
39th PARLIAMENT,
2nd SESSION
Standing Committee on Public Safety and National Security
EVIDENCE
CONTENTS
Wednesday, May 14, 2008
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The Chair (Mr. Garry Breitkreuz (Yorkton—Melville, CPC)) |
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Mr.
François Damphousse (Director, Quebec Office of the Non-Smokers' Rights
Association, Canadian Coalition for Action on Tobacco) |
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Mr. Rob Cunningham (Senior Policy Analyst, Canadian Cancer Society, Canadian Coalition for Action on Tobacco) |
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The Chair |
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Mr. Michel Gadbois (Executive Vice-President, Canadian Convenience Stores Association) |
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The Chair |
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Mr. Lloyd St. Amand (Brant, Lib.) |
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Mr. Rob Cunningham |
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Mr. Lloyd St. Amand |
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Mr. Rob Cunningham |
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Mr. Lloyd St. Amand |
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Mr. Rob Cunningham |
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Mr. Lloyd St. Amand |
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Mr. Rob Cunningham |
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Mr. Lloyd St. Amand |
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Mr. Rob Cunningham |
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Mr. Lloyd St. Amand |
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Mr. Rob Cunningham |
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Mr. Lloyd St. Amand |
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Mr. Rob Cunningham |
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Mr. Lloyd St. Amand |
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Mr. Rob Cunningham |
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Mr. Lloyd St. Amand |
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Mr. François Damphousse |
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Mr. Lloyd St. Amand |
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The Chair |
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Mr. Serge Ménard (Marc-Aurèle-Fortin, BQ) |
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Mr. Michel Gadbois |
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Mr. Serge Ménard |
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Mr. François Damphousse |
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Mr. Serge Ménard |
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Mr. François Damphousse |
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Mr. Rob Cunningham |
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Mr. François Damphousse |
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Mr. Michel Gadbois |
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The Chair |
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Mr. François Damphousse |
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Mr. Rob Cunningham |
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The Chair |
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Mr. Michel Gadbois |
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The Chair |
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Mr. François Damphousse |
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The Chair |
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Mr. Michel Gadbois |
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The Chair |
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Ms. Penny Priddy (Surrey North, NDP) |
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Mr. Rob Cunningham |
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Mr. François Damphousse |
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Ms. Penny Priddy |
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Mr. Michel Gadbois |
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Mr. François Damphousse |
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Ms. Penny Priddy |
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Mr. François Damphousse |
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Ms. Penny Priddy |
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The Chair |
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Ms. Penny Priddy |
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The Chair |
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Ms. Penny Priddy |
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The Chair |
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Mr. Dave MacKenzie (Oxford, CPC) |
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Mr. François Damphousse |
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Mr. Dave MacKenzie |
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Mr. Michel Gadbois |
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Mr. Dave MacKenzie |
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Mr. Rob Cunningham |
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Mr. Dave MacKenzie |
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Mr. François Damphousse |
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Mr. Dave MacKenzie |
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Mr. François Damphousse |
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The Chair |
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Hon. Roy Cullen (Etobicoke North, Lib.) |
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Mr. Rob Cunningham |
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Hon. Roy Cullen |
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Mr. Rob Cunningham |
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Hon. Roy Cullen |
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Mr. François Damphousse |
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Hon. Roy Cullen |
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Mr. Rob Cunningham |
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Mr. François Damphousse |
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Hon. Roy Cullen |
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Mr. Michel Gadbois |
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Mr. François Damphousse |
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Mr. Michel Gadbois |
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The Chair |
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Mrs. Ève-Mary Thaï Thi Lac (Saint-Hyacinthe—Bagot, BQ) |
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Mr. François Damphousse |
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Mrs. Ève-Mary Thaï Thi Lac |
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Mr. Michel Gadbois |
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Mrs. Ève-Mary Thaï Thi Lac |
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Mr. François Damphousse |
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The Chair |
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Mr. Peter Goldring (Edmonton East, CPC) |
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Mr. Michel Gadbois |
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Mr. Peter Goldring |
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Mr. Michel Gadbois |
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Mr. Peter Goldring |
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Mr. Michel Gadbois |
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Mr. Peter Goldring |
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Mr. Michel Gadbois |
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Mr. Peter Goldring |
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Mr. Michel Gadbois |
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Mr. Peter Goldring |
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Mr. Michel Gadbois |
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Mr. Peter Goldring |
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Mr. Michel Gadbois |
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Mr. Peter Goldring |
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Mr. Michel Gadbois |
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The Chair |
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Hon. Roy Cullen |
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Mr. François Damphousse |
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Mr. Rob Cunningham |
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Hon. Roy Cullen |
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The Chair |
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Mr. Rick Norlock (Northumberland—Quinte West, CPC) |
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Mr. Michel Gadbois |
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Mr. Rick Norlock |
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Mr. Michel Gadbois |
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Mr. Rick Norlock |
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Mr. Michel Gadbois |
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Mr. Rick Norlock |
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Mr. Michel Gadbois |
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Mr. Rick Norlock |
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Mr. François Damphousse |
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Mr. Michel Gadbois |
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The Chair |
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Ms. Penny Priddy |
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Mr. Rob Cunningham |
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Mr. François Damphousse |
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Ms. Penny Priddy |
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The Chair |
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Mr. Serge Ménard |
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Mr. François Damphousse |
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Mr. Rob Cunningham |
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Mr. Michel Gadbois |
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Mr. Serge Ménard |
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Mr. Michel Gadbois |
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Mr. Serge Ménard |
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Mr. Michel Gadbois |
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Mr. Serge Ménard |
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Mr. Michel Gadbois |
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Mr. François Damphousse |
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The Chair |
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Mr. Peter Goldring |
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Mr. François Damphousse |
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Mr. Peter Goldring |
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Mr. François Damphousse |
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Mr. Peter Goldring |
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Mr. Rob Cunningham |
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Mr. Peter Goldring |
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Mr. Rob Cunningham |
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The Chair |
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Mr. Lloyd St. Amand |
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Mr. Rob Cunningham |
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Mr. Lloyd St. Amand |
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Mr. Rob Cunningham |
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Mr. Lloyd St. Amand |
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Mr. François Damphousse |
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Mr. Lloyd St. Amand |
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Mr. Rob Cunningham |
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The Chair |

CANADA
Standing Committee on Public Safety and National Security
|
EVIDENCE
Wednesday, May 14, 2008
[Recorded by Electronic Apparatus]
* * *
(1530)
[English]
The Chair (Mr. Garry Breitkreuz (Yorkton—Melville, CPC)):
I'd like to bring this meeting to order.
This is meeting 30 of the Standing
Committee on Public Safety and National Security. We're continuing our
study of contraband tobacco.
We'd like to welcome, from the
Canadian Coalition for Action on Tobacco, Mr. Rob Cunningham and
François Damphousse; and from the Canadian Convenience Stores
Association, Michel Gadbois.
The usual practice at this committee,
as you probably know, is to allow an introductory statement of
approximately ten minutes. We'll let all the witnesses have that
privilege before we begin questions and comments.
If you're ready to begin, go ahead, sir.
[Translation]

Mr. François Damphousse (Director, Quebec Office of the
Non-Smokers' Rights Association, Canadian Coalition for Action on
Tobacco):
Thank you very much, Mr.
Chairman and members of the Committee, for giving us this opportunity
to present our views on this important health and public safety issue.
My name is François Damphousse. I am
Director of the Quebec office of the Non-Smokers Rights Association.
I have two basic messages for you
today. First, it is important to reiterate that taxation is the most
effective means of reducing tobacco use. That is why we are asking you
today to do whatever you can to protect that public health policy.
Second, it is untrue that high taxes
on tobacco products automatically result in contraband. The problem is
much more closely linked to a lack of effective measures to control
illicit sources of tobacco. To illustrate that point, I would like to
refer to events that occurred in the early 1990s. Tobacco smuggling did
not continue in the western provinces and Newfoundland and Labrador,
despite the fact that they had not followed the lead of the federal
government and other provinces, which drastically lowered their tobacco
taxes in February of 19994.
We now know that the problem was due,
to a much greater extent, to the fact that the three main tobacco
manufacturers in Canada were, at the time, freely and deliberately
supplying the contraband market, and that they simply stopped doing
that once taxes went down in 1994.
In our view, it was a lack of action
to control manufacturers' activities that caused an explosion of
controls and activity, which has had serious negative impacts in terms
of public health and government revenues. I am not exaggerating when I
say that it took many years of sustained effort on the part of the
federal government and the health community to recover from that crisis.
The current situation is no different
now, other than the fact that, as mentioned last week by the RCMP,
contraband cigarettes are no longer being produced by the major tobacco
manufacturers; rather, the source is illegal manufacturing operations
located in a number of different Indian reserves.
Once again, we are seeing that
contraband products are more readily available in Quebec and Ontario,
compared to other provinces, which have much higher levels of taxation.
If the problem has continued to expand in the last six years, it is
because more effort was focused on intercepting contraband cigarette
runners, rather than on the real source of the problem.
Without appropriate action on your
part, the contraband problem will continue to compromise much of the
work that has been carried out—both yours and ours—to reduce smoking in
Canada.
It is also important to point out that
the effects of the contraband market are even more serious in
Aboriginal communities, where smoking rates are already two or three
times higher than in the rest of Canada. For several years now, we have
been asking for a comprehensive package of measures to be developed to
control the problem.
To talk about what that could include, I would now like to turn it over to my colleague, Rob Cunningham.

Mr. Rob Cunningham (Senior Policy Analyst, Canadian Cancer Society, Canadian Coalition for Action on Tobacco):
Thank you, Mr. Damphousse.
I, too, would like to extend my thanks to the Committee.
My name is Rob Cunningham. I am a lawyer and senior policy analyst with the Canadian Cancer Society.
(1535)
[English]
Tobacco contraband is an absolutely
enormous problem. Urgent action is needed. We do wish to recognize that
some measures have been taken by enforcement authorities and in the
2008 federal budget and some provincial budgets. We also wish to
applaud the May 7 announcement by Public Safety Minister Stockwell Day.
This represents the government recognition of the seriousness of the
situation and a strong political commitment to move forward.
Perhaps I could invite the committee
to grab our brief and turn to the final page. On the final page you
have a graph with provincial and territorial tobacco tax rates. Ontario
and Quebec have the lowest tobacco taxes but the highest rate of
contraband. This shows that contraband is not a problem of higher taxes
or demand, but rather of source of supply.
The key to success to controlling
contraband is to target the source. We know the sources: illegal
manufacturing operations on Kahnawake, Six Nations, Tyendinaga, and
especially the U.S. side of Akwesasne in New York State near Cornwall.
Our recommendations for actions are as follows.
First, because by far the most
important source is found on the U.S. side of Akwesasne, eliminating
this source must be the top priority. The federal government must
immediately persuade the U.S. government to shut down the illegal,
unlicensed factories located there. The Americans must act. Indeed, it
is in the interest of the U.S. to act for reasons of border security
and national security. Criminals who exploit the Akwesasne territory by
bringing cigarettes into Canada return to the U.S. with drugs, weapons,
and sometimes people. If the situation were reversed and the U.S. were
flooded with illegal cigarettes from Canada, costing U.S. federal and
state governments more than $10 billion annually by comparison, the
U.S. government would insist that Canada take immediate action.
Note that the Mohawk Council of
Akwesasne and the Akwesasne police, both on the Canadian side, should
be praised for their on-reserve enforcement and collaboration with the
RCMP and others, which is a positive distinction.
Second, prohibit the supply of raw
materials, including cigarette packaging, filters, and paper in
addition to leaf tobacco to anyone without a tobacco manufacturer's
licence. By way of illustration, in Ontario the Gaming Control Act
prohibits the supply of goods or services for gambling to anyone
without a provincial gaming licence. For the Americans, control of raw
materials headed to the U.S. side of Akwesasne would also be desirable,
for example, by targeting leaf tobacco from North Carolina.
Third, establish a minimum bond of at
least $5 million to obtain a federal tobacco manufacturer's licence. At
present, the current federal bond ranges from just $5,000 to $2
million. It is possible for a new, apparently small company to get a
licence for only $5,000 and begin manufacturing cigarettes in this
country. This is a joke that needs to be changed. A meaningful bond
would give the government financial leverage to encourage compliance.
Breach of laws would mean that the bond would be forfeited in whole or
in part.
Fourth, revoke licences of
manufacturers acting illegally, including for violation of provincial
tobacco tax laws.
Fifth, establish a full tracking and
tracing system to monitor product shipments, as do Purolator Courier or
Federal Express, and identify points of diversion.
Sixth, promote the opportunity to
implement a first nations tobacco tax equal to provincial tobacco tax.
There's very little awareness that this is already authorized by the
federal Budget Implementation Act, 2006. First nations would require an
agreement with the province in which they're located and first nations
would keep the revenue from this tax. In terms of contraband
prevention, there will be benefits in the long term, but realistically
not much benefit materially in the short term.
Cowichan First Nation on Vancouver
Island has a tobacco tax through different specific legislation, and
under this 2006 legislation the Whitecap Dakota First Nation in
Saskatchewan has a new liquor tax. The retail price is the same as off
reserve, and the band council of the first nation receives the revenue.
They're examples to consider.
For contraband prevention measures,
there's a role for provinces, as some measures can only be implemented
at the provincial level. Our seventh recommendation would be for
provinces to implement a provincial refund system whereby cigarettes
are shipped to reserves at a price that includes an amount equal to
provincial tobacco taxes. After a sale to an eligible status native on
a reserve, the on-reserve retailer then applies to the province for a
refund, perhaps every two weeks. Five provinces currently have such as
rebate system.
In Ontario, which doesn't have this
system, it would help deal with the situation of products of Grand
River Enterprises being found illegally in large numbers on the
contraband market. Mr. Montour testified that he didn't want that and
that laws should be toughened; he didn't specifically say what laws,
though.
Our eighth recommendation is that
there should also be a provincial quota system that limits the quantity
of tax-exempt cigarettes shipped to each reserve, based on reserve
population. Five provinces do this.
The ninth recommendation is that there
should be distinct markings to distinguish between when provincial
tobacco tax is paid and when it is not paid and the cigarettes are
intended for on-reserve tax-exempt sale. Four provinces do this. It's
easier to tell what is legal and what is not.
Immediate action and a comprehensive
strategy are essential. Delays in taking action will mean that the
problem will get worse, adversely affecting aboriginal and
non-aboriginal health.
On a final note, aboriginal smoking
rates are scandalously high. The most important explanatory reason for
this is access to cheap cigarettes, including contraband cigarettes.
Contraband is addicting aboriginal kids and non-aboriginal kids, and
everyone agrees this should not continue. We must tackle contraband and
complement this with the restoration at Health Canada of an effective
aboriginal tobacco strategy.
Contraband is a population-wide
problem of public health, public revenue, and public safety. This
committee is to be commended for initiating this study. We look forward
to any questions you may have.
Thank you.
(1540)

The Chair:
Thank you very much.
We'll now go over to our next witness.
Please introduce yourself and explain that you are not just with the
Canadian Convenience Stores Association. I think that will be helpful
for us.
Thank you.

Mr. Michel Gadbois (Executive Vice-President, Canadian Convenience Stores Association):
My
name is Michel Gadbois. I'm the senior vice-president for the Canadian
Convenience Stores Association. At the same time, I'm the president of
the Quebec convenience stores association.
I will be doing my presentation in
French simply because I'll be more precise and it will be swifter, but
at the same time I'm very comfortable dealing with the questions in
French or English.
Thank you.
[Translation]
On behalf of the Canadian Convenience
Stores Association, or CCSA, I want to begin by thanking you for giving
convenience store owners an opportunity to weigh in on the issue of
contraband tobacco. In the next ten minutes, I will be addressing the
following four issues: who we are and how contraband tobacco affects
us; the responsibilities of both convenience stores and the government
as regards the sale of tobacco; the repercussions of the current
crisis; and, possible solutions.
First of all, who are we? The Canadian
Convenience Stores Association represents 33,000 owners and managers of
convenience stores across Canada, in the four main regions of the
country: the Maritimes, Quebec, Ontario, the Prairies and Western
Canada. We have four divisions for the country as a whole.
Who is a typical convenience store
owner? It could be a mother or a father, often a newcomer to Canada. It
would also be someone who is dynamic and hardworking, who may devote
more than 60 hours a week to the business. It is someone with
close ties to his or her community and the desire to serve that
community. It is someone who employs young people, who often acquire
their very first work experience at a convenience store.
The economic impact of convenience
stores in Canada is considerable in every way. For example, we employ
some 220,000 people in Canada. We pay out $3 billion in
annual salaries and, of course, we collect $9.2 billion in taxes
for the government every year—in other words, three times more than the
salaries we pay—and that figure does not include gas. That amount does
not, in fact, include gas taxes; only taxes on tobacco. Of course, in
Quebec and other provinces as well, convenience stores also sell
alcohol.
Convenience stores are among the rare
businesses to still be managed within the family. In our opinion, it is
very important that there continue to be room in Canada for this type
of family business.
How does contraband affect convenience
stores? First of all, retailers are in a very good position to have
observed the astonishing increase in contraband occurring in Ontario
and Quebec. They see this, first of all, through price changes;
secondly, through lower sales; and, thirdly, through increased sales to
minors.
For example, with respect to pricing,
the price of a carton of contraband cigarettes has dropped from $18 or
$20, two years ago, to $5 or $6 today, compared to $70 or $75 on the
legal market. That clearly shows that supply is continuing to increase
and that the product is more and more available and accessible.
As regards lower sales at our end,
according to an internal study of convenience stores in Quebec, for the
last two years, individual convenience stores have lost some
$2 million in revenues since contraband products began to appear.
Of course, contraband was not always as prevalent a problem as it has
become; it started slowly.
In 2007, based on an illegal market
representing 30 per cent of the overall market, on average, in
Ontario and Quebec, foregone sales amounted to $2 billion. I
repeat: $2 billion! With respect to increased sales to minors, we
have provided you with a copy of a study carried out in the youth
segment to identify cigarette butts in schoolyards. In English, the
name of the study is catchier than it is in French: it is the “Butt
Study”; in French, because the word for butt is “mégot”, the title
isn't funny. However, the results published in the fall of 2007 show
that some 11,000 cigarette butts from 105 schools in Ontario
and Quebec were analyzed. Incidentally, methods were used to determine
whether the butts were from legal or illegal products. The result was
that 24 per cent of the butts in Ontario, and 35 per cent of
them in Quebec, were contraband tobacco products.
That rate is similar to the one for
the illegal market during the same period. It's huge. What that means
is that the market is extremely prevalent in the youth segment, which
represents a highly vulnerable client group. The figures show that the
median—not the average—is around, or possibly higher than, 50 per
cent. According to the figures presented in the study, in some schools,
it is as high as 75 per cent, especially in lower income
neighbourhoods.
(1545)
I would now like to address the
question of what the responsibility of convenience stores is in this
regard. Owners have three major responsibilities when it comes to
tobacco: to collect and remit taxes to the government; to enforce
specific regulations regarding the sale of tobacco, particularly with
respect to product displays; and, to prevent the sale of prohibited
products to minors, whether it be tobacco, alcohol or lottery games.
Because the highest taxed products are
sold in our stores—alcohol, tobacco, gas and products that are almost
exclusively made up of taxes, such as lottery games—convenience stores
remit some $9 billion in taxes every year, as I mentioned earlier,
not including gas.
In terms of product displays, what is
happening now is ironic: even as the uncontrolled, illegal tobacco
market is expanding with disastrous consequences, a number of
provincial governments have recently introduced new regulations which
will require convenience stores to rethink all their product displays,
at their own expense, in order to hide products sold legally in their
stores.
Despite the current context of illegal
competition, the CCSA has undertaken to help its members comply by
suggesting quick and effective solutions. Yet most convenience stores
are going through a period where they are losing their income, and it
is costing them between $2,000 and $5,000 to hide these products. That
harkens back to the days of the Commission des liqueurs du Québec. Some
of us are old enough to remember that time. Alcohol was hidden behind
the counter, and handed over in brown paper bags. That hasn't changed,
and I think people react badly to that kind of regulation.
In terms of sales to minors, we have
deployed, all across the country, an innovative program for checking
customers' ages called: “We Expect ID”. This is a rigourous program
whereby customers are asked for ID—a driver's permit, in Ontario.
On-line training and certification is provided to retailers. There is
also a mystery buyer program that allows us to see whether our members
are in compliance or not.
Now let us look at the government's
responsibilities with respect to contraband. The government has
important responsibilities in this regard. The first and most obvious
one is to ensure that people are complying with the law; the second is
that the market is fair; and, the third is reducing smoking,
particularly among young people.
In terms of law enforcement, a group
specialized in smuggling control has been set up. Without prejudging
its effectiveness, we can certainly say that its impact on this scourge
will, at best, be extremely marginal and, at worst, be absolutely
negligible, given the volume of traffic involved and the very low fines
mentioned earlier.
In terms of market equity, the very
high price differential between the legal product and contraband
tobacco remains the primary cause of increased contraband. It is
important to remember that 75 per cent of the cost of a carton
sold is taxes—nothing but taxes.
Between 1999 and 2002, the Canadian
and Quebec governments increased taxes on a carton of cigarettes by
almost $20 over a period of only three years. It was at the end of that
period that contraband really took off, exceeding at the time—and even
now, five years later—the highest levels noted in Quebec in 1994,
during the period when contraband was at its peak.
As regards the prevention of smoking
in young people, current contraband is gradually wiping out all the
prevention efforts undertaken over the years, because tobacco has never
been more accessible or affordable for young people than it is now.
What are the consequences of the
current crisis? Well, history is repeating itself. In the early 1990s,
after contraband reached the critical threshold of 30 to 40 per
cent of the overall market, it proceeded to rise dramatically over a
two-year period, reaching levels of 60 and 70 per cent. That is
perfectly normal, and it would happen in any industry: once your
distribution network is in place, the market is there and there is no
competition, growth is exponential. Now it has reached a critical
threshold. If current trends continue and contraband reaches levels
such as 50, 60 or even 70 per cent, we can expect the following
consequences.
First of all, criminal groups will
engage a power struggle to control this huge and lucrative market, and
because they'll be fighting over the same territory and customers,
violence will increase in Canada and in street gangs. Young people will
be smoking more and more, governments will see their tax revenues fall
dramatically, and citizens will become increasingly cynical, in terms
of their attitudes towards their government and its inability to
enforce the law.
Our message is simple: we must all take our responsibilities when it comes to fighting contraband.
(1550)
Convenience store owners have taken
their responsibilities by launching an extensive campaign to mobilize
people across the country, a campaign which includes the following: an
anti-contraband advertising campaign in convenience stores across the
country that will be launched in early June; the creation of a national
coalition to fight contraband, that will bring together all groups and
organizations concerned about contraband tobacco at the national,
provincial and regional levels; on May 26, we will begin a tour of
seven major cities in Quebec; and finally, we will be getting
convenience store owners on board to carry out a campaign all across
the country aimed at federal and provincial elected officials, and even
senators.
In closing, I would like to emphasize,
once again, the role of government and its responsibilities. There is
not only one solution; there are many. There is an obvious need to
review tobacco taxes as a whole, including the very interesting areas
mentioned earlier. I am going to say something now which may hurt: it
may be necessary to lower taxes temporarily in order to bring back the
market or, at least, return us to a situation where we can prevent the
exponential growth we are seeing today. Something must be done, and
that is one of the temporary measures that could be taken.
As well, there is a need to start a
constructive dialogue with the Aboriginal nations, to tighten up
enforcement measures and increase police resources at the federal and
provincial levels, particularly on the U.S. side. That is the most
significant source of the problem we are currently experiencing. We
must make the public aware of the dangers of contraband tobacco, which
is something we will be starting to do in a comprehensive manner all
across the country.
In closing, leadership and political
will on the part of the government are the key to success when it comes
to eliminating contraband. We believe that retailers, social groups and
governments can work together to rid us, a second time—and for the last
time, we hope—of the national scourge which contraband tobacco has
become.
Thank you.
[English]

The Chair:
Thank you very much.
Now we'll begin a round of questions and comments.
We'll begin with the Liberal Party. Mr. St. Amand, please.
(1555)

Mr. Lloyd St. Amand (Brant, Lib.):
Thank you very much, Mr. Chair.
Thank you, gentlemen, for your very cogent presentations to us.
The problem, which is a significant
problem, was identified long ago. I think all the committee members
appreciate your recommendations or suggestions on how to deal with this.
I have a couple of questions that
merit short answers and then a question that merits, I hope, a more
fulsome answer.
I appreciate that these are best
estimates only, but with respect to the quantity of cigarettes
manufactured in the United States, which end up of course illegally
here in Canada, what percentage are manufactured in the U.S. relative
to what is being manufactured illegally here?

Mr. Rob Cunningham:
On one
occasion the RCMP said 90%. On another occasion they said it's by far
the biggest source. So there's not a precise number, but it's very big.

Mr. Lloyd St. Amand:
The vast majority, though, it seems.

Mr. Rob Cunningham:
Absolutely.

Mr. Lloyd St. Amand:
I
believe it was you, Mr. Cunningham, who indicated that the rate of
smoking among aboriginals is, in your phrasing, “scandalously high”.
Relative to non-aboriginals, what is the approximate ratio?

Mr. Rob Cunningham:
The
Canadian average is 19%. There are different surveys. It's 44% to 60%
among the aboriginal population. It's more difficult to measure, but
it's two to three times the Canadian average.

Mr. Lloyd St. Amand:
I've
more than a passing interest in this, because my riding of Brant
includes Six Nations of the Grand River, on which live approximately
11,500 individuals, but on which are being operated over 300 smoke
shops or smoke shacks.
I've heard stories, and correct me if
I'm wrong, that non-aboriginals come to Six Nations and essentially buy
their year's supply of cigarettes, load up their truck or their van.
Within 90 miles of Six Nations probably are four million to four and a
half million people. Is what I'm hearing correct, that non-aboriginals
are clearly complicit in the outrageous purchasing of these illegal
products?

Mr. Rob Cunningham:
Yes. In
very large numbers non-natives are abusing the tax exemption rights of
status aboriginals, and that's a problem. It's not only purchases on
reserve, but taking large quantities off reserve for informal, illicit
distribution to workplaces and homes. Yes, it's an enormous problem.

Mr. Lloyd St. Amand:
With
respect to your last recommendation, Mr. Cunningham, to enable first
nations to impose their own tobacco tax, do I understand that as it is
now they would have the authority to do that and that it has, in fact,
been implemented in some communities?

Mr. Rob Cunningham:
There are
29 that implement the goods and services tax. But just in terms of a
tobacco tax equal to provincial...there is one, Cowichan on Vancouver
Island, and one is done for alcohol.

Mr. Lloyd St. Amand:
With respect to Cowichan, what has been the result?

Mr. Rob Cunningham:
It's been
in place roughly for a decade, and where the band has had the revenue
from purchases on their territory, their experience has not been
sufficiently documented, in terms of quantifying the revenue or
measuring smoking rate changes, for example. But clearly the higher
prices will have a beneficial impact on decreasing smoking.

Mr. Lloyd St. Amand:
But
there would be no requirement that the tax imposed by a first nations
community be commensurate to or equivalent to the provincial rate?

Mr. Rob Cunningham:
In fact, it must be identical. That is the only option.

Mr. Lloyd St. Amand:
All right.
I won't say your first recommendation
is a weak one—I don't mean to speak disrespectfully—but “persuade the
U.S. federal government to shut down illegal manufacturing
operations...”? I'm sure they've already been cajoled, coaxed, begged
to do that. Or is it your view that the efforts so far by Canadian
governments—over the years they have been clearly less than
persuasive—have not been forceful enough, or is it your view that we've
made token requests only of the United States?

Mr. Rob Cunningham:
I don't
know what details may occur in private, but the public indications are
that there have not been, at the ministerial level or at the secretary
member of cabinet level, sufficient representations.
My understanding is that there are not
adequate enforcement resources in the area. There's a recognition now
that there's a problem, but the products are going north to Canada, so
I think they're less sensitive to the importance of moving quickly, and
I don't think there's necessarily a full appreciation of the magnitude.
I know there are different fora where
members of Parliament or government representatives can raise this. I
believe that when the full story is told, the Americans will agree that
it's very much in their interest to find a solution to it. They have
different enforcement options, they have different technologies, there
are different approaches, and the Americans can help figure out what
would be an appropriate way, including consultation, to deal with this.
(1600)

Mr. Lloyd St. Amand:
In terms
of the enforcement in Canada, and again getting back to my example of a
non-aboriginal who goes onto a reserve and buys however many hundreds
of dollars worth of illegal product, what efforts, if any, have been
made to intercept that individual as he or she drives home with the
illegal cigarettes?

Mr. François Damphousse:
Most
of the time the RCMP comes out with press releases showing that they
seized actual runners purchasing these products in large quantities on
the reserves and distributing them across the provinces. That's a big
problem, but the thing, for us, is that spending much of the resources
trying to intercept the runners is not, in our opinion, an effective
way of dealing with the contraband problem.
If they get caught, they get caught,
which is why we've been advocating dealing with the source of the
problem. In our opinion, that would be much more effective. We know
where the sources are. We've been proposing measures that would address
the issue outside the reserves by blocking off the supplies of raw
materials to these illicit manufacturers. We believe that would be the
much better strategy to deal with this issue, instead of going after
just runners, who are going a little bit everywhere. The RCMP even
testified in front of the Standing Committee on Health that they don't
have the resources to go after all the runners with their products.

Mr. Lloyd St. Amand:
Thank you, Mr. Chair.

The Chair:
Monsieur Ménard, please.
[Translation]

Mr. Serge Ménard (Marc-Aurèle-Fortin, BQ):
Thank you, Mr. Chairman.
To begin with, I would like to offer
you all my sincere congratulations. Your opening statements were clear,
as is your take on the problem. In addition, your suggestions with
respect to the action that is required are extremely convincing. Of
course, that is no surprise coming from the Canadian Coalition for
Action on Tobacco, which exclusively represents organizations with no
other interest than public health. Indeed, it was formed for that
purpose.
I also want to commend the Canadian
Convenience Stores Association. I understand that you have a certain
interest to protect, but we all recognize as well that, in order for
you to practice a legal commercial activity, you have to be
protected—and that is our responsibility—against illegal competition.
Your brief is generally objective and has convinced me of your desire
to defend the public interest.
The one difference I note in your
suggestions—and I would like you to talk a little more about this—is
that the Coalition believes lower taxes will have no effect. In those
provinces where taxes were very high, there was neither a decrease or
increase in contraband. Basically, acting on the source is the most
effective response.
I would be interested in hearing your
comments. My question is addressed to the Canadian Convenience Stores
Association.

Mr. Michel Gadbois:
There are
a number of points there. I do not want to claim expertise that neither
I, nor the other organizations around the table, do not possess.
There are reasons why Ontario and
Quebec are exposed to higher rates of contraband: their geographical
situation, naturally, and their population density. There is a market
there. Elsewhere, you can imagine that it's not very profitable to be
running around to every corner of Saskatchewan to try and drum up
enough business. That is the main reason why there will always be
contraband in areas that are more densely populated. That is one of the
factors behind the difference in terms of the extent of contraband,
which is not only based on the amount of tax included in the cost of
cigarettes.
The other point is: why us? Well, to
begin with, experience—it's as simple as that. There has been
contraband before. I know that the nature of the contraband at the time
was quite different; on the other hand, its manifestations were exactly
the same. The rate of growth I referred to earlier is exactly the same.
You only need 30 per cent of the market. Anyone who owns a
business knows that once you have a solid market share, you can begin
to expand. Even though it's illegal, it is a business supported by
people because of the huge difference in price. There is absolutely no
comparison.
Our proposal is not based solely on
lower taxes, which would be ridiculous, particularly given the
difference that has arisen since 2002-03. However, I firmly believe
that a temporary tax reduction is a potential solution. In the short
term, the government would not risk a catastrophe in the market,
because the catastrophe is there already. Until it is able to control
the problem at the source, the government could, in the meantime,
introduce a reasonable rate of taxation and thereby convince smokers to
behave intelligently and come back to the market.
Some studies show that, at a given
rate of taxation, you have either that option or public disenchantment.
The government will not be losing money if it brings in an increase, or
gets it from the contraband market. However, if that doesn't work, it
can be returned to the same level.
(1605)

Mr. Serge Ménard:
Yes, I
understand perfectly what you are proposing. As I have very little
time, I would like to move on to a different topic.
The federal government has just
announced a program. Some of the measures that are planned are very
similar to your suggestions. However, some people believe that is
woefully inadequate. You must be familiar with the program the
government recently introduced. What is missing from that program?

Mr. François Damphousse:
Having
read the RCMP's strategic plan, I would say that the most important and
most problematic factor is what is going on on the U.S. side and in the
St. Regis Reserve.
A number of measures have been
proposed that we have been advocating for a number of years—such as
tracing inputs that end up in the hands of illicit manufacturers.
However, the strategic plan does not necessarily address the problem of
illicit manufacturers operating on the St. Regis Reserve. It would
have been very appropriate for the RCMP to review these proposals, and
potential solutions, in cooperation with their colleagues in the United
States, in order to control the problem in St. Regis, particularly
since it is the most significant source of contraband cigarettes being
sold on the Canadian market.

Mr. Serge Ménard:
That's one thing. Is there anything else?

Mr. François Damphousse:
Yes.

Mr. Rob Cunningham:
The
Department recognizes that this was one step in the process. To that
could be added specific legislative measures that we proposed today in
our testimony. All of these elements, along with new legislation and
new tools to assist the police, should, in our opinion, be part of a
comprehensive strategy.

Mr. François Damphousse:
As
well, I believe the penalties for contraband tobacco are far too low to
allow us to control the problem. We hear anecdotal information about
people getting involved in the contraband market, rather than the
illicit drug market, because they know that, if they get caught, the
fines will not be very high and that there may be no prison term.
People must be made to understand that
activity surrounding contraband cigarettes goes well beyond the simple
fact of providing people with contraband cigarettes. There are other
activities involved as well. As the RCMP stated, organized crime is
behind this and, ultimately, we are encouraging it by buying these
cigarettes. In my opinion, police should be in a position to impose
much higher fines.
(1610)

Mr. Michel Gadbois:
I fully
agree, and I would like to add something in that regard. There is no
doubt that the biggest problem now is on the U.S. side. If the
situation were reversed and Americans felt that their security was
threatened… We know the kind of connections the RCMP has been able to
make—namely, who is being financed through this type of crime.
I fully support that position.
However, the major criticism I would make relates to the silo approach
taken by the RCMP and the government, as though there were only one
solution—one which focuses on security. But, as you just mentioned, we
need to engage the entire population, because this is a scourge that
affects our behaviour, our mores, our way of life and young people.
We have to engage Canadians on this
issue. Security or coercion are not the only methods. We need to talk
to the Aboriginal people, and discuss the issue broadly.
[English]

The Chair:
Thank you very much.
Before we go to the NDP and Ms. Priddy, I have a follow-up on this.
You talked about geography, and it
wasn't clear to me why they would distribute in Ontario and Quebec
rather than in New York State, where there are many more people.
The other question I have in relation
to what you've just said is, why is this not a threat on the American
side? What are they doing differently, and maybe successfully, that
we're not doing?

Mr. François Damphousse:
The
governor in New York State has raised this issue for New York. New York
has one of the highest tax rates in the United States. Some of the
products that are manufactured in some of the reserves, specifically
St. Regis on the U.S. side of the border, are also flooding the State
of New York.
This has been raised. They're trying
to find solutions to the problem. There are reports coming out that
this is more and more prevalent in the United States, specifically in
New York State. The problem has not yet reached the point of what I
believe has been happening in Canada, in Ontario and Quebec.
Geographically, it's mostly here
because of where the St. Regis reserve is located. We have to be very
careful. That's why we need to have the collaboration of the American
authorities on this issue, to work with the Canadian authorities to
deal with this problem.

Mr. Rob Cunningham:
Just to
elaborate, the $6 carton price that we see in Canada often is not found
in New York State in the material quantity that we see in Ontario and
Quebec. The reason for that, I believe, is that the manufacturers on
the U.S. side of Akwesasne can get away with supplying to Canada; they
could not get away with supplying to the U.S. If it happened in
material quantity, the U.S. enforcement authorities would be all over
them.
I believe that's why the problem is
going north. There is some problem with interstate smuggling. There's a
problem with some quantities on which New York state tax is not paid,
but federal tax is paid in the case of contraband in the U.S. most of
the time.

Ms. Priddy.
Oh, I'm sorry; go ahead.

Mr. Michel Gadbois:
I am not
an expert on tobacco, but the type of tobacco we use here is not the
same as in the U.S. This tobacco comes in through containers in the
port of Montreal and elsewhere. That's what we're talking about. This
product goes back to the U.S., is used in manufacturing on the
reservations, and comes back to us. Americans don't like that type of
cigarette.
A voice: Ce n'est pas le cas.

The Chair:
I thought it was coming up from North Carolina, somebody said.

Mr. François Damphousse:
That
was the situation. What was happening in the 1990s was that tobacco
manufacturers were exporting large quantities of containers to the
United States to duty-free warehouses, and they were basically shipped
back. Sometimes it was only on paper; the cigarettes were just
delivered to contraband networks at the time.
Now it's a totally different
situation, in which it's not the Canadian manufactures who are
involved, but illicit manufacturing operations on the U.S. side of the
border. They're probably getting their raw materials from, for example,
North Carolina.


Mr. Michel Gadbois:
Just on
that issue, as far as the process is concerned, I believe you're right.
As far as the type of tobacco is concerned, we are wrong; it is not
American tobacco.

Ms. Priddy, you will have seven minutes, please. Go ahead.

Ms. Penny Priddy (Surrey North, NDP):
Thank you, Mr. Chair.
Thank you for being here, and thank you for your presentations.
I'm interested in the answers to two
or three questions. First, I know, because I come from British
Columbia, that there are certainly a number of bands who have
arrangements with the federal government around applying a tax that
goes back to community development in the particular band. But if most
of the tobacco is being produced in the United States, I'm not quite
sure how that would work in the same way. I can understand, if it's
being produced here, and you tax here, and so on, but if it's being
produced in the United States and shipped up here, that would have a
significant difference, I would think, in terms of applying a tax.
Secondly, I wouldn't mind people
speaking, just for a minute, about geography. I think you mentioned
that there are 37,000 small businesses, but we've only heard about
Ontario and Quebec. I realize that's where the largest problem is, but
I would be interested in whether the only problem in the country is in
Ontario and Quebec or whether we actually see it in other provinces but
simply in smaller numbers. I expect that's the case, but I would be
interested in having you speak to that.
Concerning the $5 million bond that
has been a recommendation at least by Mr. Cunningham, are there any
bands that are leg