stated that there has been an increasing amount of multi-commodity seizures linking those responsible for tobacco smuggling with drugs, weapons, and counterfeit money.
Summary. Empirical, anecdotal and historical data show a strong relationship between tobacco prices and contraband tobacco: as the price of legal tobacco increases, contraband tobacco increases its share of the market. As has been demonstrated throughout Canada's history, finding the appropriate tax level for cigarettes is difficult. Although the RCMP and other agencies such as Finance Canada continuously review tobacco tax levels across the country in order to determine their effectiveness in addressing both smoking consumption and the illicit tobacco market (RCMP, 2008), it appears that Canada has not yet found the price point that will lead to reduced smoking consumption without encouraging expansion of the contraband market and its related criminal tobacco market (RCMP, 2008). Understanding the Impact of the Contraband Tobacco Market on Public Health.
