First Nations Cigarette Allocation System

Transcription

1 FINAL REPORT First Nations Cigarette Allocation System Independent Review Kathleen Lickers and Peter Griffin The summary nature of this Report is intended to capture a composite of responses and is not intended to express the verbatim views or identity of any one party.

2 TABLE OF CONTENTS I. Introduction... 4 Overview of this Report... 5 The Facilitators... 6 Background... 6 This Review... 8 Methodology... 9 The Taxing of Cigarettes in Ontario (generally)... 9 Tax on Tobacco Products in Ontario What is the First Nation Cigarette Allocation System? Hypothetical Allocation System Scenario Hypothetical Community Information Allocation System Formula: Increase(s) to Base Allocation Retail Agreements Retail Allotments Federal Excise Duty Development of low cost tobacco market on reserve Composite Nature of this Report No clear boundaries: uncontemplated transactions in System not amenable to enforcement II. What we heard a. Participating First Nations Input Tobacco Manufacturers Off Reserve Wholesale Distributors Public Health Advocates Retailers (including off reserve convenience stores) III. Uncontemplated Transactions (creating gaps with the current system) a. Assertion of autonomy/jurisdiction b. Nation to nation trade and commerce c. New and variable tobacco economy d. Scope of tax immunity e. Obligations for provincial tax collection: tax immunity is not tax avoidance. 43 Page 2 of 59

3 f. Ontario's System vulnerable to abuse g. Intersection of federal and provincial jurisdiction over tobacco h. Innovative sources of revenue i. Reconciling a quota system with legitimate health concerns j. Role and scope of a quota system as a contributor to the uncontemplated tobacco transactions IV. Potential Options Key Interests Need to Address Uncontemplated Transactions Option 1: Update Allocation Formula Strengths: Weaknesses: Option 2: Real Time Sales Verification By Reserve Retailers Strengths: Weaknesses: Option 3: Models from other Jurisdictions / Negotiated Solutions / Pilots Strengths: Weaknesses: Option 4: Revenue Sharing Agreements Option 4a: Enhanced Rebate system Strengths: Weaknesses: Option 4b: Administrative Revenue attached to Allocation Tobacco Strengths: Weaknesses: Option 4c: Allocation Tobacco trade between First Nations Strengths: Weaknesses: Conclusion and Next Steps Page 3 of 59

4 I. Introduction In 1993, the government of Ontario formally introduced the First Nations Cigarette Allocation System (sometimes referred to as "the cigarette quota") under the Tobacco Tax Act (TTA) 1. Prior to this, the government had imposed a cigarette quota system on First Nation reserve retailers in Ontario intending to ensure that tax-exempt cigarettes would only be available to First Nation purchasers and not diverted to consumers not entitled to tax exemption. 2 The current cigarette allocation system has been in place for over twenty years without amendment. Ontario sees the TTA as a law of general application that, like any other provincial law of general application in Ontario s view, applies on reserve. In 2011 the TTA was amended to equip the Ontario Ministry of Finance ( MoF ) with the authority to enter into arrangements and agreements with First Nations Band Councils regarding the enforcement and administration of the TTA on reserve. 3 In its 2014 Fall Economic Statement, the government of Ontario committed to launching a formal review of the First Nation allocation system: "As part of this review, the government will appoint a facilitator who will work with First Nation communities and other stakeholders across the province, such as industry and public health experts. It will listen to stakeholder perspectives, identify issues with the current system, and make recommendations for improving and modernizing the allocation system." 4 1 The allocation system came into effect on October 21, 1993 by Ontario Regulation 649/93 pursuant to the Tobacco Tax Act, R.S.O. 1990, c. T. 10 (TTA) 2 The Ontario Divisional Court found Ontario's cigarette quota system was without legislative authority in Bomberry v. ON (Ministry of Revenue) (Ont. Div. Ct) 70 O.R. (2d) Bill 186, An Act to Amend the Tobacco Tax Act, Fall Economic Statement, Minister of Finance. Page 4 of 59

5 To carry out the objectives of this Review, Facilitators were engaged to: 1. Listen to the perspectives and ideas of First Nations leaders, communities, industry, public health experts; 2. Identify gaps in the current allocation system, including whether to incorporate other tobacco products, such as cigars; 3. Conduct an assessment of exemption models used in other jurisdictions to identify best practices; and 4. Identify specific options to the government on improving and modernizing the current allocation system, or alternative approaches. Overview of this Report This Report reflects: (a) (b) (c) (d) (e) The background to Ontario s on-reserve cigarette allocation system; The inputs from interested participants; The identification by the Facilitators of both key interests and certain economic realities at play; A series of options for consideration and discussion amongst Ontario and those key participants; and A way forward to begin these important discussions. Page 5 of 59

6 The Facilitators Ontario retained (us), Peter Griffin and Kathleen Lickers as co-facilitators to carry out this review. Peter Griffin is a member of the Bar of Ontario practising civil and commercial litigation in Toronto since Peter has represented both plaintiffs and defendants in the resolution of complex multi-party disputes both before the courts and through mediated and negotiated resolutions. Peter is past President of The Advocates Society, a Fellow of the American College of Trial Lawyers and Chair of the American College of Trial Lawyers Ontario Committee. Kathleen Lickers is a Seneca from the Six Nations of the Grand River First Nation and a member of the Law Society of Upper Canada since Kathleen has served as legal advisor and then Commission Counsel to the Indian (Specific) Claims Commission predecessor to the Specific Claims Tribunal of Canada. For the past 13 years, Kathleen has been a sole practitioner of her own firm. She has been a facilitator and advisor on many First Nations issues at the federal and provincial level and has appeared before both House and Senate Standing Committees on Aboriginal Affairs. Background Since 2009, the MoF 5 has been working with a number of First Nations on matters concerning tobacco on reserve and in July 2011 retained Kathleen Lickers to continue this discussion by initiating a "process of listening" with First Nations leadership in an effort to better understand First Nations' interests and their views going forward. Ms. Lickers documented the perspectives of First Nations leaders in a 2011 Facilitator's Report that went beyond the allocation system that is now specifically the subject of this review. Regarding the allocation system, First Nations leaders were unequivocal in saying that they "resent not only the introduction of this system but the maintenance of it 5 In 2009 the MoF was known as the Ministry of Revenue. Page 6 of 59

7 as well. First Nations characterize Ontario's cigarette allocation as akin to "rations" founded on what they view as Ontario's desire to stop gap the loss of tax revenue." 6 Over the past twenty years that the allocation system has been in operation, some First Nations have developed their own economy growing, manufacturing, distributing and retailing their own tobacco products, seen as a new economy on reserve by First Nations but criticized by others as an unregulated market. The 2011 Facilitator s Report noted that First Nations leaders questioned the definition of contraband tobacco adopted by Ontario and resent the broad characterization of on-reserve tobacco as being illegal. Further, the 2011 Report noted First Nations voices which challenged the province s jurisdiction to monitor and regulate the sale of tobacco on reserve. In addition to summarizing the views of First Nations in 2011, Ms. Lickers was asked to provide recommendations to help the government of Ontario better understand First Nations interests in tobacco on reserve 7. Some of these recommendations include: Noting that many First Nation communities in Ontario have generated local economies based on participating in the tobacco industry as growers, manufacturers and sellers of tobacco products, including some of the allocation cigarettes; Ensuring that engagement take place on tobacco initiatives; Recognizing the importance of tobacco economies on reserve; Committing to explore solutions that encourage partnerships, investments and a range of economic opportunities not limited to tobacco in First Nation communities; and Recognizing the importance of jurisdiction to First Nations that see land use, business, trade and commerce as embedded in treaty relationships. 6 Tobacco on Reserve: Perspectives Shared from First Nations Facilitator's Final Report, Kathleen Lickers, pp A copy of this report is available from the MoF. 7 A copy of this report is available from the MoF upon request. Page 7 of 59

8 This Review Building upon this, the review undertaken here re-engaged many First Nation leaders to examine their experiences with, and perspectives of, Ontario's cigarette allocation system. In addition to the perspectives of First Nation communities, Ontario is aware of the statistics related to the health effects of tobacco revealing that more than 13,000 smoking-related deaths and smoking-related health care costs of more than $2.2 billion in Ontario annually 8. To this end, public health advocates believe the allocation system should be reformulated; as it is both too generous and does not discourage smoking, particularly amongst youth, resulting in poorer health outcomes. This review invited the participation of public health advocates with a view toward identifying constructive solutions. This review examines the allocation system in greater detail and sought the perspectives of supply chain stakeholders from tobacco manufacturers to retailers, both on and off reserve. When introduced, the allocation system focused on cigarettes. As a practice, Ontario includes fine cut tobacco in the allocation limits (1 gram = 1 cigarette), because fine cut tobacco is only used to roll your own cigarettes. Other forms of tobacco products (eg. cigars) were omitted. The review therefore examines whether the system should be expanded to include all tobacco products. Finally, the review examines the administrative efficiencies of the system, as experienced by those stakeholders with responsibility to ensure its operation. Owing to the fact that there are two methods of administering the system (through the Band Council or through the Ministry), the review explores whether any best practices might emerge to be replicated and/or where the parties might create improvements Ontario Budget, Chapter V: A fair and efficient tax system. Page 8 of 59

9 Methodology This review was officially launched on April 17, 2015 when the Facilitators were ready to proceed with the public distribution of a brief Discussion Paper drafted to orient the public to the details of the current allocation system and to prompt dialogue with interested participants through the introduction of a series of discussion points. To ensure as wide a public distribution as possible, the MoF posted notice of the launch of the review on its website on the same day with a link to the website the Facilitators created to directly engage with interested participants. The website stated the purpose of the review, provided a copy of the Discussion paper and an address that only the Facilitators could access. Over the course of early in person meetings, the Facilitators found themselves providing even more detail regarding the operation of the allocation system than outlined in the Discussion Paper. To address these questions, the Discussion Paper was revised to provide greater detail of the operation of the allocation system. We have repeated these details from the revised Discussion Paper in the sections below. The Taxing of Cigarettes in Ontario (generally) All provinces charge tax on tobacco products and most provinces also charge a retail sales tax. In Ontario, a harmonized sales tax is applied 9. Both kinds of taxes (tobacco and sales) are considered taxes on personal property and are therefore not charged to status Indians who purchase tobacco products on reserve for their personal use. Under section 87 of the federal Indian Act, "the personal property of an Indian or a band on a reserve is exempt from taxation." 10 9 On July 1, 2010 a harmonized sales tax took effect in Ontario. The 13% tax replaces the federal goods and services tax (GST) of 5% and the provincial sales tax (PST) of 8%. The Canada Revenue Agency (CRA) administers the HST. First Nations in Ontario negotiated a point of sale exemption from paying the 8% Ontario portion of the HST for qualifying off-reserve purchases. The Ontario MoF administers the rebate for First Nation consumers. 10 Indian Act, R.S. C. 1985, c.i-5, s. 87 (1)(b). Ontario recognizes the tax exempt nature of tobacco as personal property through Regulation 1034, s. 23 of the Tobacco Tax Act, ON. Page 9 of 59

10 Tobacco products purchased for personal consumption by status Indians on reserve are considered personal property and are therefore exempt from federal and provincial sales tax and provincial tobacco tax under the Tobacco Tax Act. 11 Cigarettes in Ontario which are intended for consumption by status Indians (First Nations individuals) therefore do not include Ontario's tobacco tax of $30.95 per carton (of 200 cigarettes) nor the harmonized sales tax of 13%. Tax on Tobacco Products in Ontario The current tobacco tax rate in Ontario (most recent increase effective February 26, 2016) is: per cigarette $3.10 per package of 20 cigarettes $3.87 per package of 25 cigarettes $30.95 per carton of 200 cigarettes per gram of cut tobacco 56.6 % of taxable price of a cigar In general, the taxable price of a cigar is the price paid by the retail dealer, multiplied by a factor of 1.22 A federal excise duty is imposed on manufacturers and importers ($21.03 per carton of 200 cigarettes) Finally, tobacco products are also subject to the 13% HST 11 Tobacco Tax Act, RSO 1990, c. T. 10 Page 10 of 59

11 What is the First Nation Cigarette Allocation System? In 1993, the government of Ontario introduced Ontario Regulation 649/93 under the Tobacco Tax Act creating a system to regulate the sale of unmarked (i.e. tax-exempt) cigarettes to Status Indians (First Nations individuals) on reserve in Ontario. The regulation does not deal with other forms of tobacco such as cigars. The stated purposes of the regulation were two-fold: (a) (b) To ensure that there is sufficient quantity of unmarked cigarettes available for purchase on a reserve by adult members of a band for their own consumption; and To prevent the purchase of excess quantities of unmarked cigarettes that could be resold to non-indians. 12 The Tobacco Tax Act and its regulations, including the First Nation cigarette allocation system is administered and enforced by the MoF 13. Ontario makes available a certain quantity of "unmarked cigarettes" for sale on reserve (products where an amount equal to the tobacco tax has not been paid in advance by the retailer to the wholesaler and where the retailer is not required to recover this amount from the consumer). The Ontario tax has been deliberately taken out of the cost of the package/carton, using the allocation system. The allocation system is the means by which Ontario recognizes and manages the requirement for a tax exemption on on-reserve sales of cigarettes to First Nation individuals for their exclusive use. The system is designed to make available a sufficient quantity of untaxed cigarettes for First Nation consumers. The system protects the provincial tax base by limiting the quantity of tax exempt cigarettes to that which First Nation smokers could realistically be expected to consume. It provides a formula for calculating the maximum quantity of allocation cigarettes available annually 12 O. Reg 649/93, s. 2(1). The term "unmarked cigarettes" means cigarettes that are not marked or stamped with an indicium, R.R.O. 1990, Reg In collaboration with the Ontario Provincial Police and local police services for enforcement. Page 11 of 59

12 to each reserve. The formula is based on the on- and off-reserve population of each community, as reported annually by Indigenous and Northern Affairs Canada; and smoking and cigarette consumption rates of First Nation individuals (as of 1991). The allocation system includes only cigarettes and fine cut tobacco - cigars and other tobacco products were not included in Reserve retailers purchase allocation cigarettes from authorized wholesalers during the year (April 1 - March 31), as needed. Prior to 1993, sales of cigarettes on reserve were untaxed. In the 1970s and early 1980s these sales began to increase at a rate that exceeded what could reasonably be characterized as personal consumption. Rather than create an administrative burden upon each on reserve retailer to collect and remit taxes on sales to non-entitled consumers, in 1983 the Ministry of Revenue introduced a quota on the total quantity of untaxed cigarettes that reserve retailers could sell (i.e. Ontario introduced supply chain controls). The 1983 quota was based on an allotment of 11 cigarettes per day for each reserve resident and was implemented on 29 reserves with a documented history of excessive cigarette sales. In 1989 two retailers on the Six Nations Reserve successfully challenged the quota system on the basis that Ontario did not have legislative authority for the system 14. The Divisional Court held that the quota system was invalid since it was not authorized by statute or regulation. The ministry was granted permission to continue the quota system pending an appeal. In 1990, the Tobacco Tax Act was amended to authorize by regulation an allocation system for unmarked cigarettes. Under this authority, O. Reg. 649/93 became effective on October 21, The purpose of this regulation was to ensure that there is a sufficient quantity of unmarked 16 cigarettes available for purchase on a reserve by adult members of a band for their own consumption and to prevent the purchase of excess quantities of unmarked cigarettes that could be sold to non-first Nations individuals. 14 Bomberry v. ON (Ministry of Revenue) (Ont. Div. Ct) 70 O.R. (2d) O. Reg. 649/93 pursuant to the Tobacco Tax Act, R.S.O. 1990, c.t A sufficient quantity is defined by the formula in O. Reg 649/93 Page 12 of 59

13 The quantity of unmarked cigarettes allocated to each reserve in Ontario is determined using an annual formula. The formula takes into consideration the adult population of the First Nation (living both on and off reserve), and the smoking patterns of First Nations. This formula results in a base allocation. All First Nation communities are entitled to receive a 10% increase to their base allocation to account for sales to visiting First Nation individuals for reasons such as special events on the reserve. The First Nation may obtain a 20% increase in its base allocation if it enters into a Retail Agreement with the Ministry. The Ministry relies upon population data received from Indigenous and Northern Affairs Canada (INAC) on an annual basis. INAC considers an adult to be someone 15 years and older, yet the legal smoking age today is The consumption data (i.e., 2.5 cartons on reserve and 2.7 cartons off reserve) is based upon the federal 1991 Aboriginal Peoples Survey and has not been updated. The allocation year operates from April 1 to March 31. The annual formula is as follows: [(R x 2.5 x 0.423) + (OR x 2.7 x 0.423)] x 12 = Base Allocation (in cartons of 200 cigarettes) Where: R is the number of Adults (aged 15+) in the reserve community (obtained annually, as at December 31st, from INAC) 2.5 is the number of cartons of cigarettes smoked per month per smoker in the on reserve community based upon the 1991 Aboriginal Peoples Survey, Statistics Canada 17 Currently, the allocation formula includes the population data from INAC. INAC considers an adult to be anyone 15 years and older. In early 1993, when the allocation system was created the legal smoking age was 16 and later that year was raised to 18. In 1994 the smoking age was raised to 19. Relying on INAC's data makes it very difficult to exclude year olds however, it is illegal to sell cigarettes to this age group in Ontario. Page 13 of 59

14 0.423 is the percentage of smokers, based upon the 1991 Aboriginal Peoples Survey, Statistics Canada OR is the number of Adults (15+) in the off-reserve community (obtained annually, as at December 31st, from INAC) 2.7 is the number of cartons of cigarettes smoked per month per smoker in the off reserve community based upon the 1991 Aboriginal Peoples Survey, Statistics Canada 18 Only MoF authorized tobacco wholesalers are permitted to deliver to Ministry authorized retailers on reserve. The Tobacco Tax Act defines a reserve retailer to mean a retail dealer who, in the ordinary course of his or her business, sells cigarettes to First Nation consumers. An authorization to purchase allocation cigarettes for sale to First Nations is issued by the Ministry to a reserve retailer based on proof (eg. by a Band Council resolution) that the retailer is authorized to deal in tobacco on the reserve. Band Councils can allocate the annual quantity of allocation cigarettes among reserve retailers pursuant to the terms of a Retail Agreement 19. If the Band Council has not entered into such an Agreement or has not made the allocation, the Minister (of Finance, then Revenue) may do so directly. 20 For 2015/16, 92 First Nations in Ontario have a Retail Agreement with the Ministry. If the Band Council has entered into a Retail Agreement, the Council allocates the annual quantity of cigarettes and monitors those sales to ensure that sales are not made to non-first Nations individuals. The allocation system was not intended to provide non-first Nations consumers with tax exempt cigarettes. 18 O.Reg. 649/93 19 O. Reg. 649/93, s. 4(1) 20 O. Reg. 649/93, s. 5.(1) Page 14 of 59

15 If the Minister receives a complaint that unmarked cigarettes intended for Indian consumers have been sold to non-first Nations consumers, the Minister may investigate such complaints. If sales to non-indians have in fact taken place, and the Band Council does not promptly transfer the unpurchased portion of the allocation to another reserve retailer, the Minister may suspend or cancel the Retail Agreement 21. If suspended or cancelled, the Minister will (also) reduce the unpurchased portion of the annual quantity by applying a predetermined formula. Hypothetical Allocation System Scenario Ontario Regulation 649/93 provides a formula for calculating the quantity of allocation cigarettes available to each reserve annually. To demonstrate how this formula is applied, we have presented a hypothetical scenario below. This example is intended to illustrate how the system currently works for a community with 500 on reserve adult members and 500 off reserve adult members. The MoF is responsible for administering Ontario s First Nations Cigarette Allocation System, including computing annual allocation amounts. Hypothetical Community Information 22 : On-Reserve Population: 500 members Off-Reserve Population: 500 members 21 O. Reg. 649/93, s. 8(3) 22 The information presented is intended to illustrate how the system works only and is not intended to reflect an actual community allocation. Page 15 of 59

16 Allocation System Formula: [(R x 2.5 x 0.423) + (OR x 2.7 x 0.423)] x 12 = Base Allocation (in cartons of 200 cigarettes) MoF s electronic system calculates the base allocation amount according to the order of operations rule: Brackets, Exponents, Division, Multiplication, Addition, Subtraction. The system multiplies the on-reserve population (500) by 2.5, which represents the number of cartons consumed by on-reserve smokers each month. This provides a total of 1,250 cartons. The system then multiplies this amount by 0.423, representing the smoking rate of First Nation individuals (42.3%). This provides a total value of cartons of cigarettes required per month to accommodate on-reserve smokers. Following the same approach for off-reserve membership, the system multiplies the population (500) by 2.7, representing the consumption patterns of off-reserve membership. The system then multiplies this amount (1350) by 0.423, again representing smoking rates of First Nation individuals (42.3%). This provides a final total of cartons of cigarettes required per month to accommodate off-reserve smokers. Adding these amounts together provides the total monthly amount of cartons required to accommodate on- and off-reserve membership: MoF s system calculates the annual base allocation by multiplying the monthly total ( ) by twelve, which, in this case, provides a base allocation of: cartons of cigarettes for the allocation year. This number would be rounded up to 13,198 cartons of cigarettes. Page 16 of 59

17 Increase(s) to Base Allocation All communities are entitled to receive a 10% increase to their base allocation to accommodate situations such as special events and purchases made by visiting members of other First Nation communities. This would result in an annual allocation of 14, cartons (rounded up to 14,518) cartons. Retail Agreements If the Band Council signs a Retail Agreement with the Ministry, the base allocation is further increased by 20%. This would result in an annual allocation of 17, (rounded up to 17,422) cartons. Retail Allotments A Band Council which has signed a Retail Agreement with the Ministry is required to assign or allot its total annual allocation to reserve retailers. In this case, the Band Council tells the Ministry how much of the annual allocation (17,422) each authorized reserve retailer is allotted for the allocation year. If the Band Council does not have a Retail Agreement, the Ministry determines the allocation allotments for reserve retailers. Generally, the Ministry s policy is to evenly allot the reserve s allocation to the reserve retailers. In this case, the annual allocation (14,518) is divided evenly between the authorized on-reserve retailers. For example, if there were three retailers in this hypothetical community, each retailer would have an annual allotment of 4,839 cartons of cigarettes. Federal Excise Duty The federal government, under the Excise Act,2001 regulated through the Canada Revenue Agency attaches a duty on tobacco products in the form of an excise duty. This duty is applied directly to the manufacturer/importer. The current federal excise duty is $21.03 per carton of 200 cigarettes. The Canada Revenue Agency explains that "a federal excise duty is imposed on tobacco products at the manufacturing level and is payable by the manufacturer, or in the case of imported tobacco products, by the Page 17 of 59

18 importer 23. It is treated as a cost of the manufacturer or importer and therefore, becomes embedded in the price of the product. This federal excise duty applies to manufacturers and not to personal property so the section 87 Indian Act personal tax exemption does not apply. While Ontario's allocation system is intended to regulate cigarettes that may be sold taxexempt (peach stamp only) to status Indians on reserve, the Canada Revenue Agency (CRA) permits the delivery of Ontario yellow stamped cigarettes for sales to First Nation consumers, without the imposition of the HST (13%) to First Nation reserves. There is no specific legislative authority for CRA to restrict quantities. What this means is that both kinds of stamped cigarettes (peach/allocation and yellow/cra) are lawfully available for sale to status Indians on reserve. Non- First Nation purchasers of these cigarette products are not entitled to the tax exemption attached to these tobacco products. 23 Canada Revenue Agency, Information Bulletin No.39, June 2013, Manufacturers of Tobacco Products. Page 18 of 59

19 Cigarette and Fine Cut Tobacco Markings All packages of cigarettes and packages of fine cut tobacco for sale to consumers who have to pay tobacco tax in Ontario must be marked with the Ontario-adapted federal stamp. Cigarette cartons (200 cigarettes) must have a yellow and black rectangle marked ONTARIO on both ends Cigarette cases (50 cartons) must have ONTARIO on the top of any two opposite face sides of the case All packages of cigarettes and packages of fine cut tobacco for sale to persons who are exempt from the payment of tobacco tax (First Nations and diplomats) must be marked with the federal peach coloured stamp on the package Page 19 of 59

20 Cigarette Carton Price and Tax Structure Type Approximate Total Price Taxes Yellow Stamped $80-$115 $21.03 (federal excise) + $30.95 (PTT) + HST Allocation Cigarettes $45-$70 $21.03 (federal excise) Contraband Cigarettes $10-$45 Page 20 of 59

21 Development of low cost tobacco market on reserve At the time that the allocation system was introduced in 1993, the tobacco industry was dominated by manufacturers located entirely off reserve. 24 The federal Canada Revenue Agency and the then Ontario Ministry of Revenue controlled the licensing of and taxes/duties on cigarettes entering the retail market on reserve. Over the past 20 years the cultivation of tobacco, and the manufacture, distribution and sale of tobacco products on reserves in Ontario has emerged. The on reserve tobacco industry has not only emerged but, in some communities, solidified itself as an important economy. To be clear, the low cost tobacco products manufactured on reserve and allocation (tax exempt) cigarettes sold on reserve by retailers from Ministry approved wholesalers are not the same products from a tax administration perspective. While the products may differ, where the consumer is a non-first Nation individual, the transaction is the same: the non-first Nation consumer is not entitled, in law, to purchase tobacco products tax free. Effectively First Nation retailers are extending the personal tax exemption available to registered Band members to the non-first Nation consumer something to which that consumer is not entitled. The availability of tobacco products to non-first Nations consumers on reserves free of federal excise duty, tobacco and harmonized sales tax in Ontario has resulted in a difference of pricing between on reserve and off reserve retailers and raises a complexity of issues that Ontario and First Nations are seeking to address. On June 1, 2011, Ontario's Supporting Smoke-Free Ontario by Reducing Contraband Tobacco Act, 2011 that amended the Tobacco Tax Act, received Royal Assent. As a result, the Minister of Finance may enter into arrangements and agreements with a Council of the Band with respect to tobacco or for the purposes of the administration and enforcement of the Act. The potential to negotiate new arrangements has resulted in the Ministry exploring the possibility of self-regulatory models regarding tobacco on 24 Today, these manufacturers trade under Imperial Tobacco; Rothmans, Benson & Hedges; and JTI-Macdonald. Page 21 of 59

22 reserve with two First Nation communities. During the course of exploring this potential, the pilots have examined approaches that have emerged outside of Ontario; these other models were summarized in the revised Discussion Paper and we will return to their adaptability later in this report. In addition to the launch of the review through the Ministry website and their own web address, the Facilitators wrote directly to some participants with a known interest in the allocation system to inform them of the review and invite their input - either in person or using the website. This direct outreach included the First Nation Political Territorial Organizations throughout the province, the two First Nations which are actively engaged with the MoF in pilot projects regarding tobacco on reserve and some First Nations in proximity to the 400 series highways. All tobacco manufacturers, some wholesalers, interested retailers and/or retail associations and public health advocates were also informed and invited to participate. The Facilitators ran public notices of the allocation review and posted its website for further input and information in all First Nation news publications in Ontario with a circulation to First Nation communities. A list of who the Facilitators met with and/or heard from will be delivered to Ontario separately. Composite Nature of this Report To support the independent nature of this review, the Facilitators made clear to the government representatives and assured participants that their identities or other personal information would not be included in this report. Instead, this report summarizes what was said in a general, non-identifying way to the greatest degree possible. Page 22 of 59

23 No clear boundaries: uncontemplated transactions in 1993 The landscape has changed considerably since the allocation system was introduced in Issues are not so black and white - if they ever were - and instead bleed into each other. We will detail these issues later in this report, but summarily state them now as follows: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) The matter of First Nations autonomy and self-determination with respect to economic activity on reserve; Nation to nation trade and commerce; The new and variable on reserve tobacco economy and its effect on non- First Nation enterprises; The scope of tax immunity; Obligations for provincial tax collection; The vulnerability of Ontario s system to abuse; The intersection between federal and provincial jurisdiction over tobacco; Innovative sources of (First Nations) revenue; Reconciling an allocation system with health concerns; The role and scope of an allocation system as a contributor to uncontemplated tobacco transactions. System not amenable to enforcement By 2015, the allocation system was overtaken by developments that make its enforcement challenging. Ontario inspection and investigation officers enforce compliance with the TTA however, in most cases there is limited or no enforcement of the sales of allocation cigarettes on reserve. Under the current division of federal and provincial powers on reserve, Ontario's regulatory regime faces jurisdictional challenges Page 23 of 59

24 to enforcement. This leaves a void which may be filled internally by First Nation governance structures, but they are ad hoc and lack the necessary human and financial resources to support them. The current system provides an option to a Band Council to enter into a retail agreement with the Ministry and in return the reserve's allocation is increased by 20 percent. The Band Council further agrees to: distribute the allocation cigarettes amongst reserve retailers; monitor the sales of allocation cigarettes to ensure the sales are made only to First Nation consumers; change the allotment of allocation cigarettes previously made to onreserve retailers; and cancel an on-reserve retailer's allotment and transfer the unpurchased portion to another on-reserve retailer, when necessary. First Nations question why Ontario provides no additional resources to equip a First Nation administration with the tools necessary to fully implement these terms of an agreement. Instead, Ontario offers additional cigarettes (20% of the base allotment) as an inducement to sign a retail agreement. This does little to nothing to support or ensure compliance. The Ontario Provincial Police and local police forces assist in enforcing the Tobacco Tax Act including the power to lay charges for offences related to marked and unmarked tobacco products and seize unmarked cigarettes in plain view. The Facilitators did not interact with any police service during this review. Enforcement of the allocation system should not be confused with the enforcement measures to combat contraband". 25 These measures are not limited to provincial and 25 The term "contraband" appears in quotes throughout this report to reflect the reality that while commonly used by key stakeholders off reserve, there is not a shared definition or common usage of this term with the First Nations community. Page 24 of 59

25 local police services but also include the RCMP and (new) offences under the federal Criminal Code of Canada. 26 II. What we heard The Facilitators wish to thank each and every participant who took the time and effort to express their views and share their experiences with the current system. While the regulatory environment creating the cigarette allocation system is confined to products manufactured, distributed and sold under Ontario's tobacco licensing regime by on reserve retailers to First Nation consumers, all participants inevitably made some linkage to on reserve manufactured tobacco. For Ontario, all cigarettes and other tobacco products sold exempt of tobacco tax to otherwise taxable consumers are referred to as "contraband". This includes on reserve manufactured tobacco. For First Nations, tobacco products manufactured on reserve and sold free of taxes are not "contraband" but an exercise of autonomy in a market economy that is not dependent upon government regulation for its existence. First Nations made clear that while they were prepared to meet to discuss the issues, this is not "consultation" and any potential changes must include formal consultation with them and that the Ministry must be clear in how it will engage going forward. a. Participating First Nations Input What follows is a summary of the views and perspectives shared and comments expressed by First Nations participants to the Facilitators: First Nations participants generally expressed suspicion as to the purpose and timing of this review. The participants were largely aware of the passage of the federal Bill C 10, An Act to Amend the Criminal Code and the provincial raw leaf regulations. 26 Bill C 10, An Act to amend the Criminal Code of Canada (trafficking in contraband tobacco). During the Parliamentary consideration of this Bill, some First Nations in Ontario did appear in Committee to express their objection and criticism of this Bill. Page 25 of 59

26 There is a deep seated resentment and overall mistrust of government intentions. First Nations have been on the receiving end of too many misplaced intentions; Ontario cannot now just say "trust me" - this bridge burned long ago. First Nations have endured too many heavy handed regulatory regimes over resources (i.e., fishing quotas, tobacco quotas) all working toward the detriment of First Nations peoples. Many First Nation participants expressed the same view as was summarized in 2011: they view the allocation system as discriminatory. They question why it must apply on reserve when a reserve member cannot travel off reserve and purchase tax exempt cigarettes. First Nations expressed a shared interest in preserving their tax exemption, and have no interest in being tax collectors for the province. A one size fits all approach is not reasonable. Some First Nations leaders recall that was Ontario's desire leading up to the regulation 649/93. There needs to be a collective solution but the solution should provide for individual agreements; there is much diversity between First Nations in the north and south. There was no shared view of adopting a refund based model. If First Nations allow tax, even on a revenue sharing basis, this will open the floodgates for other taxes. First Nations do not view competition with the off reserve retail market as unfair - this economic disparity is finally correcting itself. The use of the term "unfair competition" does not reflect the historical socio-economic marginalization of First Nation communities and reinforces the erroneous "native tax privilege" view held by many. First Nations have been on the Page 26 of 59

27 margins economically for too long; it has always been easier for nonnatives to fully participate in Canada's economy. There must be economic incentives to participate; if the outcome of this review is to make the flawed allocation system work better, this is not desirable. The quota may become irrelevant in some communities as the on reserve manufacturers grow to dominate the market. There are many economic benefits to communities surrounding manufacturing reserves. Perhaps the communities should "tax" the name brands themselves (referring to a levy). Leading with enforcement is not recommended; enforcement always seems to precede logical thinking but it is the wrong foot to lead with. A heavy handed approach will not be seen positively. In some First Nation communities the cigarette allocation system operates on reserve without a retail agreement with Ontario. While the majority of First Nations operate with a retail agreement, those operating without one made clear that they have never had nor do they ever intend to enter into such a retail agreement; they resent the introduction of this system and do not want to be seen to be helping Ontario manage what they see as a problem that Ontario created. As a result, as is the case for every other First Nation without a retail agreement, the Ministry administers the allocation system from its offices in Oshawa, Ontario. We met with some First Nation retailers on a reserve without a retail agreement, who expressed concerns with the Ministry's capacity and rigour in managing its own system; we will summarize these views later in this section. In cases where there are no retail agreements, retailers are most directly impacted by the actions of the Ministry; it is the Ministry that determines who is a "reserve retailer" for the purposes of administering the allocation Page 27 of 59

28 system. This action of the Ministry is interpreted by some First Nations as ignoring the jurisdiction of the First Nation. The existing structure sets up issues between the First Nation government and independent retailers where the retailers are not band owned or there is no retail agreement. Whether a First Nation administers the allocation through a retail agreement or not, some have added an administration fee which is passed on to the reserve retailer and/or consumer if the reserve retailer is band owned. The funds generated from these allocation sales create a fund from which First Nation governments support community services (i.e. Elder support; recreation; youth initiatives). Where strict enforcement or compliance with a retail agreement is upheld by First Nation government - this may emerge to ensure other (provincial) licensing regimes are not put at risk. Yet, compliance measures require resources to ensure monitoring and enforcement. First Nations view Ontario as creating this governance burden, but Ontario does not provide the tangible resources to support this responsibility: a 20% bonus in volume to the base allocation of cigarettes is not revenue which supports its administration. Some First Nations are aware of the abuse to tax immunity amongst their members but their biggest concern is the issue of price/tax 'parity'. If you level the price, you either grow the black market or put First Nation retailers out of business. Somehow tax immunity must be preserved. Other countries have put in place regimes that permit visitors to shop duty free at airports, border crossings; purchasing products on reserve should have the same treatment. Page 28 of 59

29 There is some confusion about this review and role of CRA. The smuggling of yellow stamped cigarettes from other communities has and in some cases might still be taking place. First Nations view businesses operating on reserve with a federal license as lawful enterprises and believe they have been shut out of major markets simply because they operate from reserves. First Nations desire to think outside of the box and negotiate on a treaty basis. The tax should not be permitted to be levied in treaty or traditional territories. Excise tax and the treatment of raw leaf tobacco are issues of regulation over products going in and out of a reservation. There is no clear sense of economic justification. Other models in Canada do not reflect a treaty based relationship; unless Ontario is willing to revisit this issue in the treaty context, the status quo cannot change. The current analysis adopted by Ontario is one of harmonization. It does not examine this issue from the treaty relationship. We do not agree with Ontario's strict black and white interpretation of this issue as one of taxation and s. 88 laws of general application. This should be dealt with in the way the HST point of sale exemption was dealt with; as a nation to nation issue. The government is not likely interested in negotiating tens of separate tobacco agreements; they are likely interested in administrative efficiencies. First Nations see too much legal ambiguity; First Nation retailers resent being blamed or used as a scapegoat for activity they are not responsible for. First Nations clarified that, taking a rights based view, this review is too limited in its focus on cigarettes. The same or similar issues apply to gasoline. Page 29 of 59

30 Some First Nations have sought clarification from MoF officials on whether cigars are included or excluded from the allocation system; these questions have gone unanswered. First Nations question how wholesalers are licenced; is there a First Nation wholesaler? When was the last time the Ministry issued a wholesaler's permit? With so many hurdles, it is nearly impossible to acquire a wholesaler's permit. For those First Nations who have attempted to acquire such a permit, their application has been declined. Some First Nation retailers are aware that illicit whites are being sold in stores off reserve which is having a negative impact on their market (i.e. counterfeit contraband). First Nations are alive to the impact a change in one community may have on neighbouring First Nation communities (i.e. need for price parity to eliminate the diversion of tobacco purchases away from communities) Some First Nations see it as a mistake for Ontario to model a reformed allocation system on its rebate structure for gasoline; this system is poorly managed; expensive and does not work. While Ontario says it has a 40 day service standard for gas rebates, retailers can wait up to 6 months to see payment and then Ontario acts as if "they are doing us a favour". This conduct is seen as heavy handed and has put some businesses in jeopardy or forced closure all together. Some reserve retailers are aware of cash register technology that the Ministry relies upon to track gas sales but not all retailers want to make this investment and even if they did, they still have to deal with issues of connectivity and privacy. Those gas retailers operating without real time cash registers continue to rely upon paper stub transactions to record tax exempt gas sales. These stubs form the basis upon which monthly rebates are calculated; this is a labour intensive and expensive system to operate. Page 30 of 59

31 For some reserve retailers, notice of their annual cigarette quota from the Ministry is never received on time. Sometimes these quotas have been revoked or changed by the Ministry without explanation. This issue is not isolated to tax (immunity or privilege) but rather should be framed around economic reconciliation - an action called for by the Truth and Reconciliation Commission of Canada, nation to nation relationships and institution based dispute resolution. Ontario has to be interested in transformative change and demonstrate a willingness to discuss jurisdiction; only then can a range of options emerge. Articles 3, 4 and 5 of the UN Declaration on the Rights of Indigenous Peoples, also highlighted by the Truth and Reconciliation Commission affirm the right of Indigenous peoples to freely pursue their economic development, to exercise their right to self-determination (as well as ways and means for financing their autonomous functions and the right to maintain and strengthen their distinct economic institutions). Tobacco Manufacturers Two of three national manufacturers participated in this review. Although invitations were extended, no on reserve manufacturer participated in this review. One such on reserve manufacturer made clear to us that where tobacco manufacturers operate on reserve, the jurisdiction to regulate, tax or legislate operations is solely that of the First Nation. The national manufacturers that did participate manufacture cigarette products that are distributed on reserve through the allocation system. Page 31 of 59

32 What follows is a summary of the views and comments expressed by the participating tobacco manufacturers: Relying upon their wholesale distributors, each tobacco manufacturer requires strict compliance for allocation products and HST exempt tobacco sales. Prior to 2014, the business model of the tobacco manufacturers was predominantly direct to wholesale. Post 2014, a new business model is emerging whereby manufacturers have a direct to retail; a mix of direct to retail and wholesale; or remain entirely wholesale. These changes reflect the desire to maximize two elements they can control: visibility and price. In the 1990s, some manufacturers of cigarettes legally produced in Canada were involved in a scheme whereby they were exporting cigarettes to the U.S., which were then smuggled back into Canada to be sold tax-free. Imperial Tobacco Canada Limited and Rothmans Benson and Hedges signed an agreement in 2008 to pay $1.15 billion in criminal fines and civil restitution over 15 years, while JTI-Macdonald Corp. and Northern Brands International pleaded guilty and paid $550 million in criminal fines and civil restitution. 27 Part of the settlement agreement requires that the tobacco manufacturer adopt "know your customer" protocols 28. The participating manufacturers to this review made known that all wholesale distributors that place orders with their companies are deemed to have accepted and agreed to their published terms and conditions of sale of their tobacco products. All orders are subject to acceptance by the manufacturer, which reserves the right to reject any order and refuse to sell its product to a distributor if (a) the order for 27 Legislative Summary, Bill C-10, An Act to amend the Criminal Code (trafficking in contraband tobacco) Library of Parliament 28 "know your customer" protocols are common anti-laundering requirements imposed by Canadian law on financial institutions etc... Page 32 of 59