Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 17 - Evidence
OTTAWA, Wednesday June 6, 2001 The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-13, to amend the Excise Tax Act; and Bill C-26, to amend the Customs Act, the Customs Tariff, the Excise Act, the Excise Tax Act and the Income Tax Act in respect of tobacco, met this day at 3:35 p.m. to give consideration to the bills. duty free Senator E. Leo Kolber (Chairman) in the Chair. [English] The Chairman: Honourable senators, our first witnesses are here on behalf of Bill C-13. Mr. Cullen, do you have an opening statement? Mr. Roy Cullen, M.P, Parliamentary Secretary to the Minister of Finance: Yes. I will abbreviate my remarks because I know that time is of the essence. I appreciate the opportunity to speak to Bill C-13, the proposed Sales Tax and Excise Tax Amendments Act, 2001. We would be happy to answer any of your questions following my introductory remarks. [Translation] The bill implements measures in the 2000 Budget relating to the goods and services tax (GST) and the harmonized sales tax (HST), as well as additional sales tax measures that were proposed in a Notice of Ways and Means Motion tabled on October 4, 2000. [English] These measures are aimed at improving the operation of the GST/HST and ensuring that the legislation is in accordance with the policy intent. I would like to begin by outlining the measures from the 2000 budget. The first one relates to export distribution activities. This bill removes an impediment that was there before with respect to the GST. These measures allow companies, within certain parameters, to set up export distribution centres in Canada that will create jobs and some economic activity. A second measure relates to export activities that apply to Canadian businesses supplying warranty repair or replacement services. The rules governing relief from the GST / HST will extend to situations where a replacement good is provided under warranty and exported in place of the original, imported, defective good - for example, where the original good is destroyed. A third measure expands the exporters of processing services program, which ensures that the GST/HST does not impose prohibitive cash-flow costs on Canadian service providers by making them pay tax on customers' goods at the time of importation. Bill C-13 expands the program to allow access to businesses that provide only storage or distribution services for non-residents. Another cross-border transaction measure addresses sales of goods delivered in Canada to non-residents who intend to export the goods. The amendment relates to the sale of railway rolling stock to non-resident businesses. These measures will ensure that, if there are goods, typically as in the case of the rolling stock as it moves to the United States, there are no punitive GST/HST provisions. Thus, those goods can move freely, notwithstanding that they are in rolling stock on their way to market. [Translation] I would now like to turn to a sales tax initiative in Budget 2000 that will be of significant benefit to builders and purchasers of new residential rental accommodation. [English] Under the existing sales tax system, tax applies to new residential rental property when the property is acquired by a landlord from a builder, or, on a self-assessed basis, when the builder is the landlord. As a result, both purchaser landlords and builder landlords must finance the tax liability upfront and recover the tax over time. Bill C-13 introduces the new residential rental property rebate, which will provide a partial rebate of GST paid on newly constructed, substantially renovated or converted long-term residential rental accommodation. The new rebate will reduce the tax rate on newly constructed rental property by 2.5 percentage points, which is the same reduction that applies to purchasers of new owner-occupied homes under the existing New Housing Rebate program. There are additional sales tax measures that involve real property; they tend to be more minor in nature. One example of that would be the purchase of real property from a vendor, including the payment of GST or HST, and the subsequent return of the property to the original vendor without having used the property. Another example would be the sale of real property by individuals or personal trusts, and the measures that relate to those sales. All of the amendments relating to real property transactions reflect the government's commitment to ensure that our tax system is fair and efficient. [Translation] The bill also builds on the government's commitment to continue to work towards improving the qualify of life for Canadians - particularly with respect to providing quality health care and education. [English] Bill C-13 has certain provisions that relate to particular services. There are also provisions that relate to the field of education. With respect to vocational training, Bill C-13 will harmonize the regulatory regime in each province. The government also recognizes the important role that charities play in assisting Canadians to enrich our communities. Under Bill C-13, the GST/HST legislation properly reflects the government's intended policy of generally exempting from sales tax the rental of real property and related goods by charities. As I mentioned at the outset, this bill also includes amendments that relate to excise taxes on specific products, including automotive air conditioners and heavy automobiles. Several manufacturers have recently challenged the provisions in respect of air conditioners that are installed in imported new motor vehicles. They are seeking substantial tax refunds. They argue that the relief on importations by licensed manufacturers does not simply defer payment of tax; rather, it permanently exempts these goods from tax, and this is contrary to the policy intent and longstanding interpretation and administration of these provisions. Bill C-13 ensures that there can be no misinterpretation of these provisions as they apply to importations and intermediate transactions. The retroactive application of these amendments is consistent with the criteria laid out by the government in 1995, in the response to the seventh report of the Standing Committee on Public Accounts. [Translation] For nearly 20 years these provisions have been interpreted and administered by both Revenue Canada - now the CCRA - and manufacturers and importers, in a manner consistent with the underlying policy intent. Tax charged on automobile air conditioners has routinely been included in the price charged to consumers. [English] The amount of government revenue at risk is substantial, honourable senators, and definitive action is warranted. There can be no doubt about the application of these provisions for both future and past transactions. The second excise tax amendment gives the Minister of National Revenue the authority to waive interest that would otherwise be payable under the non-GST/HST portions of the Excise Tax Act. This brings the rules into harmonization with similar rules that apply under the Income Tax Act. There is another measure that improves the administration of the tax system in the spirit of the Government On-Line initiative, which was recently announced by the Prime Minister, for the administration of the tax system, which already facilitates the electronic interface of taxpayers with the Canada Customs and Revenue Agency, CCRA. Taxpayers have been able to file their sales and income tax returns electronically over the Internet for some time. However, the sales tax procedures have entailed a pre-approval process. Bill C-13 streamlines these procedures and harmonizes them with those under the Income Tax Act, thereby facilitating greater access to the electronic filing of GST/HST returns. In closing, I would like to say that the measures in Bill C-13 reflect the government's commitment to ensure that our tax system is less complex and, more important, fairer to individual Canadian taxpayers and Canadian businesses alike. We would be happy to answer any questions. Senator Tkachuk: I have a question about export distribution. At present, is this narrowed to only the people whose main business, or all of their business, includes export? For all the goods that they purchase for their own company, they would, of course, receive rebates. Would it mean that, at source, they would no longer have to pay the GST? Mr. Cullen: This would apply to those operations where the guideline is that 90 per cent of the products need to be exported and the remaining 10 per cent would be destined for the domestic market. There would be certain protocols to account for that, because, clearly, the relief would not apply to both. In starting off this program, there is also a certain percentage of value-added; up to 20 per cent of value-added is permitted. Until now, for example, we have had, all over the world, so-called duty-free zones. There are many Canadian businesses that are going to those areas. In Canada, until now, we have had duty-deferral programs. Those programs actually apply to a company that sets up a division or operation and then applies for a duty deferral for their operations. However, the impediment is still present. Was the GST/HST relief on duty? Until this proposed legislation, there has been no relief on the GST/HST. The taxes had to be paid on the imported goods, and then the rebate had to be applied for after the goods were exported. It was a cash-flow impediment and an administrative impediment. Senator Tkachuk: Thank you. I did not know about the conditions under "new homes": used primarily as a place of residence and to provide short-term accommodation. At present, if a new home is used for a bed and breakfast, is the full GST paid on it? Ms Marlene Legare, Senior Chief, Legislation Policy, Sales Tax Division, Tax Policy Branch, Department of Finance: If they purchase a new home and it is for use as a bed and breakfast - Senator Tkachuk: Even though they live there? Ms Legare: There is a question as to what extent the home is used as a bed and breakfast. In many cases, in terms of the number of rooms set aside for the bed-and-breakfast function, they were disqualified from the new housing rebate. The new housing rebate is targeted to new homebuyers acquiring a house for use as a principle place of residence. The measure in this bill addresses that anomaly. It ensures that the use of the home as a bed and breakfast would not disqualify the buyer as long as it was also used as the principal place of residence of the operators. Senator Tkachuk: On November 28, 1989, Paul Martin, now the Minister of Finance, described the GST to the House of Commons as a stupid, inept and incompetent tax. Do you feel that way, Mr. Cullen? Mr. Cullen: Apart from Atlantic Canada, we have missed a huge opportunity to harmonize it. I am more familiar with the Ontario situation. I gather that, if we were able to harmonize in Ontario, we could right off the top reduce the combined rate by about 1 percentage point because of the administrative savings. The savings to businesses would be enormous. In terms of harmonizing, yes, unfortunately, we have missed an opportunity, in my opinion. However, we could keep working towards that. The GST brings in a significant amount of revenue. If you look at the way the economy is changing vis-à-vis the mix of goods and services, there is some policy rationale for it. We tried to get rid of the duplication and harmonize it. Fortunately, we have been able to do that in Atlantic Canada. However, there is still some work to do in order to achieve benefits for all Canadians, and we should be pushing for them. Senator Tkachuk: The rationale surely is not that even though it is a stupid tax it is okay as long as it brings in a significant amount of revenue? Mr. Cullen: I do not want to get into the minister's comments, which were likely made in the heat of partisan debate. I do not know the context. If you look at our tax burden in Canada generally, our commodity-type taxes are probably in the lower quartile in comparison to other OECD countries. Our income taxes are clearly on the higher end, which is why the minister and the government have been trying to provide most of the tax relief there. With respect to payroll-type taxes, if I can call them that, we are again in the lower quartile. There are some economists who suggest that we should increase the GST and reduce income taxes by a comparable amount. I am not sure that that will happen, but it is an interesting debate. Senator Wiebe: In light of the fact that Senator Tkachuk wandered from the concept of the bill we are dealing with, I will take the opportunity as well. My question relates to something that I hope you and your department can look into. As you are aware, new homebuilders will be refunded a certain percentage of their GST, plus they will qualify for a refund of the same percentage on their landscaping. Many new homeowners/homebuilders mortgage their homes and use the GST rebate to help pay for landscaping. What happens is that they send in the application for a GST refund on their landscaping but the application is denied because it must be included with the original package. A homeowner receives a GST refund on landscaping if he or she applies for that refund at the time of application for the new home. I think that is something that should definitely be reviewed. The majority of the new homes are mortgaged. The homeowner applies for a GST rebate, gets it, and then in the next year decides to landscape but does not qualify for the GST rebate as a result. I would appreciate you looking into that. Any change that might result would be well accepted by the public. Mr. Cullen: We will do that, senator. The Chairman: Would you agree to review that and write to us within a month or two to tell us what you have done about it? Mr. Cullen: What we have done about it, or if there is any policy rationale? The Chairman: Whether there is a policy rationale for what Senator Wiebe says is a problem. Mr. Cullen: Sure. The Chairman: We might invite you back in due course. Mr. Cullen: We will undertake to get back to you. I have been working on other issues with respect to rental properties and cash-flow issues in terms of paying the GST upfront. The issue could be a significant one. We will certainly check into that and get back to you through the chairman. Senator Wiebe: You are here so often, we will soon begin to think of you as a member of this committee. Mr. Cullen: I would be delighted. Senator Kenny: You will have to take a pay cut. Senator Kelleher: His attendance has been as good as that of some of your members, Mr. Chairman. The Chairman: You are absolutely right. Senator Kelleher: The devil made me say it. Senator Oliver: I have a question that follows along the lines of the first question asked by senator Wiebe about GST on properties. In your presentation, you talked about the new residential rental property rebate. I gather that if a landlord is building a new property, he or she could now get 2.5 per cent back. I would like to know how that would work. Would the rebate come at the very end, or would there be quarterly rebates? Second, you said that the new rebate will reduce the tax rate on newly constructed rental property. Earlier, however, you talked not only about newly constructed property, but also substantially renovated or converted. Does the 2.5 per cent also apply to the substantially converted or renovated? Mr. Cullen: The answer to your last question is, yes, it does. With respect to the rebate, it applies on a self-assessed basis once the property is coming into use. At that point, the rebate is available and remitted. Senator Oliver: At the end of the renovation, it is submitted? Mr. Cullen: I was coming back to your first question. You were asking when the tax is payable on a self-assessed basis. The tax becomes payable at the point in time when the property is coming into use and is designated. Senator Oliver: And the rebate? Ms Legare: When the tax becomes payable, the builder simultaneously becomes eligible for the rebate. Most builders, in that circumstance, will offset the rebate against the amount of tax required to be remitted and remit the net amount. Senator Banks: I have a question about something that is not in the bill, rather than something that is. I guess it is theoretical, therefore. One of the biggest problems faced by municipalities in particular across the country, but I suppose other places too, is affordable housing for lower-income people. Was any consideration given in this version of the bill to this group, and if not, do you think consideration might be given in future versions of it or amendments to it? Would you consider increasing the amount of the rebate from the 36 per cent, which translates to 2.5 per cent, in respect of conversions and/or new buildings that are designed as low-cost affordable housing, provided that they are guaranteed to stay that way for some reasonable length of time? I notice that the rebate is based on the assessed value of the building, regardless of the number of units. Thus, the unit cost would not necessarily translate. In any case, it is not necessarily the case that affordable housing units cost less than otherwise. We have to find ways to provide incentives to builders, landlords and developers to provide low-cost, affordable housing, particularly in the larger cities. I am wondering if this might not be a device to do that. Mr. Cullen: Thank you for your question, senator. The supply of affordable housing and the need for it is still very great. It is an objective of the government to use whatever instruments can reasonably be used to stimulate that type of development. I do know that there were a number of tax instruments that were looked at when this was under active review. There are challenges respecting putting in place a national program; for example, the availability of affordable housing varies from place to place. We want to avoid the old MURB-type situation. As you know, in the government is committed to work with the provinces and the municipalities to increase the stock of affordable housing. Those discussions with the provinces are ongoing. However, I take your point. Perhaps Ms Legare or Mr. Willis could comment on what specific GST provisions have been looked at or could be looked at to stimulate the inventory of affordable housing. I agree with you, senator, we are still not there. At the federal level, the infrastructure program allowed the flexibility for the provinces and municipalities to incorporate affordable housing in the infrastructure program. In fact, to my surprise and that of others, in their presentations on infrastructure, the Canadian Federation of Municipalities came out and said that that was a priority. I am not sure that is playing out exactly that way now in terms of discussions with the provinces and municipalities. Nonetheless, that provision is there. I hope that some of the municipalities and provinces take advantage of it. Ms Legare: I would just add that under the GST program there are rebates available to municipalities and non-profit organizations that provide low-income housing. Those rebates are between 50 per cent and 57 per cent. They are larger than the new housing or the new rental housing rebates. Of course, they are specifically targeted to accommodation for low-income individuals. Senator Banks: It is not only municipalities that build low-cost housing. Some developers are now successfully building and renovating for the purpose of low-cost housing. It would be salutary if more developers and builders could be enticed, if that is the word, into building low-cost housing. In the future, this might be the way in which an incentive could be provided. Mr. Cullen: Some developers argue that the creation of tax policies, whether GST or income tax policies, that encourage development will almost automatically increase the stock of affordable housing. There are those who are sceptical about that, including myself. I think you are asking about whether there is a way to target it. When the House of Commons Finance Committee consulted with these advocates, I kept them talking about affordable housing by saying to them, "Come forward with some workable tax ideas and I am sure the government will look at them." At that time, the push was on for more direct government intervention. As I say, we are trying to do something there. If there are tax instruments that work, I am sure the government will want to look at them. Senator Oliver: At one time, there was a write-off related to soft costs. Maybe we should look at that again. Mr. Cullen: That is one of the areas that could be subject to abuse. I am sure all areas are, but soft costs is kind of a fuzzy area sometimes. I take your point. The Chairman: If there are no further questions, I believe Senator Kenny has a motion. Senator Kenny: I move that we proceed to clause-by-clause study of the bill. The Chairman: Is it agreed that we now give clause-by-clause consideration to Bill C-13? Hon. Senators: Agreed. The Chairman: Is it the intention of any honourable senator to propose an amendment to the bill? Hon. Senators: No. The Chairman: Shall the title stand postponed? Hon. Senators: Agreed. The Chairman: Shall clause 1, the short title, stand postponed? Hon. Senators: Agreed. The Chairman: Shall clauses 2 to 33 carry? Hon. Senators: Agreed. The Chairman: Carried. Shall clause 1, the short title, carry? Hon. Senators: Agreed. The Chairman: Carried. Shall the title carry? Hon. Senators: Agreed. The Chairman: Carried. Shall the bill carry? Hon. Senators: Agreed. The Chairman: Carried. Shall I report the bill? Hon. Senators: Agreed. The Chairman: Carried. Honourable senators, we now have Bill C-26 before us. Mr. Cullen will make a presentation with respect to the bill. We also have here witnesses from the Department of Finance. Following the government officials, we will have two witnesses, the Association of Canadian Airport Duty-Free Operators and the Canadian Transit Company. Two letters will also be tabled: one from the Canadian Cancer Society and one from the Frontier Duty-Free Association, informing us that they will not be making representations. Mr. Cullen, please proceed. Mr. Cullen: Mr. Chairman, the measures in this bill stem directly from the April 5 announcement by the Ministers of Finance and Health and the Solicitor General of a comprehensive new tobacco strategy. [Translation] The new strategy is designed to improve the health of Canadians by reducing tobacco consumption - which is one of the government's national health objectives - and represents the most extensive tobacco control program in Canada's history. [English] Increased spending on tobacco control programs and tobacco tax increases to discourage smoking are key components of this new strategy. The tax increases are linked to a new tobacco tax structure aimed at reducing the incentive to smuggle. The bill before us today, Bill C-26, implements the tax elements of the new strategy. I will begin my review of the bill with the new tobacco tax structure, which builds on the 1994 national action plan to combat smuggling. That plan has proven to be very effective in reducing the level of contraband activity and restoring the legitimate market for tobacco sales. The 1994 national action plan introduced the current tax on exports of tobacco products. The tax structure implemented in Bill C-26 replaces that tax with the new two-tiered excise tax on exports of Canadian-manufactured tobacco products. [Translation] I will begin my review of the bill with the new tobacco tax structure which builds on the 1994 National Action Plan to Combat Smuggling. That plan has proven to be very effective in reducing the level of contraband activity and restoring the legitimate market for tobacco sales. [English] The threshold dropped to 2.5 per cent in 1999 and under Bill C-26 is further reduced to 1.5 per cent of production. This threshold represents the approximate level of exports required to meet the legitimate demand for Canadian tobacco products abroad, principally in the United States. This two-tiered excise tax on exports of Canadian-manufactured tobacco products is effective as of April 6, 2001. All exports of Canadian brands of tobacco products will now be taxed, a move that will reduce the incentive to smuggle exported products back into Canada. Exports up to the 1.5 per cent threshold will be taxed at a rate of $10 per carton of cigarettes. The tax will be refunded upon proof of payment of foreign taxes. This measure will ensure that these products will not be subject to double taxation when they enter legitimate foreign markets. Exports over the threshold will be subject to the current excise duty on tobacco products and a new excise tax, amounting to a total of $22 per carton of cigarettes. This second-tier tax will not be refunded. [Translation] Mr. Chairman, the new export tax structure will reduce the incentive to illegally bring Canadian tobacco products back into Canada and will thereby set the stage for future tobacco tax increases. [English] The next element of the export tax structure affects people who travel. The government believes that all Canadian brands of tobacco products should be taxed, regardless of where they are sold. As a result, Canadian tobacco products delivered to duty-free shops and ships' stores, both at home and abroad, will now be taxed at a rate for cigarettes of $10 per carton, effective April 6, 2001. [Translation] To ensure a level playing field, imported tobacco products delivered to Canadian duty-free shops will also be taxed. However, the tax on the first carton of these products sold to a non-resident will be refunded. [English] These changes, Mr. Chairman, clearly demonstrate just how serious the government is about reducing tobacco consumption. Continuing to allow Canadians who travel access to low-cost, tax-free tobacco through duty-free shops would be inconsistent with the government's strategy of raising tobacco domestically to achieve our health objective of reducing smoking. These changes in the tax treatment of tobacco products for sale in duty-free shops also 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. Mr. Chairman, the second measure affecting people who travel ensures that returning residents can no longer bring back tobacco products that are tax free and duty free under the traveller's exemption. This change does not apply to non-residents. Returning residents are currently allowed to bring back, as part of the traveller's allowance if they have been out of the country for more than 48 hours, one carton of cigarettes tax free and duty free. Under Bill C-26, as of October 1, 2001, they will now be charged a new $10 per carton duty when importing cigarettes. [Translation] To ensure that returning residents are not subject to double taxation on Canadian tobacco products on which tax has already been paid, this duty will not apply to tobacco products with a Canadian stamp signifying that excise duties and taxes have already been paid. [English] Again, Mr. Chairman, as with the last measure, the government believes that allowing Canadians who travel continued access to low-cost, tax-free tobacco would be inconsistent with our strategy of raising tobacco taxes domestically to achieve the government's health objective of reducing smoking. Both measures will help meet the government's goal of reducing smoking, which, as I mentioned earlier, is one of our national health objectives. Mr. Chairman, tobacco tax increases are another key element of the tobacco strategy. Through this bill, the federal government is raising tobacco taxes jointly with the five provinces that matched its tobacco reductions under the 1994 national action plan to combat smuggling. As of April 6, 2001, the total of federal and provincial tobacco taxes increased by $4 per carton of cigarettes sold in Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island. 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 PEI. 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. Now, only Ontario and Quebec will have federal excise tax rates on cigarettes that are below the national rate. I am pleased to report that this is the fifth increase in tobacco taxes since 1994. Another measure in Bill C-26 increases the surtax on the profits of tobacco manufacturers to 50 per cent from 40 per cent effective April 6, 2001. [Translation] This surtax was initially introduced on a three-year temporary basis in 1994 and made permanent in 2000. It currently raises about $170 million annually and, with this increase, will raise an additional $15 million each year. [English] Mr. Chairman, while legislative amendments are not required, I would like to bring to the attention of the committee an additional measure that is directly related to the provisions in this bill. The government is providing additional resources in the amount of $15 million the first year and $10 million each year thereafter to assist federal departments and agencies in monitoring and assessing the effectiveness of the new tax measures in reducing smuggling. These additional resources will be targetted at the RCMP, the Canada Customs and Revenue Agency, and the Departments of Justice and the Solicitor General. In closing, I should like to encourage members of the committee to keep three points in mind when considering this bill. First, the new structure will help reduce the incentive to smuggle Canadian-produced tobacco products back into Canada. We believe this is a significant difference and will make a significant difference in the contraband activity. Second, the tax increases will help advance the government's national health objectives by discouraging tobacco consumption. Third, the tax measures will increase federal revenues from tobacco products by $215 million per year. In addition, as I mentioned earlier, a successful new tobacco tax structure will enable the government to increase tobacco taxes even further in the future. [Translation] Mr. Chairman, the comprehensive new tobacco strategy announced in April demonstrates the depth of the government's commitment to reducing tobacco use. The tax measures in this bill provide the means to fulfil this commitment. [English] I am here with officials, and we would be happy to deal with any questions. Senator Tkachuk: I will focus more on the duty-free shops. What is the primary purpose behind the introduction of a tax on tobacco products in the duty-free market? Mr. Cullen: When the government got into these discussions, a very real concern was expressed by various agencies and other stakeholders about the duty-free shops themselves, although volume is perhaps not terribly significant. There was a concern that if we did not deal with this aspect we would be at risk of undermining the policy intent and this whole initiative. Coupled with the notion that the idea of the government is to increase taxes on tobacco products generally, it was felt that that was consistent with that policy objective. So, with those two issues in play, the government felt it had to include the duty free. Senator Tkachuk: Are you talking about smuggling? Are you worried about cigarettes being smuggled through duty-free shops? Mr. Cullen: Through those channels, perhaps. Senator Tkachuk: That is a fairly serious allegation. Mr. Brian Willis, Senior Chief, Excise Act, Sales Tax Division, Tax Policy Branch, Department of Finance: I think the most important thing is the health issue. Senator Tkachuk: Is it a health issue or is it a smuggling issue? Mr. Willis: This is a health package, fundamentally. The government is raising taxes to meet its health objective. Also, as Mr. Cullen said, once products have been shipped out of the country - for sale and duty free outside of Canada - we no longer have any control. Those products go into what is referred to as the "duty-free market" worldwide, outside of Canada. In the past, we have found that, as we have tightened up on the availability of low-cost tobacco products, people dealing in contraband markets have succeeded in finding sources. To give you some examples, one of the first sources in the early 1990s was local embassies. A number of embassies were selling tobacco products out their backdoors. We tightened up on that. Officials from Foreign Affairs and the RCMP closed those operations down. Next, we saw diversions from Canadian manufacturers, where products were ostensibly for export but did not quite make it. Ships' stores were a source of product via ship chandlers, who supply products for vessels that are leaving Canada. The next source was found to be bonded warehouses in the U.S. The list goes on. The first objective of this is to meet the government's health targets of reducing smoking, but to do that we have to be able to control the sources of contraband. If contraband comes back into the country, then the health objective is undermined. Senator Tkachuk: I do not really see the logic of the export tax on products leaving the country; they can be re-circuited back. That happens when taxes are too high. When taxes were lowered, the market was basically killed. Is that not what happened? I will focus on the duty-free shop. Right now, it is called a duty-free shop, which, to me, means that there is no duty, there is no tax. You are saying that the one carton per individual that is allowed makes up about 20 per cent of the revenue for the duty-free shop. We are not only talking about the big shops at the airports; there are also smaller shops across the country, as well, at the highway border accesses. How will that stop smuggling? Or is this a health issue? Mr. Cullen: Of course, there is still duty-free liquor, et cetera. Senator Tkachuk: There are other bad substances. Mr. Cullen: Yes, perhaps, but the duty-free shops will continue to have a comparative advantage over domestic suppliers. With some exceptions, as some witnesses have said, the duty-free shops are not terribly upset with these measures because they still have a comparative advantage in the marketplace. Mr. Willis: Historically, prior to the government using the tobacco tax structure as one of its key tools to reduce smoking, the duty-free industry had full relief from tobacco taxes. They had a reasonable business that continued to operate for many years. In the late 1980s and early 1990s, as governments at both federal and provincial levels started to use this tool as a way to reduce the use of cigarettes, the difference between the duty-free price and the retail price obviously increased dramatically. This bill reduces that difference again, but the difference, as Mr. Cullen has indicated, continues to exist. There is still relief federally from the GST - there is no change there - and, of course, at this stage there are still provincial taxes. Our objective is to see the price move up so that Canadians, as a whole, will see a higher price in all sources of tobacco products. Senator Tkachuk: I am trying to get at the public policy behind this. The $10 charge at the duty-free shop is a health policy, but it is only a health policy for a portion of the tax. In other words, you are saying that duty-free shops can now be taxed for all products, providing that the prices are cheaper than they would be in downtown Toronto, for example. Is that the policy direction that you are taking, or does that policy apply only to tobacco? Mr. Cullen: The first objective, of course, is the health objective. There are some logistical reasons for doing that, but it also sends the signal that the government is serious about this. The question then arises: If you put it into the whole system, do you really want to be in a position where you are wrecking a whole number of businesses that exist in Canada? Clearly, if the government could avoid that, it would try to do that. The bottom line is that we would still reach our health objectives; at the same time, because there is still a comparative advantage in the duty-free shops, they would remain whole. Senator Tkachuk: Let us talk about the health objectives of charging a tax at the duty-free shop. Are there people who cross the border each day to buy a carton of cigarettes? How does that work? Is the average traveller an adult who would be travelling on business or for pleasure? An individual is allowed to purchase only one carton. We must have the statistics. Does an individual purchase at a duty-free shop once a year, twice a year, five times a year or ten times per year? How often would an individual travel across the border and take advantage of a duty-free shop? Mr. Willis: I do not know if I have statistics on the number of people who buy cartons of cigarettes and how many times those people cross the border. The broader picture is that it is not a matter of whether a few people do, whether they do it each time they cross the border, or whether they do it only half the time. The objective of tobacco taxes is to achieve the government's health objectives. That is why the government is raising its tobacco taxes. In the context of that policy, it does not make much sense to say, "There will be lower tobacco taxes for these particular people in these particular circumstances." Senator Tkachuk: You cannot have it both ways: you cannot have a duty-free shop and call it that. You want to have it both ways. You are trying to convince me that the government is doing this because its want to alleviate a health issue. Now you are telling me that it is more symbolic, to show that you are being fair. Well, each time I buy something at a duty-free shop, I am being unfair to someone. I am buying a retail product at that shop because there is no tax on it, rather than buying it a local liquor store in Calgary, where it is a private operation, or one in Ontario, where it is a government operation. I am being unfair to them, because you offer this service; there is a reason why you are offering this service. You are the one who raised the health issue - that it is proposed for health reasons to curtail smoking. I do not mind that, if you can give me legitimate statistics on how this will be of assistance. I would rather you say that it is proposed simply to collect more money. You are the one who raised the issue of health. I want you to address how the health of Canadians will be affected by charging $10 per carton to the occasional traveller who would rather purchase a carton of Canadian cigarettes than smoke Winstons from across the border. Mr. Cullen: As I said before, the volumes on the face of it are not significant. However, people can be creative and imaginative in they ways that they go about things. In coming up with this package, by eliminating the incentive to bring cigarettes back into Canada, the government would be a little naive to believe that that would end the story. The government will be vigilant, because, as you know, people can be extremely creative and imaginative on the enforcement side or on the contraband side. Senator Tkachuk: Did that occur in the duty-free shops? Mr. Cullen: No, it occurred in general. It is a viable argument to say that not only is it meeting our health objective, but also that it is a strong symbolic statement that we mean business. Also, it deals with the question of contraband. People are imaginative and very creative. We do not want to give them that opportunity. Senator Tkachuk: How much money is raised through the duty-free shops? Mr. Willis: We have not broken it down by individual component. This proposed legislation will bring in $215 million. That includes all the measures in this bill, including the surtax, the export tax, the duty-free tax, the domestic tax. Senator Tkachuk: What will you do with that money? Mr. Cullen: It goes into general revenue. Senator Tkachuk: Will the government spend it on anti- smoking campaigns, which Senator Kenny is proposing in the proposed Tobacco Youth Protection Act? Mr. Cullen: The government does not believe in dedicating taxes. I mentioned in my remarks that there was some other activity in the Department of Health to deal with health education and promotion in this area, but the two are not really linked. Senator Tkachuk: What are the statistics regarding smoking cessation in Canada between 1994 and 2001? Mr. Willis: The long-term decline has been running in the range of 2 percentage to 3 percentage points in decreases in smoking. Senator Kenny: Did you say 2 per cent to 3 per cent a year? Mr. Willis: That has been over the long term, going back 20 or 30 years. Senator Tkachuk: Let's go back 10 years. What is the change from 1994 to 2001, because those are the years referred to vis-à-vis increases in smoking. What happened then? Mr. Willis: Part of the problem with using that time period is the increase in the contraband market during 1991-94. There is a discontinuity in some of the survey data published by Statistics Canada. The surveys were not comparable in that time period. Hence, I do not have the answer to your question. I cannot give you factual information on that. Senator Tkachuk: Did smoking decrease? You are using the health argument, not me. I just think that governments tax because they like the money. By how much have the statistics gone down? Mr. Willis: The conventional view on the impact of taxes on consumption is that for adult Canadians there is a price elasticity of demand between negative .4 and negative .7. That means that a 1 per cent increase in price is expected to result in a decrease in consumption of between .4 per cent and .7 per cent. For youth, the price elasticity of demand that most studies have come up with is something like 1.4 per cent. Therefore, a 1 per cent increase in price for youth is expected to result in a decrease in consumption of 1.4 per cent. Those are the data on which the government bases these policies. That is the expectation that will arise from these changes in taxes. We expect to see a real decrease in consumption if the real price to consumers rises. Senator Tkachuk: You have not reached the point where there is a decrease in the number of smokers because of the four increases that we have had in tobacco taxes? Mr. Willis: I believe there is a decrease in consumption. Senator Tkachuk: Was there a decrease even during the time the price of cigarettes went down in Ontario and other parts of Canada because there was no provincial tax? Mr. Willis: Statistics Canada did a study that looked at youth smoking rates and their conclusion was that youth smoking rates rose during the period prior to 1994, when the contraband market was widely available. They found that youth were accessing tobacco on the contraband market and that there was a rise in consumption during that time period. There has not been an increase in consumption by youth since that time period, according to the most recent Statistics Canada studies. Senator Tkachuk: Can you regulate what is sold in duty-free shops? Mr. Willis: Certainly. Senator Tkachuk: Why not ban the sale of cigarettes? Mr. Willis: The government did not choose to ban the sale of cigarettes. They have another mechanism, which is the price mechanism. The government has been using the price mechanism domestically and has chosen at this stage to use the price mechanism in the duty-free shops. That is a less blunt tool, and it allows much more latitude for achieving the government's policy objectives. Senator Tkachuk: The objectives being to sell cigarettes and make money; correct? If the government banned cigarettes, the duty-free shops could not sell them, right? Senator Angus: Where would you get yours? Mr. Willis: If I may, even the health groups do not propose that the government ban the sale of cigarettes because they recognize the difficulty of attempting to do that. The tax mechanism is a useful tool in discouraging consumption, without trying to implement a ban. If I may address the revenue issue, I have been in meetings with our minister where he has indicated that he would be overjoyed to see all of his money coming from tobacco disappear if its disappearance were a result of Canadians quitting smoking. Senator Angus: There would be more people alive to tax. Senator Kenny: Welcome back, Mr. Cullen and officials. Mr. Willis, I am focussing on the 1.5 per cent exemption. Could you assist the committee by telling us the total dollar amount of federal and provincial taxes on a carton of cigarettes in Quebec and Ontario currently? Mr. Willis: If you would give me a moment. You are looking for the total taxes in Ontario and Quebec? Senator Kenny: Yes. Mr. Willis: The provincial tobacco tax in Quebec is $10.60 per carton. The federal excise tax is $4.85 per carton. The federal excise duty is $5.50 per carton. In Quebec, provincial sales tax does not apply but the GST applies on the sale price by the retailer to consumers. Senator Kenny: What is the total? Mr. Willis: About $20.95 in product taxes; and in Quebec, the retail sales tax would be $2.30, roughly. That figure will vary, depending on price, on whether the retailer is a discount outlet, on whether the cigarettes are sold by the pack or by the carton. In total, you would be looking at something in the range of $23.25 in Quebec. Ontario has somewhat lower taxes. The Ontario product tax is $7.30 per carton. The federal excise tax is somewhat higher in Ontario, $5.25; the duty is $5.50. Of course, in Ontario we have both the provincial sales tax at 8 per cent and the federal GST at 7 per cent, for a total of 15 per cent of the retail price. So far we are at about $18 in product taxes. Then there is the 15 per cent on roughly $32, to make about $4.80 in product tax. Hence, total taxes would be in the order of $22.50 to $23 in Ontario, 0on a carton of cigarettes. Senator Kenny: Would it be fair to say that it would be significantly higher in Newfoundland or the western provinces? Mr. Willis: Absolutely. To give a quick number, B.C. would be $22 a carton at the provincial level; federal taxes would be the same. British Columbia does not have a sales tax on cigarettes. Senator Kenny: Let us come back to the 1.5 per cent that is exported - 1.5 per cent of 48 billion cigarettes works out to roughly 2.1 billion cigarettes going out the door. You are talking about preventing smuggling, Mr. Cullen. The tax that is being charged on the cigarettes in Quebec and Ontario, which are the two lowest provinces, works out to $22 or $23 a carton. You are only charging $10 extra a carton on your export product. You still have a very significant margin, $13 a carton, for smugglers. That is on a couple of billion cigarettes a year. Why have you folks come up with such a half-hearted measure? Why have you not removed the economic incentive so that there is no smuggling? Mr. Cullen: Are you referring, senator, to the 1.5 per cent? Senator Kenny: Exactly, the 2 billion cigarettes. That is a lot of cigarettes, Mr. Cullen. Mr. Cullen: It is a lot of cigarettes in absolute terms. However, there are some legitimate markets in the U.S. Canadians go to Florida - Senator Kenny: In fairness, you are giving a rebate for the legitimate markets. Mr. Cullen: In overall terms, it is not that significant. Senator Kenny: Are you telling this committee that leaving an economic incentive for 2 billion cigarettes to come back into this country by way of smuggling is not that significant? Mr. Willis: I think you are operating from the premise, senator, that we have not removed the economic incentive. I would suggest that we have removed it. The black market needs a very substantial profit margin to operate. It needs to have profits to fund the creation of a black-market structure. It needs to have a margin to be able to reduce its price to consumers. Without a very substantial margin, it is much more difficult for that market to get going. Even when the 1994 tobacco tax reductions were put in place, the federal and provincial governments did not reduce the price to that at which the black market was able to source cigarettes. In late 1993, you could buy black-market cigarettes in Cornwall for $15 per carton retail. The lowest the retail price went in Ontario and Quebec was in the low $20 range. That was sufficient, even when the market had already been established and the infrastructure for moving contraband tobacco was in place. That reduction was sufficient to eliminate the ability of the illegal industry to function. Senator Kenny: Mr. Willis, you are suggesting to the committee that $13 in the lowest-priced provinces is not sufficient economic incentive. How do you rationalize that with the police reports of east-west smuggling, just from Ontario to Saskatchewan or from Quebec to Alberta and British Columbia? The police tell us this problem is a serious one in our country because we have not rationalized the tax levels between the provinces. You are talking about margins that are within the $13 range. Mr. Willis: In part, the margins are within $13. However, in part, they are not. There are sources of supply within the provinces of Ontario and Quebec where the product price to the contraband market is significantly below the retail price. They are not buying at retail from your normal retail store. The margin on those products is closer to $20. Senator Kenny: They are not buying at retail because they are picking up the stuff that has been going out at zero and coming back in. That is why it has been so attractive for them to smuggle. You are decreasing the margin by 10 per cent. I do not understand why you have a 10-per-cent solution. Why do you not have a 100 per cent solution? What is the policy rationale of coming in with something that does not clearly close the economic gap? What harm would there be if you put $23 on these cigarettes going out? Why have you not done that? Mr. Willis: To explain the measure, the export tax is $10 on that first 1.5 per cent. When the tax in the foreign jurisdiction is paid and the goods enter into the legitimate commerce, the tax is refunded. Putting $23 on and refunding it if the taxes are not paid in that jurisdiction will not help. Senator Kenny: You are putting the $10 on so that the cigarettes do not come back into Canada. Mr. Willis: That is correct. Once the product enters the foreign market, that $10 is then refunded to the foreign importer and to the domestic manufacturer. Our assessment is that that $10 is sufficient to ensure that those products go into the legitimate channels outside Canada and are not diverted back here. Once the foreign taxes are paid, then the cost in other countries is such that it is not economic to bring the product back. Senator Kenny: I do not have a problem with that - in fact, no one does. The problem is really disputing whether you have removed the economic incentive or not. If the economic incentive for east-west smuggling in Canada is $13 or less, I do not understand why you think it is going out of the country. Mr. Cullen: As you know, in 1999, the threshold dropped to 2.5 per cent. Under this bill, it is reduced to 1.5 per cent. I would argue that the infrastructure that is needed to smuggle cigarettes back into Canada is a little more elaborate than loading a car with smokes and driving from here to Saskatchewan. Having said that, we believe that there are some legitimate markets. Canadians go South. It will be monitored. If it does not work, the government will have to look at it. At that level and volume, we do not think we have a significant exposure. Senator Kenny: It is not very persuasive. Mr. Cullen, you mentioned the 1994 tobacco reduction program. You were here previously with Mr. Willis giving testimony to this committee. I was surprised to hear you raise it again today. The health component of that plan disappeared in two years; is that not correct? Mr. Cullen: Are you talking about the expenditures in Health Canada? Senator Kenny: Yes. "The world's greatest tobacco reduction program." Mr. Cullen: I am not sure it is really relevant to this bill, Mr. Chairman. Senator Kenny: You raised it. You brought it up, which is why I am asking you about it, Mr. Cullen. Mr. Cullen: During program review, many things had to be cut. This is really not looking backward, it is looking forward and saying, "Now that government finances are under better control, there is an opportunity here to reinvest and top up some of these very legitimate programs." As you know, senator, the government was faced with a very difficult situation. We had to cut many things, no matter how good they were. Mr. Willis, do you have that data, or would you like to expand? Mr. Willis: Mr. Cullen has covered the issue. It was cut back in program review after a couple of years, as the senator is aware. It was a decision taken by Health Canada at the time in the context of program review. The announcement on April 5 effectively put new funds into that. As Mr. Cullen has indicated, we now have the ability to do that. Senator Kenny: Can we look forward with confidence to having these new funds stay in the spending plans of Health Canada? Mr. Cullen: That would be a matter for - The Chairman: He has already answered that. Senator Kenny: Thank you. Senator Oliver: I have a very brief question for Mr. Cullen, if I may. When the government brings in a new tax, I suppose there are several different public policy reasons for that. Would you agree with that? Mr. Cullen: Yes. Senator Oliver: One of the things I did not hear from you today was anything about the tourism component in your public policy making. Parts of Canada, such as Atlantic Canada, which is where I am from, really wish to attract more and more tourists as part of an overall tourism policy to help contribute to the economies there. What is the public policy reason for imposing a duty-free tax of $10 per carton on people who may want to come as tourists to Atlantic Canada and who would like to stop and buy a bottle of wine, say, and/or cigarettes? Is that not punitive? Does that not go against good public policy to attract tourists to come here? Mr. Cullen: These measures do not apply to non-residents. Senator Oliver: What about residents leaving, then? Is that not counter to tourism policy as well? Senator Angus: Tourism from Bermuda. Mr. Cullen: I am not sure how it would affect tourism in Canada. Senator Oliver: If tourism and other public policy arguments can be made against the imposition of a punitive tax of $10 on a carton of cigarettes, are you prepared to consider the suspension of the $10 tax in relation to duty free? Mr. Cullen: In relation to duty free? No, I do not think the government would be prepared to do that, for the reasons we have just outlined. We believe that it would be inconsistent with the policy objectives to leave out duty-free shops. Also, there is the concern about creating channels or potential channels for contraband, which is something we clearly do not want. The government looked at the duty-free shops very carefully. We did not want to put duty-free shops at any kind of special risk or exposure. There was consultation. They still have comparative advantages - perhaps smaller, however. You may hear from some duty-free shops that do not share that view, but in the main they believe they understand the government's policy objective and can live within it. Senator Banks: I am curious about the contraband. If I go into a duty-free shop, I can buy one carton of cigarettes; is that correct? Mr. Willis: That is correct. Senator Banks: How would I make a lot of money on contraband, at that rate? Mr. Willis: I am glad this question has been posed, because it is a difficult question. The Canadian duty-free industry has not been a source of contraband. They are tightly controlled. They have excellent businesses, and they have been very cautious and cooperative in even limiting the sales of cigarettes to one carton. The problem arises when a domestic manufacturer exports Canadian cigarettes from Canada, ostensibly for sale either in a foreign domestic market or foreign duty-free shops. Once those products leave Canada, we have no control. One of the big sources of problem in the early 1990s was bonded warehouses in the U.S. We had those problems in Canada in the early 1990s, and the government took action to take tobacco products out of bonded warehouses in Canada. In the U.S., when products are exported from Canada, they go into bonded warehouses, and they were a key source of problems. It is not the domestic duty-free industry that supplies the contraband market; it is products that wind up in these duty-free markets outside of Canada that are totally outside our control. That is where the concern on the contraband front was. Senator Banks: From the health perspective, it probably would not hurt if I were a tourist leaving to go to Bermuda that I take a package of cigarettes with me at $10 less than I would otherwise pay. Mr. Willis: With respect to Canadian cigarettes, it is largely Canadians who are smoking them. Whether they smoke them in Canada or in Florida, the health costs and health risks come back to this country. You will notice that the bill does not attempt to tax Americans coming into Canada and buying American cigarettes. In fact, there is a tax on non-Canadian cigarettes sold in duty free, but it is relieved where the cigarettes are bought by a non-resident. The government's objective is to focus on the health problems of Canadians, and that is why this tax focuses on the products they smoke. Senator Banks: I appreciate that, and I am glad to hear, to use your words, that the government is dead serious in its effort - appropriate words - and to learn, also in your words, of the depth of government's commitment to stop smoking. I am just curious. I know you do not believe in dedicated taxes, and, needless to say, we do not believe that the levy that is imposed in Bill S-15, which is now before the Speaker of your House, is a tax at all. The government does not collect it, keep it or spend it, so it cannot be a tax. This proposed legislation will increase government revenues by what you estimate to be $215 million. Given that, what will be the total government revenue from the source of sale of tobacco? Ballpark? Mr. Willis: It will be in the order of $2.2 billion. Senator Banks: So the government's depth of commitment is that, out of $2.2 billion a year, it will spend perhaps $98 million on reduction. That does not sound like a very deep commitment. Mr. Willis: In fairness, that relates to one specific program aimed at reducing the use of cigarettes. In addition to that, of course, the government has transfers of funds on the health side to the provinces that are quite substantial. As I recall, the numbers were in the order of $20 billion additional, as announced a few years ago. All those transfers come out of the Consolidated Revenue Fund, which is where the revenues from these sorts of taxes go. A few years ago, some outside economists did analyses of the balance between spending by governments as a result of smoking and the revenues that governments raise. Those studies concluded that the result is a net loss for government. Hence, the comment I made earlier about Minister Martin's position, that he believes he would be a net winner, as would all Canadians, if there were no cigarettes and he was getting no revenues from them. Mr. Cullen: There are other initiatives government has taken and can take that do not necessarily involve a fiscal cost. Those have to do with packaging and sponsorship, and you are aware of those initiatives. Some of those initiatives have been contentious and controversial, but the government has ploughed ahead and taken those steps as well. It is part of an overall package. Senator Tkachuk: Have they cost any money? Did it cost the government money to ban cigarette sponsorship at sporting events - say, Players cigarettes on cars or du Maurier at tennis? Did it cost the government money? Did you replace that cash? Mr. Cullen: That is what I am saying. The measures the government takes do not always have to equate to a fiscal cost. There are policy measures and initiatives that the government can take that do not necessarily involve fiscal costs but still might have some positive results. Senator Banks: You cannot have your cake and eat it, too. The $98 million is in a program to try to curb smoking. The $20 billion in tax transfers to the health care system is not solely there to treat smoking-related problems, although much is. The purpose is to treat the "smoking" problem. We are talking about trying to stop it, and that is what you are talking about, but you are not trying to treat health care problems that arise from smoking by increasing the taxes. You are trying to stop people from smoking. I know this is not the place to ask the question, but the overview accompanying this bill talks about this being part of a comprehensive effort to reduce smoking. I do not think the government's efforts in that respect are comprehensive. You have answered my questions. Thank you very much. Senator Angus: Perhaps, Mr. Willis, you could help me. I have been reading the briefing document sent to us by the Finance Department last month. Senator Tkachuk said that a tobacco stick is a cigarette, but clearly it is not. What is it? Mr. Willis: It looks very close to a cigarette. Senator Kenny: I had a supplementary on that, if I could. Tobacco sticks are an invention of the Finance Department. They only exist because of your tax policy. Why do you have a lower tax on tobacco sticks? Why do you not tax them like cigarettes? Senator Angus: Can I find out first what a tobacco stick is? Mr. Willis: A tobacco stick initially was developed under the definition of fine cut tobacco, which is loose tobacco. They took the loose tobacco and rolled it in a porous paper. It was designed to slip inside the tube an individual would use with loose tobacco, to make a roll-your-own cigarette. There have been subsequent modifications of it, but the basic philosophy is that if it cannot be smoked, if it is removed from the pack, then they argue it is not a cigarette. Those are the rules the revenue agency, CCRA, previously known as Revenue Canada, provided. Senator Angus: Do you buy them in packs of 20? Are they like little cigarettes? Mr. Willis: They are in cartons, typically, but in packs inside the carton. Senator Angus: If they are like cigarettes, why would the tax be less? It is $10 for 200 regular cigarettes, and $7 for 200 of these things. That is why I concluded that they were not cigarettes. Mr. Willis: Historically, Canada has had a lower tax rate on fine cut and loose tobacco and a higher rate on cigarettes. Those rate differentials have been narrowed quite dramatically over the last 15 years or so. In the 1980s, in particular, the rate on fine cut tobacco was raised dramatically. The industry developed the sticks as an alternative to fine cut. They qualified at that time under the definition of fine cut. However, because fine cut tobacco was taxed on the basis of weight, and these sticks weighed less than what would be used vis-à-vis roll-your-own cigarettes, had we not taken some action to create a new definition to tax them at a different level they would have been less heavily taxed than they are even today. That is one part of the equation. The law was changed to ensure that these things did not get a lower tax even than roll-your-own cigarettes. The second question related to why there is still a lower rate. There are a number of different responses to that question. The government's focus has been getting the price of cigarettes up, because that is the primary product that people smoke. There have been suggestions that the tax rates on fine cut cigarettes and on sticks should be raised dramatically so they are all at the same level, and that is a possibility. There may be a point when the government elects to proceed with a policy of that nature. In the short term, no proposals like that were made to the minister, primarily because we did not want to be changing too many things at once. What you see in this bill is a substantial increase in tobacco taxes and a substantial change in the structure of tobacco taxes, along with funding to monitor what happens in the marketplace. The greatest concern is that if we make an error and set off a renewed contraband situation, as governments clearly did in the late 1980s and early 1990s, there will be a loss of control of tax and health policies, and the ability to achieve health objectives will be undermined. The policy objective here is to proceed incrementally with measures that focus on the key part of the problem. The tax treatment of fine cut and tobacco sticks are issues to be looked at in the future. For the moment, the difference in tax rates is not as large as one might think. They are there, but they are not enormous, as they were prior to 1987. Senator Kenny: Is it the policy of the government to harmonize the tax rates on all tobacco products so that sticks and roll-your-own cigarettes are all taxed at the same rate as regular cigarettes? Mr. Cullen: That would be an objective, once we have been able to absorb these policy changes and monitor them. That would probably be the direction in which the government would want to move. Senator Banks: Did I hear you say that the excise tax in Quebec is different from the excise tax in Ontario? Mr. Willis: Yes, Mr. Chairman, that is correct. That came out of the 1994 structure in which, to try to control the contraband problem, the Prime Minister announced a $5 reduction in federal excise taxes. However, because there is a shared field, the problem could not be completely solved on the federal initiative. Hence, there was an offer made to the provinces to reduce federal taxes further in any province that chose to reduce its product taxes. Five provinces elected to reduce tobacco taxes, by different amounts, and the federal government matched those. That resulted in differential federal excise taxes, and we are now virtually at the stage of restoring a uniform rate across Canada, which of course is our long-term policy objective as well. The Chairman: Our next panel of witnesses, from the Association of Canadian Airport Duty-Free Operators, are Mr. Andre Bergeron and Ms Kathy Kendall, and, from the Canadian Transit Company, Remo Mancini. [Translation] Mr. André J. Bergeron, Vice President, Association of Canadian Airport Duty-Free Operators: Thank you for giving us a opportunity to appear before you today. [English] We are pleased to appear before your committee on behalf of Canada's duty-free industry and, in particular, the airport duty-free shops across this country. Our main intent is to express our concerns about Bill C-26, in particular that this legislation undermines the foundation on which a duty-free industry has always been based, and as well that it will not fulfil the objectives of Health Canada of curbing tobacco consumption, in particular among youth. First, I will give a brief snapshot of our sector. Canada has established a strong position in and is poised to increase its share of this growing $20-billion global industry. The Association of Canadian Airport Duty-Free Operators represents the operators of airport duty-free shops. Canadian airport duty-free stores employ at least 1,000 Canadians directly, and many more indirectly, through the purchase of local and national goods and services. In 2000, the total sales of the Canadian airport duty-free industry were just over $167 million. On average, 40 per cent of products sold at Canadian duty-free airport shops are of Canadian origin. Indeed, the airport duty-free operators have contributed in no small way to the success of the Canadian wine industry. The Canadian airport duty-free industry is part of the overall tourism package and is the last memory that foreign travellers retain of Canada. I will briefly review the international origins of duty-free shops. As international travel has grown, the tax free trade has expanded; and with the advent of international flights, tax and duty-free sales extended to this new form of travel. In 1944, the Chicago Convention, signed by 54 nations, paved the way for the development of tax free zones at airports. The first one opened in 1947, at Shannon Airport in Ireland, waiving national taxes on goods destined for export. From this forerunner, the airport duty-free industry has continued to grow to represent almost half of the total duty-free industry worldwide. This growth over the last 50 years has been possible by keeping tax and duty-free tax free. Through Canada's duty-free policy and program, many benefits were created: it competes on the international market in terms of service offered to the travelling public; it increases the spending of the international travelling public in Canada; it contributes substantially to the revenues required by the local airport authorities, helping them to keep costs down for travellers; the duty-free program contributes substantially to the revenue paid to the finance ministry by the airport authorities under their local airport authority lease agreements; it strengthens the tourism package by offering a retail vehicle that the international travelling public expects, and it promotes the sales of domestic goods and it creates direct and indirect jobs. Before this industry existed in Canada, all travellers stopped at U.S. or other foreign duty-free shops to meet their travel needs. As a result, our economy was losing millions of dollars in travel and tourist revenues. Successive Canadian governments have supported and encouraged duty-free enterprises because revenue lost through the exemption of custom, duties and taxes is recouped by the direct and indirect economic benefits of local job creation, purchases from suppliers and a boost to the tourism industry in general. The government's strategy has worked, and customer shopping habits are now well-established at duty-free outlets across Canada. Duty-free operators have made significant long-term commitments and financial investments since the government encouraged the creation of this sector. More than $20 million has been invested at airports by the airport duty-free operators, in buildings, store equipment, technology, fixtures and staff training. Moreover, it is also worth noting that we pay more than $55 million a year in rents to airport authorities. The heart of the matter is stop taxing duty free. Against this very positive backdrop, the federal government announced on April 5, 2001, that Canada would immediately impose a tax on duty-free shopping. This tax on tobacco has caused immediate and significant concern in the Canadian and international duty-free industries. The concern would be the same regardless of the product, whether it be perfume, alcohol, foodstuffs, or any other. I repeat, the concern will be the same regardless of the product. The principle of duty free is important. It was abandoned by the government in an instant, without any fanfare, and certainly without the benefit of an analysis to see whether duty free was part of the problem. What has been the effect of the tax? Almost immediately, consumer satisfaction with duty free began to erode. In fact, a new perception has emerged here and internationally. The perception is that, in Canada, duty free no longer means duty free. This is causing increased uncertainty over the future of our business, not just among operators, but also within the wider community of customers, suppliers and employees. The nature of duty-free transactions is that they are infrequent and customers must leave the country afterward for at least 48 hours. As a result, customers concentrate purchases into a few visits. When customers discover that they are not assured of tax and duty-free pricing, one of the main attractions of the store disappears. Visits then simply dry up, leading to reduced sales, thereby directly affecting our suppliers, our employees and the rents paid. Some of that loss then passes through to the government. This is not the first attempt in Canada to tax duty-free shoppers, most of whom are tourists, or to impose further restrictions on the sale of cigarettes. In 1992-1993, an attempt was made to impose an export tax on sales of tobacco products. However, the federal government reversed course, recognizing that the measure would not contribute to the control of smuggling and would severely damage the duty-free industry. The export tax was suspended. In 1996, in its tobacco control blueprint to protect the health of Canadians, Department of Health exempted the duty-free industry from further restrictions on the sale of cigarettes and tobacco products, recognizing that this industry does not promote the sale of cigarettes to youth and does not encourage smoking. Why our strong reactions? There were discussions with the government regarding tobacco taxes. The result of that process was a complete shock. We would go so far as to say that the government was not straightforward with us in those discussions and that it, in fact, used those discussions to illicit confidential information that was used to design the tax so that it would have the most devastating effect on our business. We emphasize that the duty-free industry does not take issue with the intent of the federal government program to discourage tobacco consumption. The industry has never argued against this policy and, indeed, follows a strict code governing the sale of tobacco products. In this context, it is important to note that the government already imposes severe restrictions on the purchase of tobacco made at duty-free outlets that are not imposed on other retailers. These requirements include buying an airline ticket and leaving the country for 48 hours after making a purchase. Duty-free tobacco purchases are limited to one carton for personal use, not likely to be a factor in smuggling. A key government target is to curb youth smoking. Duty-free outlets do not sell tobacco products to minors. Moreover, only 3 per cent of airport traffic is minors, who typically are accompanied by an adult, parents or guardians. In addition, youth do not purchase tobacco products in cartons. The duty-free industry only sells tobacco products or cigarettes in cartons. Finally, I note the price of international air tickets. To leave the country for a minimum of 48 hours would cost a minimum of $300 to $500. That definitely makes a mockery of the notion that anyone would leave the country in order to buy one carton of cigarettes or that the duty-free industry is providing cheap cigarettes. Ms Kathy Kendall, Director, Association of Canadian Airport Duty-Free Operators: I would like to build on Mr. Bergeron's comments. We are here to encourage the government to remove this tax for several reasons. The first is most important. It contradicts the policy and principle of the duty-free industry for which it was established. Second, it is a bad piece of legislation. It purports to solve a problem by targeting the people who are not the cause of the problem. In the process, it causes significant negative side effects. In this vein, I am compelled to respond to Mr. Cullen's comments that airport duty-free operators still have a comparative price advantage with the rent structure at airports. We no longer have a comparative price advantage over general retail sale of cigarettes. I would also like to mention that we are quite upset by his comment. I return to the reasons that we would like to ask to you remove this tax. The industry's customer base has started to erode, as Mr. Bergeron has mentioned. This may well result in a loss of jobs. In terms of the problem this tax was designed to solve, the airport duty-free industry is not part of smuggling activity. The industry is not a factor in encouraging Canadians to smoke. It is not a starter market - starters buy single packs of cigarettes; we only sell in cartons. To purchase a carton of duty-free cigarettes at one of our member shops, the purchaser must leave the country, as Mr. Bergeron indicated. An airline ticket must be purchased. We are not providing cheap cigarettes, not when you figure in the cost of your trip certainly. The youth market represents approximately 3 per cent of airport traffic. The volume of cigarettes sold through airport duty free is less than 1 per cent of the entire Canadian domestic market. Again, we do not question the government's health motives, but surely the measures must not be arbitrary. They must support the goal. Applying this tax to a sector that accounts for between 1 per cent and 2 per cent of tobacco sales in Canada, has no sales to minors, is not a factor in smuggling and was founded on the principle of duty free can only make this step arbitrary. We strongly urge that this tax be removed, or suspended as it was in 1992-93. Left in its current state, the legislation opens the door to many more future tax and duty increases that would continuously erode the very duty free advantage established by the government itself decade ago. To conclude, by imposing a tax on duty-free stores, the Canadian government has undermined the principle upon which it established the duty-free industry. The government has begun the erosion of traffic and sales of all goods and services at duty free outlets, not just tobacco. Further, it has jeopardized the employment prospects of hundreds of Canadians, has negatively affected tourism and the role of duty-free shopping for travellers, and has jeopardized significant long-term commitments and financial investments made by Canadian airport duty-free operators. It has created hardships to the members of the Canadian airport duty-free industry, not just in terms of lost sales but also because many of us are bound through lease agreements with local airport authorities that have minimum annual guarantees. We hope that with the amendments we have proposed the door will be closed to tax and duty impositions on duty-free stores. Mr. Remo Mancini, Corporate Vice-President, Canadian Transit Company: Honourable senators, I want you to know that I have always agreed with Senator Kenny. Senators are worth as much as MPs, and I would think that when that bill comes here you might wish to make some amendments. I serve and represent the Canadian Transit Company as corporate vice-president. The Canadian Transit Company has operational headquarters in Windsor, Ontario and corporate headquarters in Toronto, Ontario. I much appreciate this opportunity to appear before your committee today to discuss our strong concerns with Bill C-26. I will first briefly tell you something about the Canadian Transit Company, then note our problems with the bill, and then conclude with some suggestions. The Canadian Transit Company is a privately owned, tax paying business that owns and operates the Canadian half of the Ambassador Bridge crossing between Windsor, Ontario and Detroit, Michigan. The company was founded in 1921 by an act of Parliament. The Ambassador Bridge opened for business in 1929, and is a direct link between Windsor and Detroit. The Ambassador Bridge has since become the pre-eminent international border crossing in North America. In 1992, we surpassed the Peace Bridge as the busiest commerce crossing in North America. Last year, more than $140 billion worth of merchandise traversed the Ambassador Bridge. In 2000, we also became the busiest auto crossing on the Canada-U.S. border, surpassing the Windsor-Detroit tunnel. Through one of our associated companies, in a public-private initiative with the University of Windsor, we operate a duty-free outlet that on a regular basis employs 70 staff members, of which a minimum of 75 per cent must be University of Windsor students. This is a fair-sized enterprise that directly and indirectly contributes to the local and Canadian economies through employment, through the use of local suppliers, like insurance brokers, cleaners, stationery suppliers, and also through purchases made from Canadian manufacturers. The duty-free industry has a minimum 30 per cent to 40 per cent target of selling Canadian-made products. We are here today because we have a significant interest in the future of the Canadian duty-free industry that we believe has been placed in jeopardy. What are our problems with Bill C-26? First, I agree with the broad thrust of the position of my colleagues from the Association of Canadian Airport Duty-Free Operators. However, I view the threat to our industry as immediate and very serious. My suggested solution is to remove this threat hanging over our industry and to return the industry to the position it was in prior to the introduction of Bill C-26. To put it more clearly, I am respectfully asking the Standing Senate Committee on Banking Trade and Commerce to take all steps necessary to return the tax and duty-free industry to a tax and duty-free status. I dare say that if you were to canvass the travelling public they would ask you to do the same thing. Please understand that our company does not take issue with the government's broad policy initiative on reducing the consumption of tobacco products. Indeed, we take our responsibilities in this area very seriously, as you would see if you were to visit our store and other Canadian tax and duty-free stores. The government's policy itself is not the issue here. However, the government's policy is being carried out with no seeming understanding or concern about its collateral effects on the duty-free industry and with little regard for due process. Let us look at the way in which the anti-tobacco policy is being carried out in duty-free stores. The government is imposing a tax of $10 a carton on cigarettes sold in tax and duty-free outlets. This tax invasion in a previously non-tax retail environment is being carried out ostensibly to curb the consumption of tobacco in Canada, especially among young Canadians - at least that is what we are told. What is wrong with this move? Plenty. It will not do a thing to reduce tobacco consumption, least of all among youth. In the process of not reducing tobacco consumption, it will have considerable negative side effects on our industry, changing its very foundation and the public policy principles on which the industry was founded and built. Why will it not reduce Canadian tobacco consumption? To begin with, tobacco sales through tax and duty-free outlets account for only 1.4 per cent of tobacco sales in Canada, so we are looking at a very small catchment area indeed. Many of those buying tobacco at tax and duty-free stores are non-residents visiting from other countries. This new tax will only encourage them to purchase their cigarettes at U.S. tax and duty-free stores. How does this help the health of Canadians? Third, the extra charge will have absolutely no impact on youth tobacco consumption. Very few travellers are unaccompanied minors, and we do not sell tobacco to them in any case. That is illegal. Our fine record of self-enforcement speaks for itself. The extra charge, therefore, will have no discernible effect on tobacco consumption. It will, however, have very discernible effects on the tax and duty-free stores and their suppliers and on the communities in which they operate. Here is how: Tobacco products are a major part of the duty-free industry. When visitors come in to buy tobacco, they also purchase other items like fragrances, alcohol and food - all tax and duty free. The new tax on tobacco products will simply encourage less frequent visits to our stores. Thus, the effect of this new tax is to reduce the viability of tax and duty-free outlets and with this comes the negative impacts on employment, on local and federal tax revenues, and on any rents paid that are based on revenues. Another negative aspect of this extra charge is its effect on tourism in general. We have large signs in our stores that read "Tax and duty free." Those signs are now absurd because the statement is no longer true. In the highly competitive world tourism market, Canada will become less attractive. The negative spinoffs arising from a reduction in the number of visitors are surely clear to members of this committee. We have, in sum, an extra charge on tobacco products that provides negligible health benefits to Canadians while playing roulette with well-run businesses and the communities in which they operate. I hope you will agree with me, therefore, that this extra charge does not make much sense. As if these problems are not enough, the extra charge was imposed with what I believe to be little discussion with the industry. I am so pleased to have had this opportunity to appear before your committee because this is really the first chance that the Canadian Transit Company has had to speak about this important and broad public policy initiative in an open and public forum. The final message I want to leave with senators this afternoon is that we have a tax and duty-free industry. At one time, all the products sold in those stores were tax and duty free, which was to be for the benefit of Canada in the world tourism market, our share of which we are trying to increase. We have now walked away from that policy. Do not think for a moment that other products will now be immune to this tax. Other ministers will follow the current minister and decide to impose a tax on liquor, or perhaps on fragrances, to which many people object to these days for various reasons.The door has been opened for successive ministers to eliminate, step by step, the tax and duty-free industry. We are heading down the slippery slope. There is only one way to turn this around, which is for the Senate to take a sober second look at what this bill does and return it to the House of Commons with amendments. We ask Parliament to preserve what was a very successful and well thought out policy. Tax and duty-free stores have proven to be successful. Senator Angus: Your presentations were all very good. It does seem somewhat illogical to have an industry based on exemptions from taxes and duties. There are two points I would like to explore with you. When this was announced on April 5, was it a bolt out of the blue, or had there been some consultation with your industry? Ms Kendall: There had been limited consultation on a very high level. We were invited to attend a meeting in January with some officials of the Ministry of Finance. Mr. Bergeron may want to add to this, because he was also there. We talked about tobacco generally and about taxes on tobacco, but on a high level. It was my impression, on leaving the meeting, that nothing had been decided, that any steps that were in the works were far off. There was no talk of anything resembling what happened to us when we woke up on April 6. Senator Angus: Did you make the arguments that you have made before us today? Mr. Bergeron: A number of the same arguments were made. As a matter of fact, last night I reviewed the presentation that we made at that time. There were some basic facts. We also understood that the government had some intention of consistency, as well. We brought back the issue to others about the whole duty-free industry not being the appropriate location that will encourage smoking, whether youth or adult. We made a point, as well, that to provide cheap tobacco - because that was an expression that came up. New smokers, as we said in the presentation, buy single packs. Senator Angus: I understood the arguments, and they were clear. Mr. Bergeron: That was one issue. The other issue was smuggling. I believe we heard earlier today from Department of Finance officials that they recognize that the duty-free industry is not related to the issue of smuggling. We understood that as well at that time. There had been subsequent pressure from the World Health Organization with respect to tobacco, and at that January meeting we said that banning tobacco completely would bring about many ill effects, not unlike what we have talked about today. Those presentations were made at that time, in a similar approach. Senator Angus: Mr. Mancini, you also mentioned in your remarks that there was a lack of consultation. Mr. Mancini:There may have been some consultation with the Frontier Duty-Free Association, but I was not part of that. The Canadian Transit Company and the Ambassador Duty-Free Store were never part of any consultations. Senator Angus: We are quite familiar with the Department of Finance, and we know that they do a significant amount of consulting before changes are made. Your arguments seem, on the face at least, to be very persuasive. That leads me to this question: Do you have statistics on the percentage of the gross sales of tobacco in your member shops? Mr. Bergeron: As a matter of fact, I have in front of me a document that is published by the Canada Customs and Revenue Agency. The sale of tobacco in airport duty-free shops represents about 17 per cent or 18 per cent of sales. I do not have all the figures in front me, but it is about $29 million out of $167 million. Senator Angus: That is about 18 per cent. Mr. Bergeron: It is about 18 per cent in the airport market. Senator Angus: That is quite a significant amount of the sales. Mr. Bergeron: It is a significant amount, but the percentage, over the years, has declined. We are also exploring other categories of products. By the nature of the product, cost structure and margin, it does fuel the ability of the operator to pay the high rent that we pay to the airport management. We pay no less, on the average, than 30 per cent of our gross sales in rent. Senator Angus: I understand that. Would it be a viable business if you could not sell cigarettes in your stores? Mr. Bergeron: No. Some stores would survive, but on the whole, we would have to say a definite no. Senator Angus: This is a strong inhibition by the government. They obviously know this. Have you told them that? Mr. Bergeron: I cannot remember if we told them in exactly those words, but we definitely made that representation. Senator Angus: The government has proceeded, nevertheless. [Translation] The government knew what it was doing when it introduced legislation on this. [English] Senator Furey: Regarding the figure of 18 per cent, Mr. Bergeron, does that pertain to tobacco products only, Canadian and non-Canadian? Mr. Bergeron: Yes, but the vast majority of that is Canadian product, cigarettes being the large proportion. Senator Furey: Would you have a figure that would represent Canadian cigarettes and tobacco sticks only? Mr. Bergeron: I can take an educated guess; later, I can provide you with more definite numbers. Out of the $25 million, it is definitely at least $20 million in Canadian-made cigarettes. The numbers are different in land border shops. Senator Kenny: I have a question for the airport operators. Are your prices always better than downtown prices when you are duty free? You have been talking so much about your rent structure and heavy overhead. Is it a better deal to shop at a duty-free shop, or can you get the product for the same price, or a better price, downtown? Mr. Bergeron: The duty-free price, on the whole, and the industry is based on this, is better than the downtown price - that is, the high street price or regular price. Definitely, there is still a tax advantage. In some products, it varies. The percentage of savings varies substantially, depending on the category of the product and the expectations of the consumers. Senator Kenny: What savings would there be? Ms Kendall: It depends on the tax structure of the individual product, whether domestic or imported, and what the taxes are. The other thing, in comparing price, is that fairly regularly some of the products may not be available in a normal domestic market. Senator Kenny: You have been talking about the policy of duty free and its benefit to Canada. Sometimes I get the impression that a consumer is almost captive at an airport. There is no other place for a consumer to shop; the consumer has to pay whatever he or she is being charged. I must say, I have always wondered about that. Is it a better deal, or should I have done my shopping elsewhere? Mr. Bergeron: We will encourage you to continue to shop at duty-free shops. The issue to North American consumers is that we have a tendency to compare the price strictly with the posted price, not including all the additional taxes that are attached separately. Definitely, on tobaccos, spirits and fragrances the prices are advantageous, based on the posted price. Senator Kenny: What about the prices of candies and other such items? Mr. Bergeron: You will still save the taxes. Again, let us keep duty free tax free. Senator Hervieux-Payette: I buy most of my cosmetics in the airport, so they are cheaper. Mr. Bergeron: We hope to see you again. Senator Kenny: Mr. Mancini, you made some interesting arguments. The one that I really have difficult with, and I guess all three of you have made it, is the implication that our tourism industry will be jeopardized because someone cannot get a carton of cigarettes. You do not really think that someone on this committee believes that someone will say," Well, I will go to another country because I cannot buy my cigarettes for $10 less at the duty-free shop." Please tell me that is not your testimony. Mr. Mancini: You must look at the entire picture, and put yourself in the frame of mind of a consumer from Toledo, Ohio. You need to jump in your car, drive for several hours, reach the Ambassador Bridge and pay the toll. You arrive in Canada, where you are met by law enforcement agents who ask you many questions. They allow you entry into the country, where one would hope you have a good time, and, on your way back, you see a tax and duty-free store. You would like to make a purchase but then you learn that it is not really tax and duty free. You pay another toll to cross the bridge, you exit the country, and you are greeted by a new set of law enforcement agents, some of whom wear guns. They ask you a bunch of questions and they may force you to open up your trunk. All of this is part of the travel experience. I want to enhance that travel experience. I am suggesting that you are doing exactly the opposite. If I were to only zero in on the very heart of your question, then obviously the answer would be "no." I put your question into the bigger context of what we are doing to enhance the entire travel experience of that person or family. Are we helping it? Are we making it psychologically an experience the person would want to repeat, or are we making it less of an experience the person would want to repeat? Basically, we are trying to tell you in the strongest way possible that there are already many deterrents out there to travel and tourism: the high cost of gasoline; presenting yourself to law enforcement agencies and not knowing what you will be asked, which makes most people very nervous; the cost of the entire trip for a family. As the traveller exits Canada, this is the last chance we have to do business with that person, the last chance that we have to enhance the travel experience, and we are now pulling the rug out from underneath that person or family. I think that is how you must look at it. Senator Kenny: The tourist from Toledo has a choice of going to Windsor or Tijuana. If he is going to Windsor - Mr. Mancini: He could stay home and spend his money there. Senator Kenny: Here is the deal. If you tell me that you do not like the hit of $10 a carton, I can understand that. Senator Angus: That is what he is telling us. Senator Kenny: I can see how that affects you financially. That is clear. However, when you tell me that he will not come to Windsor because he will not get that carton of cigarettes, we part company. Mr. Mancini: We have to look at the entire picture. I am saying to you that we are adding one more impediment to that person or that family's travel experience. In this instance, it is called a $10 tax on cigarettes. Next week, it may be a 50-cent tax on candy. Three years from now, it may be a $10 tax on something else. We have now added several more impediments. We must decide what we want to do. Do we want to encourage the industry to grow, or do we want to have the industry retrench and perhaps shrivel up? Senator Furey: Mr. Mancini, the U.S. tourist, as an example, is generally not buying Canadian cigarettes, so this tax does not really apply to a tourist buying cigarette products. Mr. Mancini: No, if a non-Canadian resident buys a pack of non-Canadian cigarettes - Senator Furey: What I am saying is that, generally, we heard statistics that about 90 per cent of non-Canadian tourists are buying non-Canadian products. The U.S. tourist is presumably buying a U.S. product, correct? By and large? Mr. Mancini: By and large, you are possibly correct. Senator Furey: The tax does apply to them. Mr. Mancini: The tax does apply. Senator Furey: It would not apply in the sense that he is not buying Canadian cigarettes. Mr. Mancini: We are certainly making it more difficult. If it did not apply before, it will apply even less in the future. Mr. Bergeron: If I may, it is making it more difficult, because you have to charge the tax, but they are eligible for the rebate. It makes the experience somewhat more convoluted. Senator Furey: The tax does not apply to them if they are buying U.S. products. Mr. Bergeron: It does apply at the point of process. The way the process works is that you pull the price with the tax and then have to explain to the customer that it does not apply and that it will be deducted from the bill. It makes the process of shopping at a Canadian duty-free shop more convoluted and difficult for that customer. Senator Furey: I can understand that, but he does not pay the tax. Mr. Mancini: On that product. Senator Banks: Out of curiosity, do you have any idea why cigars are not included in these taxes? Ms Kendall: I do not. Mr. Mancini: No. Mr. Bergeron: No. Senator Kenny: Not seeing any other senators wishing to ask questions, I move that we go to clause-by-clause consideration. Senator Oliver: We are having a discussion. Senator Tkachuk: Can we have a minute or two? The Chairman: Take as long as you want. The committee continued in camera. The committee resumed. The Chairman: We have a motion to proceed to clause-by-clause consideration of Bill C-26, to amend the Customs Act, the Customs Tariff, the Excise Tax, the Excise Tax Act and the Income Tax Act with respect to tobacco. Is it agreed, honourable senators, that we move to clause-by-clause consideration of Bill C-26? Hon. Senators: Agreed. The Chairman: Is it the intention of any honourable senator to propose an amendment? Senator Oliver: Yes. The Chairman: Read it out, please. Senator Tkachuk: The motion is not yet ready. The Chairman: Which clause do you wish to amend? Senator Angus: Basically, we want to remove the duty free. Senator Oliver: The $10 tax on cigarette cartons in duty-free shops. Senator Angus: Both at airports and at the duty-free outlet at the Ambassador Bridge. Senator Tkachuk: I think duty-free shops would cover it all. Can we do this with the intent that we have? Senator Oliver: Can we give you the formal wording later, Mr. Chairman? Senator Angus: Did you not have a formal wording? The Chairman: We understand precisely what you mean. You can write the amendment whenever you want. You are moving an amendment to eliminate the $10 tax on cigarettes at duty-free shops under this bill. Senator Angus: In duty-free shops. The Chairman: So moved. Do you have a seconder? Senator Oliver: I so second. The Chairman: All those in favour? Some Hon. Senators: Agreed. The Chairman: All those against? Some Hon. Senators: Nay. Senator Tkachuk: I am shocked. The Chairman: The amendment is defeated. Shall the title stand postponed? Hon. Senators: Agreed. The Chairman: Shall clause 1, the short title, stand postponed? Hon. Senators: Agreed. The Chairman: Shall clause 2 carry? Hon. Senators: Agreed. The Chairman: Shall clauses 3 to 6 carry? Hon. Senators: Agreed. The Chairman: Shall clauses 7 to 15 carry? Hon. Senators: Agreed. The Chairman: Shall clauses 16 to 42 carry? Hon. Senators: Agreed. The Chairman: Shall clause 43 carry? Hon. Senators: Agreed. The Chairman: Shall clause 44 carry? Hon. Senators: Agreed. The Chairman: Shall clause 1, the short title, carry? Hon. Senators: Agreed. The Chairman: Shall the title carry? Hon. Senators: Agreed. The Chairman: Shall the bill carry? Hon. Senators: Agreed. The Chairman: Shall I report the bill? Hon. Senators: Agreed. The Chairman: The clerk points out that his minutes will indicate the clauses that were affected by your proposed amendment. Senator Tkachuk: Perfect. The Chairman: Thank you, honourable senators. The committee adjourned.