Canada: Federal Budget Unveils Major Tax Hike for Smokers that Will See Jump in Cost of Cigarettes, Tobacco and Cigars

Source from:  Canadian Politics  02/12/2014

The federal government is substantially hiking taxes on cigarettes, chewing tobacco and cigars — a move that is sure to leave Canadian smokers fuming and could lead to an increase in contraband sales.

In a surprise announcement in Tuesday's budget, the Conservative government unveiled a major tax hike for smokers that will force them to dig deeper to light up.

Even so-called "duty free" tobacco won't be spared from the tax hike and will now face the same federal excise taxes as smokes and manufactured tobacco for sale in the domestic market.

The government expects to make approximately $3.3-billion in additional revenue from the tobacco tax hikesbetween now and the 2018-19 fiscal year (including $685-million in the 2014-15 fiscal year starting April 1).

The move is sure to spark some ill will towards a government that has promised it would not increase taxes on Canadians, as Ottawa looks to balance the books in 2015, partly on the backs of smokers.

The excise duty on a pack of cigarettes will increase by about $4 per carton of 200 cigarettes, to $21.03 from the current $17, an increase of about 24 per cent. The government says the federal duty on cigarettes has effectively not increased since 2002 and that the hike accounts for inflation.

A corresponding tax hike will also be applied to tobacco sticks, with the duty also increasing to $21.03 per 200 tobacco sticks from the current $17.

The federal excise duty on manufactured tobacco (such as chewing tobacco or fine-cut tobacco for roll-your-own cigarettes) will increase to $26.29 per 200 grams from the current $21.25. Also, the excise duty on cigars will increase to $22.89 per1,000 cigars, from the current $18.50, and the additional cigar duty will also increase.

The tax hikes take effect Feb. 12.

"Taxing tobacco products at a sustainable level is an important element of the government's health strategy to discourage smoking among Canadians," the budget says.

The government is also increasing the "duty free" excise tax slapped on all Canadian-made cigarettes, tobacco sticks and manufactured tobacco for sale in domestic and foreign duty free shops, as well as on imports of these products for sale in Canadian duty-free shops.

Currently, a carton of 200 cigarettes receives a $2 excise duty preference compared to a carton in thedomestic market ($15 per carton compared to $17). The budget changes will see the duty free rate for cigarettes increase to $21.03 per carton of 200 cigarettes, in line with the changes for smokes available in the domestic market.

The duty-free rate on tobacco sticks and manufactured tobacco will also increase to the same rate as those in the domestic market (to $21.03 per 200 tobacco sticks and $26.29 per 200 grams of manufactured tobacco).

And the tobacco tax hike will continue into the future. The government also announced the higher excise taxes will be indexed to inflation and automatically adjusted every five years. The first inflationary adjustment (beyond the higher rates announced Tuesday) will be effective Dec. 1, 2019.

The excise duty is slapped on tobacco products manufactured in Canada at the time manufacturers package them and on imported tobacco at the time of importation.

In an effort to ensure that the higher tobacco rates are applied consistently to all cigarettes, the government will impose roughly a two-cent per-cigarette tax on inventories held by manufacturers, importers, wholesalers and retailers.

The tobacco tax hike is certain to increase contraband tobacco in Canada, a point the government seems to acknowledge. The Conservatives also promised in the budget approximately $92 million over five years to help the RCMP combat contraband tobacco.

The money will partly go toward creating a "Geospatial Intelligence and Automated Dispatch Centre" and the deployment of various sensor devices to detect movement on the border in high-risk areas from the Maine-Quebec border to Oakville, Ont.

Gregory Thomas, federal director of the Canadian Taxpayers Federation, said the government could have a difficult time trying to collect the more than $3 billion it's expecting in additional revenues over the next five years.

The tobacco tax hike will dramatically increase the amount of contraband tobacco in Canada, he said, yet the government is only investing a relatively small amount in combatting the illegal tobacco market.

"Let's see them try and collect it [the expected additional revenue]. They're demanding a whole lot of conscience on the part of smokers," Thomas said.

"We all know that tobacco smuggling activity on our borders is a growing problem." Enditem