Canada’s Indigenous communities could earn millions with tobacco tax scheme

The Canadian government has unveiled plans to allow Indigenous governments to levy a new tax on alcohol, cannabis, tobacco, fuel and vaping products sold in their communities – a move that could net millions of dollars for First Nations and Inuit communities across the country.

Under the proposal, outlined in its 2024 budget, the federal government would negotiate tax administration agreements with Indigenous governments that choose to participate. If an Indigenous government participates in the plan, the tax would apply on purchases of the products the community chooses to tax – regardless of whether the customer has Indigenous status.

Chief Derek Epp of the Tzeachten First Nation, near Chilliwack, British Columbia, says the proposed tax could increase his community’s revenues by millions of dollars – money that can help build infrastructure and housing.

Epp predicts the government’s proposal could convince some First Nations to agree for the first time to charge taxes. “It’s First Nations–led and that’s important,” he said. “I think it will also create comfort for the First Nations communities who haven’t accessed these tax regimes.”


Issues with tax-free status on First Nations reserves


Sales taxes on First Nations reserves and other Indigenous communities have long been a complicated question. Under Canada’s Indian Act, those with Indian status don’t have to pay sales tax on products purchased on reserves. However, that tax-free status has often attracted customers without Indian status to stores on reserves in search of a bargain on products like cigarettes or cannabis.

While governments argue it is illegal for those without status to buy items like tax-free cigarettes on reserves, it has been poorly enforced. A 2019 global review report for the World Bank found that Indigenous communities – particularly a handful of communities in Quebec and Ontario – played a large role in illicit tobacco sales in the country.

“The involvement of some Indigenous communities makes Canada’s illicit tobacco market distinctive,” wrote Robert Schwartz with the University of Toronto’s Dalla Lana School of Public Health, author of the report’s section on Canada. “Nation-to-Nation sensitivities between Indigenous communities and Canadian governments and the exemption of First Nations people from paying sales taxes on tobacco products constitute an important backdrop against which the illicit tobacco market operates. The Royal Canadian Mounted Police estimates that some 80% of illicit tobacco originates in border reserves in the provinces of Ontario and Quebec.”

Harmonising sales taxes is one of the measures Schwartz cited that have been adopted to curb illicit tobacco sales.

A 2023 report, prepared by Ernst & Young Global (EY) for the Convenience Industry Council of Canada, described how the temporary closure of tobacco manufacturing operations and smoke shops on First Nations reserves during the pandemic led to “a dramatic temporary increase in legal tobacco sales”.

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    “When on-reserve cigarette factories and distribution networks reopened in July 2020, legal sales plummeted back down to pre-pandemic levels as the production and distribution of contraband tobacco products resumed,” the report reads.


    New hope for more First Nations to participate in an amended framework


    In 2003, the Canadian government introduced the First Nations Goods and Services Tax (FNGST) Act, which provided a framework for Indigenous communities willing to impose the 5% sales tax and reap the revenue. To date, however, only 39 communities or territories have chosen to participate, most of them in western or northern Canada.

    The Canadian government estimates there are 630 First Nations across the country. A new tax on fuel, alcohol, cannabis and tobacco (FACT) sales in Indigenous communities was first floated by the federal government in its 2021 budget. A public consultation with Indigenous communities followed in 2022.

    In its 2023 budget, the government said: “Since fall 2022, productive discussions have taken place with Indigenous partners, and Indigenous communities have expressed interest in moving forward collaboratively.”

    The government’s 2024 budget outlines its plan to amend the FNGST Act to enable the FACT sales tax and add vaping products to the list of items that could be taxed.

    The government did not provide any estimate of the new taxation power’s potential revenue. Epp said one problem with the current FNGST system is that tax revenues are capped, and 95% of tax revenue over CAD1m (USD731,000) goes to the federal government, rather than to the First Nation where it was collected. “It’s still very much a paternalistic approach that doesn’t work,” he said.

    Epp is working to remove the existing FNGST revenue cap. In the meantime, his nation is charging a separate First Nations Tax on sales of alcohol, fuel and tobacco products. Epp said the First Nations Tax currently brings an annual CAD1m to CAD2m (USD1.5m) to his 750-member community. He estimates the government’s proposal could increase that by CAD3m (USD2.2m) to CAD4m (USD3m) per year.

    Epp said his nation has not allowed cannabis stores because it doesn’t yet have the power to tax cannabis sales. “With the FACT tax, the cannabis tax would open up a lot more revenue streams to us,” he said.

    – Elizabeth Thompson TobaccoIntelligence contributing writer

    Photo: Lise Savard

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    This article was written by one of TobaccoIntelligence’s international correspondents. We currently employ more than 40 reporters around the world to cover individual nicotine markets.

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