Canadians losing billions to organized criminals selling contraband tobacco: Report

Convenience Industry Council of Canada partners with EY Canada to examine the reasons behind declining tobacco sales.

CSNC staff

9/19/2023

Convenience Industry Council of Canada (CICC) is sharing the results of a new study confirming what many in the channel observe firsthand: The contraband tobacco market in Canada is a growing pan-Canadian problem fuelled by organized crime, which is cheating governments and Canadians out of billions of dollars.

Conducted by EY Canada, CICC’s Impact of Contraband Tobacco on Legal Sales and Government Tax Revenues is a follow- to its report, “The Impact of COVID-19 on contraband tobacco and provincial tax revenues in Canada” that was published in 2020.

READ: Legal tobacco sales spiked during COVID-19 restrictions: Study

The new comprehensive 80-page report focuses on legal tobacco sales in three provinces: British Columbia, Ontario and Newfoundland and Labrador. The study estimates the size of the contraband tobacco market is as high as 69% in Ontario, 45% in British Columbia, and 44% in Newfoundland.

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“The industry in question is illegal, contraband tobacco and as of the time of writing, its growth continues unabated, possibly costing the governments of British Columbia, Ontario and Newfoundland as much as $2.47 billion in lost tax revenues between 2019 and 2022.”

Broken down, this translates to tax revenue losses of up to $1.8 billion in Ontario, $591 million in B.C., and $81 million in Newfoundland over the last three years.

“Governments have turned a blind eye to this illegal market,” says CICC president and CEO Anne Kothawala. “Efforts to curb smoking are actively undermined by a thriving contraband market, all while taxpayers are being short-changed, and legal retailers are competing with organized crime.”

In a press release, the CICC notes: “The uptick in illegal sales, which law enforcement agencies, including the RCMP, have previously noted are controlled by organized crime groups, directly corresponds with a sharp decline in the sale of legal products. Legal tobacco sales are down 33% in BC, 20% in Ontario and a staggering 49% in Newfoundland.”

Fred O’Riordan, EY Canada’s tax policy leader and the lead author of this report, says: “Gauging the exact size of the contraband market is difficult, but the evidence in this report clearly shows it is growing and now easily represents at least one-third of the total market in these three provinces, and possibly much more.”

“The evidence and analysis presented in this report suggest that in recent years the market for legal and contraband cigarettes has been evolving in ways that are disturbing. Only a small part of the steep declines in legal sales can be explained by a possible reduction in smoking prevalence.”

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READ: 2023 Tobacco & Vaping Report: The real story behind the numbers

C-gas retailers across Canada are, once again, calling on governments at the federal and provincial level to act on the sale of illegal tobacco.

READ: Alberta Retailers Coalition calls on Minister to address contraband tobacco

CICC has long advocated on behalf of the channel.

READ: Conquering contraband in Canada

Now, in light of the findings of the new EY Canada study, the group and its members are outlining several recommendations that include:

Increasing resources and allowing local police to keep fines and disposal of assets seized as proceeds of crime;
Increasing police enforcement and Criminal Code penalties;
Increasing public awareness of contraband tobacco;
Regular, public reporting of contraband tobacco seizures; and,
Increasing federal-provincial coordination.

Canada’s contraband tobacco market is unlike any other in the world. Not simply because of its sheer volume, but also due to a confusing legal framework that exists for the manufacturing and sale of cigarettes on First Nations reserves. In an effort to reduce smoking rates, federal and provincial governments have increased taxes on legal tobacco products. The result? Many smokers have sought cheaper tobacco on the illicit market instead. Organized crime groups exploit this demand with low-cost cigarettes manufactured on reserve, and then traffic these products to non-status individuals. These cigarettes are illegally sold, tax and duty free, without any Health Canada regulations or inspections and retail for a fraction of legal tobacco prices. In fact, contraband tobacco is eight times more profitable to traffic than cocaine—and the penalties, if caught, amount to a drop in the bucket for organized crime groups. It is not surprising that the Canadian contraband tobacco market is growing at a pace that it is eclipsing the legal tobacco market in nearly every corner of the country.

Download the full report below.