Antitobacco groups decry further delays in vape flavour restrictions

 Press Release

Vaping protection delayed is protection denied

Antitobacco groups decry further delays in vape flavour restrictions

December 9, 2024 – Ottawa, Montreal, Edmonton) – Three tobacco control organizations are repeating their call for Addictions Minister Ya’ara Saks to remove flavoured vaping products from the market quickly, as pledged earlier this fall. Recent Canadian studies provide further proof of the harms caused by the federal government’s three-and-a-half-year delay in finalizing regulatory restrictions on vaping flavours.

A study of data from the longitudinal COMPASS survey of Quebec high school students was made public this week, showing that high school students who vape become severely addicted to nicotine very quickly, typically within the first year.

“Flavours are the main driver of youth vaping,” said Flory Doucas, Co-Director and Spokesperson for the Quebec Coalition for Tobacco Control. “The sooner we remove the flavours that lure teenagers into e-cigarette use, the greater the number of young people who will be protected from severe and long-lasting addiction. Protection delayed is protection denied.”

New Canadian studies have identified that flavouring additives increase the harms caused by vapers. A research team based at McGill University recently showed that berry-flavoured vapes make it harder for lungs to fight off infections.

“These recent studies add to the longstanding evidence that youth are at risk and that vaping products are dangerous and highly addictive,’ said Cynthia Callard of Physicians for a Smoke-Free Canada. “Yet instead of accelerating flavour restrictions, Minister Saks seems to be kicking it further down the long road to effective protection.”

Last October, the federal government was reported as said the restrictions were coming “soon”, possibly even in November. Such signals prompted the pro-vaping lobby to launch new campaigns aimed at blocking the regulations, like writing to all ministers, generating thousands of robo-letters from their customer base, planning a news conference, etc. This week their spokesperson tweeted that Minister Saks office was inviting them to provide alternatives to flavour restrictions.

“While vaping companies and the groups they fund have a right to express their interests, we are calling on Minister Saks to resist their lobbying tactics and prioritize the health of our young generations and all consumers, by moving forward with vaping flavour restrictions as soon as possible,” added Ms. Callard.

Last September, the Canadian Vaping Industry accompanied by one of Canada’s largest online retailers, 180Smoke.ca, met jointly with Health Canada to express concerns regarding sale declines and the black market. “How hypocritical can the vaping industry get? 180smoke.ca is one of many retailers that shipped uncompliant vaping products to Quebec last April and October, undermining the provincial flavour ban and its taxation regime. 180smoke.ca is an executive member of the Canadian Vaping Association and its behaviour epitomizes the industry’s willingness to defy provincial restrictions. It is mind-boggling to consider that Minister Sak’s office or Health Canada would take seriously anything said by industry, its front groups or whatever mobilization these entities generate”, said Ms. Doucas.

Les Hagen, Executive Director for ASH Canada compared the delays in Canada to progress in other countries. “A growing number of jurisdictions, including China, Netherlands, Finland, and Hungary have prohibited flavoured vaping products except “tobacco” flavour and there are indications an EU-wide ban is in development. Yet despite Canada having one of the highest youth vaping rates, Health Canada has dragged its feet and left provinces without a way to defend provincial restrictions against vape stores that are willing to ship flavoured products across provincial boundaries.

“The decision by the Government of Canada to delay flavour restrictions is another gift to the tobacco and nicotine industry. Without it, they would find it much more difficult to easily recruit youth into nicotine addiction”, concluded Mr. Hagen.

Information :

▪ Cynthia Callard, Physicians for a Smoke-Free Canada: 613-600-5794;
▪ Les Hagen, Action on Smoking & Health (ASH Canada): 780-919-5546;
▪ Flory Doucas, Coalition québécoise pour le contrôle du tabac : 514-515-6780

Press Release - Feds called on to vote against proposed tobacco settlement

(November 20, 2024 – Ottawa, Montreal, Edmonton) – Three tobacco control organizations are calling on the federal government to cast its vote against the proposed tobacco settlement at the creditors meeting scheduled for December 12th.

Action on Smoking & Health, the Quebec Coalition for Tobacco Control and Physicians for a Smoke-Free Canada wrote the federal Ministers of Health and Addictions last week to encourage them to oppose the settlement plan that was made public in mid-October. Their letter was made public today.

The plan is aimed at resolving all of the lawsuits filed against Canada’s three largest tobacco companies over the past 25 years. After a Quebec court ordered the companies to pay $13 billion to injured Quebec smokers in March 2019 and facing even larger claims from provincial governments, the companies took refuge under Canada’s in insolvency laws in March 2019. Secret negotiations among claimants and the companies to resolve these lawsuits have been underway since then.

On October 17, a settlement proposal was made public and on October 31st the Ontario courts ordered that the companies’ creditors would vote on this proposed plan of arrangement on December 12th. The plan has been widely criticized by Canadian health organizations because it contains no measures to reduce the damage caused by this industry and incentivizes governments to maintain tobacco use.

The Canada Revenue Agency is among Imperial Tobacco’s creditors, which gives the federal government the right to vote on the plan as it would apply to that company. While health groups acknowledge that the federal claim on Imperial Tobacco is too small for its vote to have a direct impact on the outcome of the vote, the federal government’s approval or disapproval of this plan has enormous symbolic value.

Despite the primary role played by the federal government in regulating the tobacco industry and in otherwise protecting public health from harm, the negotiations which led to a proposal to sustain the tobacco industry for twenty years or more were conducted without federal participation.

The vote on December 12th is believed to be the first opportunity for the federal government to formally take a position on the settlement plan.

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Text of letter sent to Ministers of Health and Addiction, November 14, 2024

November 14, 2024

Hon. Mark Holland, MP, PC
Minister of Health

Hon. Ya’ara Saks, MP, PC
Minister of Mental Health and Addictions

Health Canada
Ottawa, Ontario
K1A 0K9

REQUEST THAT THE FEDERAL GOVERNMENT VOTE AGAINST THE TOBACCO SETTLEMENT PLAN

Dear Minister Holland and Minister Saks:

We are writing today to request that you take action to ensure that the Government of Canada casts its vote against the proposed settlement plan between Imperial Tobacco and its creditors (“the Plan” (1)).

A meeting to allow Imperial Tobacco’s creditors to vote on the Plan will be held on December 12th, 2024.(2) Because Imperial Tobacco identifies a debt to the Government of Canada of $333,535,110, the Government of Canada will be entitled to cast one vote at that time.(3)

We see no reasons why Canada should vote in support of this proposal and we identify many reasons that you should oppose it.

THE PLAN IS BAD FOR PUBLIC HEALTH

The Plan contains no measures to support the reduction of tobacco use or to improve public health. To the contrary, the Plan is designed to maintain revenues from tobacco sales in order to finance ongoing payments to provinces. It provides for the provinces to receive a percentage of the net revenues from tobacco sales (exclusive of excise and sales taxes) until $20 billion has been received, and forecasts that the companies’ revenues will be maintained at over $1 billion per year. Instead of helping to accelerate declines in commercial tobacco use, this Plan aims to perpetuate it for the foreseeable future.

The Plan does nothing to acknowledge, address or correct the harmful and wrongful actions of the tobacco industry. Quebec courts ruled that Canada’s three largest cigarette manufacturers acted illegally throughout the decades that were the subject of one of Canada’s longest civil tort trials. The companies were found guilty of failing to ensure that consumers were provided with information about the risks associated with their products, of misleading consumers by attacking the health information provided by others, of misleading consumers through their advertising and of violating the rights of Quebecers to life and personal security. (4, 5)

As Ministers responsible for protecting Canadians from the harms cause by this industry's products, you will be aware that these wrongful behaviours did not end in 1998, and that there are strong echoes of their past behaviour in their current marketing of novel nicotine products.

Instead of ensuring that the industry’s harmful actions do not continue, the Plan ensures that they will. It contains a set of covenants and undertakings by the companies, including a commitment that the "operational practices" they have established for selling tobacco will be maintained. The apparent goal of this covenant is to ensure that tobacco revenues and the payments that are based on them will remain high.

Vaping products, heated tobacco and nicotine pouches are carved out of the agreement. While there is no covenant or other undertaking which will require the industry to maintain the sales of these products, there are no measures included in it to modify corporate behaviour and to ensure that consumers of these products are provided with adequate information and are protected from misleading business practices.

THE PLAN IS UNJUST TO SMOKERS

The Plan would compensate a relatively small number of injured Canadian smokers: those whose lung cancers, throat cancers and emphysema were diagnosed in specific short timeframes.

Your departmental officials estimate that a million Canadians have died from tobacco use since the provincial lawsuits were first filed and that 48,000 more Canadians are killed by this industry’s products every year. This Plan proposes to extinguish the rights of almost all of these victims to compensation, including those having developed other smoking related cancers and cardiovascular morbidities.

In exchange for receiving a release from this past and current liability, the companies have agreed to fund research aimed of improving the treatment outcomes for smokers who become sick. No measures are included to prevent addiction and harms to new consumers or to help smokers quit or to support the traditional pillars of tobacco control. The Plan does nothing to improve the health of Canadians.

Moreover, the Plan is designed to be financed by the continued tobacco purchases of addicted smokers. Future payments to provinces depend on the continuation of financial and physical harm caused by tobacco addiction.

The compensation for injured smokers that is provided for in this plan is long overdue. There is enough money set aside to satisfy those claims immediately without imposing conditions that will injure other smokers.

THE PLAN HARMS CANADIAN TAXPAYERS

As Ministers responsible for health, your primary concern will not be with the financial impact of this proposal on the federal government, but on this score too there is reason for the federal government to oppose the Plan.

Because compensation payments are likely to be considered expenses for income tax purposes, the initial settlement payments will result in a loss of corporate income tax to the federal government. We estimate that this loss will be in excess of $1.8 billion in the short run, with a total loss of $5 billion over the 20 years.

The Plan will also impact the health care costs to which the federal government provides support through transfer payments to the provinces. By sustaining sales of conventional tobacco and doing nothing to curb the marketing of alternative nicotine products, the Plan will also sustain the illnesses and treatment costs caused by this industry. The analysis of the expert hired to quantify the tobacco related costs predicts that the diseases caused by this industry will continue to consume one-fifth of hospitalization costs, and that the smoking-attributable fraction of these costs will vastly exceed the value of the settlement payments.

CANADA HAS A DUTY TO PROTECT PUBLIC HEALTH FROM TOBACCO INDUSTRY INTERFERENCE

We remind you of the importance of Article 5.3 of the Framework Convention on Tobacco Control and the need to protect public health measures from tobacco industry interference.

This Plan has emerged after more than five years of secret negotiations between sub-national governments and the tobacco industry. The many ways in which this Plan favours the interests of the companies and interferes with the goals of reducing tobacco use suggests that the protection called for in the FCTC was not adequately provided.

The absence of clear national guidelines on Article 5.3 hindered the terms of engagement between tobacco companies and Canadian governments and likely the proposed plan itself. The FCTC is legally binding on participating governments including subnational jurisdictions.

We urge you to communicate the importance of voting against this Plan to your colleague, the Minister of Justice and Attorney General. How the federal government votes on this proposal will send an important signal to those responsible for consumer protection and public health.

(Signed by)

Les Hagen
Executive Director
Action on Smoking & Health

Flory Doucas
Co-Director
Coalition québécoise sur le contrôle du tabac

Cynthia Callard
Executive Director
Physicians for a Smoke-Free Canada

***

1. The proposed plan was developed by the monitors and mediator in the CCAA proceedings involving Canada’s three major tobacco companies. A copy of the plan is contained in the following linked document: In the matter of the Companies' Creditors Arrangement Act, RSC 1985, C-36, as amended and in the matter of a plan of compromise or arrangement of Imperial Tobacco Canada Limited and Imperial Tobacco Company Limited. Motion for Claims Procedure Order and Meeting Order returnable October 31, 2024. October 17, 2024.

2. In the matter of the Companies' Creditors Arrangement Act, RSC 1985, C-36, as amended and in the matter of a plan of compromise or arrangement of Imperial Tobacco Canada Limited and Imperial Tobacco Company Limited. Meeting Order. October 31, 2024

3. In the matter of the Companies' Creditors Arrangement Act, RSC 1985, C-36, as amended and in the matter of a plan of compromise or arrangement of Imperial Tobacco Canada Limited and Imperial Tobacco Company Limited. Claims Procedure Order. October 31, 2024

4. Létourneau c. JTI-MacDonald Corp. 2015 QCCS 2382

5. Imperial Tobacco Canada ltée c. Conseil québécois sur le tabac et la santé. 2019 QCCA 358

 

The tobacco settlement will cost Ottawa $5 billion in lost tax revenue (and much more in health impact)

 The federal government seemingly had a very minor role in the mediation between tobacco companies and the provincial governments that were suing them to recovery health care costs. That may prove to be a problem. 

The proposed plan that has emerged from these discussions - and that will be subject to a creditors' vote on December 12 - suggests that the federal (and national) interests may have been compromised by this deal that was brokered in secret over the past 5 years. 

This post identifies the financial downsides to the federal government from this deal. A future post will look at the public health implications.

Next year, Revenue Canada is set to issue $1.8+ billion in settlement-related tax refunds (and will lose $150 million per year for the subsequent 20 years)

Over the past 5+ years, the companies have been required to preserve all of their income and to set it aside to resolve their debts. The $12.5 billion that has been amassed so far will be used to provide upfront damage payments to class actions and provinces. Over the next 20 or so years, the remaining $20 billion of the damages promised will be paid in annual installments.

The cash reserve was built from the after-tax income of the tobacco companies. Now that this "income" is being converted into "damages", the corporate income tax of the companies will be reassessed and the income tax paid in those years will be refunded. This expectation is clearly identified in the settlement, and is several times referred to as "Tax Refund Cash Payment".

Based on a federal corporate income tax rate of 15%, the amount refunded by the federal government for the upfront damage payments of $12.45 billion will be in the order of $1.8 billion. The cost to the federal treasury for the remaining $20 billion will be $3 billion: with an annual loss of $150 million if the repayment rate follows that forecast by the plan. The total cost to the federal treasury will thus be around $4.8 billion.

Corporate income tax paid to provinces will also be refundable. Because their tax rates are lower, the refund will be smaller. Presuming a provincial corporate income tax rate of 10%, this will reduce the real value of the settlement payments to the provinces by 10%, or $2.47 billion.

From the perspective of Canadian citizens - who are implicated in the finances of both federal and provincial governments - the true value of the settlement payments is diluted by the impact on both provincial and federal corporate income tax revenues. 

The true value to the collective public purse of the provincial settlements is thus reduced by these tax implications from $24.725 billion to $18.54 billion. Once payments to outside counsel, discussed here earlier, are also factored in, the true value falls by a further $1.77 billion, to $16.77 billion.  Lost income taxes and legal fees thus reduce the societal value of the settlement by one-third.

Revenue Canada is owed hundreds of millions - the Plan does not provide for repayment 

When Imperial Tobacco applied for creditor protection in March 2019, it identified a debt to Canada Customs and Revenue Agency of more than $500 million.  When the vote is taken on December 12, this debt to the government of Canada is reduced (without explanation) to $333,535,110.  There is no provision in the proposed plan for this amount to be repaid to the federal government. Justice Morawetz commented on this during the hearing on October 31st, noting that there may be other provisions in law which apply to amounts owing to government.

If this debt is not repaid, the federal government will be out of pocket by more than a decade's value of the yet-to-be-implemented Tobacco Cost Recovery Framework. 

Ottawa will help pay for the continued smoking that is built into the settlement

The federal government provides a significant portion of the health care costs for which the provincial governments sought recovery. Yet there is no indication that the any of the payments made by tobacco companies to the provinces will be shared with federal government, or that Ottawa will be off the hook for its share of the escalating health care costs caused by smoking.

Economist Glenn Harrison was engaged to calculate the costs to provincial health care systems resulting from tobacco use, with separate calculations for tobacco use by people who became addicted before 1996. His report, included as appendix "G" in the proposed plan, provides these estimates for each province in graphical form. 

Mr. Harrison's estimate for Ontario, shown above, suggests that the cost of treating smoking-caused diseases will continue to rise for the next quarter century: with an estimated annual cost of $6 billion in 2030 and $7 billion in 2040. The situation is similar in all provinces. 

Because of the Canada Health Transfer, Ottawa is a stakeholder in provincial health care systems, and is affected by the provisions in the proposed plan to impose a covenant on companies that they will maintain their business practices to ensure the continued sale of cigarettes.

 The federal government seemingly had a very minor role in the mediation between tobacco companies and the provincial governments that were suing them to recovery health care costs. That may prove to be a problem. 

The proposed plan that has emerged from these discussions - and that will be subject to a creditors' vote on December 12 - suggests that the federal (and national) interests may have been compromised by this deal that was brokered in secret over the past 5 years. 

This post identifies the financial downsides to the federal government from this deal. A future post will look at the public health implications.

Next year, Revenue Canada is set to issue $1.8+ billion in settlement-related tax refunds (and will lose $150 million per year for the subsequent 20 years)

Over the past 5+ years, the companies have been required to preserve all of their income and to set it aside to resolve their debts. The $12.5 billion that has been amassed so far will be used to provide upfront damage payments to class actions and provinces. Over the next 20 or so years, the remaining $20 billion of the damages promised will be paid in annual installments.

The cash reserve was built from the after-tax income of the tobacco companies. Now that this "income" is being converted into "damages", the corporate income tax of the companies will be reassessed and the income tax paid in those years will be refunded. This expectation is clearly identified in the settlement, and is several times referred to as "Tax Refund Cash Payment".

Based on a federal corporate income tax rate of 15%, the amount refunded by the federal government for the upfront damage payments of $12.45 billion will be in the order of $1.8 billion. The cost to the federal treasury for the remaining $20 billion will be $3 billion: with an annual loss of $150 million if the repayment rate follows that forecast by the plan. The total cost to the federal treasury will thus be around $4.8 billion.

Corporate income tax paid to provinces will also be refundable. Because their tax rates are lower, the refund will be smaller. Presuming a provincial corporate income tax rate of 10%, this will reduce the real value of the settlement payments to the provinces by 10%, or $2.47 billion.

From the perspective of Canadian citizens - who are implicated in the finances of both federal and provincial governments - the true value of the settlement payments is diluted by the impact on both provincial and federal corporate income tax revenues. 

The true value to the collective public purse of the provincial settlements is thus reduced by these tax implications from $24.725 billion to $18.54 billion. Once payments to outside counsel, discussed here earlier, are also factored in, the true value falls by a further $1.77 billion, to $16.77 billion.  Lost income taxes and legal fees thus reduce the societal value of the settlement by one-third.

Revenue Canada is owed hundreds of millions - the Plan does not provide for repayment 

When Imperial Tobacco applied for creditor protection in March 2019, it identified a debt to Canada Customs and Revenue Agency of more than $500 million.  When the vote is taken on December 12, this debt to the government of Canada is reduced (without explanation) to $333,535,110.  There is no provision in the proposed plan for this amount to be repaid to the federal government. Justice Morawetz commented on this during the hearing on October 31st, noting that there may be other provisions in law which apply to amounts owing to government.

If this debt is not repaid, the federal government will be out of pocket by more than a decade's value of the yet-to-be-implemented Tobacco Cost Recovery Framework. 

Ottawa will help pay for the continued smoking that is built into the settlement

The federal government provides a significant portion of the health care costs for which the provincial governments sought recovery. Yet there is no indication that the any of the payments made by tobacco companies to the provinces will be shared with federal government, or that Ottawa will be off the hook for its share of the escalating health care costs caused by smoking.

Economist Glenn Harrison was engaged to calculate the costs to provincial health care systems resulting from tobacco use, with separate calculations for tobacco use by people who became addicted before 1996. His report, included as appendix "G" in the proposed plan, provides these estimates for each province in graphical form. 

Mr. Harrison's estimate for Ontario, shown above, suggests that the cost of treating smoking-caused diseases will continue to rise for the next quarter century: with an estimated annual cost of $6 billion in 2030 and $7 billion in 2040. The situation is similar in all provinces. 

Because of the Canada Health Transfer, Ottawa is a stakeholder in provincial health care systems, and is affected by the provisions in the proposed plan to impose a covenant on companies that they will maintain their business practices to ensure the continued sale of cigarettes.

As a creditor of Imperial Tobacco, the government of Canada will have 1 vote on December 12th on the version of the plan that would apply to that company.  For the reasons outlined above, there is every financial reason for it to say "no".

The proposed tobacco settlement mandates continued cigarette sales for 20+ years

There are many good reasons to doubt the sincerity of tobacco companies when they say they want to end the sale of combustible cigarettes.   There are no good reason for provincial governments to have included a requirement that they keep selling conventional cigarettes for decades to come.

This post reports on the "covenant" to maintain tobacco sales that is contained in the settlement made public last week. 

The covenants

Under each of the three individualized forms of the settlement, each company has undertaken to "not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability ...  to satisfy its obligations under the CCAA Plan..."

In short, once this settlement agreement is formally approved by the provinces and by the Ontario court overseeing the insolvency, the companies will be obliged to maintain their tobacco trade with the same enthusiasm and marketing tools that are currently in place. 

Two structural elements of the settlement have led to this condition: (1) the deferral of payments to the provinces over a period of decades and (2) the exclusion of "alternative products" from the terms of the settlement.

Deferred payments 

Most of the money paid to the provinces will come in installments that are spread out over many years. Although $6 billion will be paid from the $12.5 billion in savings that were safeguarded during the years of insolvency protection, the remaining $19 billion in provincial payments will be taken as a percentage of the companies future income on tobacco sales. 

For the first 5 years, the companies will provide 85% of their income, but after every 5 year period the proportion steps down by 5% (Year 6 to 10 at 80%, years 11 to 15 at 75%, etc.) 

Included in the settlement document is a chart ("Estimated Upfront Contribution Available") which forecasts the amount that will be paid in the near future. Between now and 2030, the companies forecast providing about $1 billion per year to the provinces. At that rate, their debt to the provinces will not be met until after 2045.

Because of their covenant, for the next 20-plus years the companies have a legal obligation to maintain current efforts to sell tobacco products

Exclusion of "alternative products"

Payments to the provinces come from tobacco sales, but not from the sale of vaping or heated tobacco products. All "alternative products" are carved out of the CCAA Plan.

To make this exclusion more overt, the companies are required to set up separate companies to manage the sale of these alternative goods. This is largely already the case, in the sense that different corporate structures exist for newer products: for example, Nicoventures is a corporate subsidiary of  BAT. 

“Alternative Product” means (i) any device that produces emissions in the form of an aerosol and is intended to be brought to the mouth for inhalation of the aerosol without burning of (a) a substance; or (b) a mixture of substances; (ii) any substance or mixture of substances, whether or not it contains tobacco or nicotine, that is intended for use with or without those devices to produce emissions in the form of an aerosol without burning; (iii) any non-combustible tobacco (other than smokeless tobacco) or nicotine delivery product; or (iv) any component, part, or accessory of or used in connection with any such device or product referred to above."

The settlement thus provides the companies with an incentive to increase the sales of these newer nicotine products because they can keep all of the revenue. At the same time, they are under an obligation to maintain tobacco sales. The settlement thus puts pressure on the system to increase overall nicotine use. 

Links to each company's proposed agreement and the covenant to maintain tobacco sales. 

Imperial Tobacco:  (British American Tobacco)

ARTICLE 11. COVENANTS AND OTHER PAYMENT ASSURANCE
11.1 Covenants
...

(g) Imperial and its Material Subsidiaries shall conduct their businesses in good faith with a view to fulfilling their obligations pursuant to the Definitive Documents, and shall not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability of Imperial to satisfy its obligations under the CCAA Plan including, the ability of Imperial to pay the Upfront Contributions, Tax Refund Cash Payments and/or Annual Contributions within the Contribution Period; 

JTI-Macdonald  (Japan Tobacco)

ARTICLE 11. COVENANTS AND OTHER PAYMENT ASSURANCE
11.1 Covenants
...

(g) JTIM and its Material Subsidiaries shall conduct their businesses in good faith with a view to fulfilling their obligations pursuant to the Definitive Documents, and shall not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability of JTIM to satisfy its obligations under the CCAA Plan including, the ability of JTIM to pay the Upfront Contributions, Tax Refund Cash Payments and/or Annual Contributions within the Contribution Period; 

Rothmans, Benson & Hedges (Philip Morris)

ARTICLE 11. COVENANTS AND OTHER PAYMENT ASSURANCE
11.1 Covenants
...

(g) RBH and its Material Subsidiaries shall conduct their businesses in good faith with a view to fulfilling their obligations pursuant to the Definitive Documents, and shall not conduct their businesses and operations, divest assets, rearrange ownership, and/or alter their corporate structures, and/or operational practices, in any manner that circumvents or is adverse to the ability of RBH to satisfy its obligations under the CCAA Plan including, the ability of RBH to pay the Upfront Contributions, Tax Refund Cash Payments and/or Annual Contributions within the Contribution Period; 

A closer look at the claims and payments in the proposed settlement

This post focuses on the amount of compensation that would flow to provincial governments, injured smokers and other parties under the proposed settlement between tobacco companies and those suing for damages.

The figures shown below (and in the downloadable fact sheet) are taken from the version of the settlement that is written with BAT-Imperial Tobacco Canada in mind. 

Two and a half cents on the dollar for provincial governments 

The overall claims of the provinces were not based on their initial court filings, but were established through a bespoke formula provided by a consultant (Dr. Glenn Harrison) and detailed in Schedule "G" to the settlement. The claims of the provinces totalled $944.5 billion, making up 98% of the total claims of $964.1 billion. 

A total of $32.5 billion is provided for in the settlement, representing 3.4% of the total identified claims. Each province will receive 2.6% of the amount of its claim, and the total to be provided to provinces is equal to 76% of the payments. 

Thirty to fifty cents on the dollar for eligible smokers.

Quebec class action victims were awarded $13.7 billion by Quebec courts and will receive $4.12 billion. Ignoring inflation, they will receive 30% of their court award. Their claim represents 1.42% of the total claims and 12.7% of the payments.

The Pan Canadian Claimants (smokers in other parts of Canada) will receive 50% of the calculated equivalent of the amount awarded to Quebec claimants, albeit with different eligibility criteria based on limitation periods. Their claims make up 0.52% of the total claims and 7.8% of the payments

Other payments

Tobacco farmers will receive 51.6% of their claim of $29 million dollars (about 3 hundredths of a percent of the total claims)

A foundation will be created, and $1 billion will be provided for its operations. This represents about 3% of the total compensation.

Health voices condemn the provincial tobacco settlements

Late in the day on Thursday, October 17th, a proposed settlement was made public. This settlement would resolve the lawsuits filed by provincial governments, the class action lawsuits filed on behalf of injured smokers and a few other small claims. 

This post reports on the response to the settlement by public health agencies and leaders. 

The terms of the settlement with the provincial government have been widely criticized for their failure to include measures to reduce smoking or to modify the tobacco trade. The portion of the settlement which resolves class action claims has received widespread support.

Representative extracts of media statements and press releases are shown below. 

----------------------------------

Action on Smoking & Health, Physicians for a Smoke-Free Canada, Quebec Coalition for Tobacco Control: Provincial governments have squandered a unique and historic opportunity to put an end to the tobacco industry
Press release, October 17, 2024.

Apart from the compensation to victims or their descendants in Québec and in the rest of Canada, which is the only positive component of this deal, there is little public health benefit to be found in this arrangement. The settlement provides no roadmap aimed at preventing these very same companies from causing more damage by recruiting new victims, including through new enticing nicotine gadgets.

Despite the tobacco industry having its back against the wall, the provinces choose to negotiate themselves a cash windfall without bothering to change the corporate behaviour at the core of the lawsuits. Provinces have deliberately agreed to allow Big Tobacco to maintain its business model extracting profits from addiction and harm in perpetuity. They have shamelessly turned a blind eye to the damage these very same companies will inflict on future generations.

Canadian Cancer Society criticizes proposed tobacco settlement as inadequate
Press release, October 18, 2024

"The approach in the proposed settlement falls massively short and fails to protect the future health of Canadians properly," says Rob Cunningham, lawyer for the Canadian Cancer Society. "How can such an approach possibly be justified when we continue to have millions of Canadians who smoke each year and while tobacco remains the leading cause of cancer death? This settlement fails to support public health efforts to reduce smoking."

The Canadian Lung Association responds to proposed settlement in tobacco lawsuits
Statement, October 18, 2024

We feel that the proposed settlement is not only monetarily insufficient but missing key measures that would prevent the tobacco industry from returning to business as usual.

We urge the government and all parties involved to reconsider this proposed settlement and seek a just outcome that truly addresses the devastating consequences of tobacco-related harm. Canadians have the right to expect a fair and equitable resolution that holds the tobacco industry accountable for its actions and provides adequate compensation for those affected while ensuring that the right supports are in place to protect generations to come.

Campaign for Justice on Tobacco Fraud: Tobacco Settlement Cave In
Press release, October 21, 2024

Tobacco lawyers would argue that the Companies Creditors Arrangement Act exists to ensure the long-term viability of companies that seek protection. We hold that governments ultimately hold all of the cards, legislation, and could have used their muscle in these talks if they had been committed to public health.

"This settlement is an embarrassment," said Mahood. "Other than providing payments to Quebec smokers harmed by the industry and due via a class action court award, the settlement has no redeeming value. It should be abandoned, not the kids who will be harmed by an industry restored to good health."

Michael Chaiton, Senior Scientist, CAMH
City News, October 18, 2024

“The lesson of these lawsuits is that cigarettes … should not be a profitable consumer product and that there are alternatives available, he said."

“Functionally, I think some of the settlement protects the companies to allow them to continue to sell those products in particular, rather than switching over.”

David Hammond, Professor, University of Waterloo
City News, October 18, 2024

"Their business practices essentially haven't changed and won't change," said Hammond.

"The industry still generates billions of profits from cigarettes, and so I think they will continue the practices that have been generating that revenue."

Rob Cunningham, Canadian Cancer Society
CBC News, October 18, 2024

Rob Cunningham, senior policy analyst for the Canadian Cancer Society, says the proposal does not go far enough. He's calling on the provinces to make changes before it's approved.

"This proposed settlement contains nothing to actually reduce smoking," Cunningham said Friday in an interview with CBC News Network.

Cynthia Callard, Physicians for a Smoke-Free Canada
National Post, October 18, 2024

Callard said the provinces could have taken a much different approach to this suit focused on winding down the industry.

“The government had the option to force the companies into bankruptcy and to find an orderly way to wind up down their business and to actually chase out smoking. Instead, they’ve given them carte blanche to operate,” she said.

Callard said she expects the proposed deal will go through. She said while the deal is a disappointment it is also an opportunity for governments to step up and do a better job regulating the industry, both cigarettes and vaping, because they have failed to do so in the past.

“Obviously, the industry did wrong, it hurt people, that’s what they’re settling about. But governments stood back in those years and let the company operate in that inadequately regulated way,” she said.

Provinces, class actions and tobacco companies reach a deal.

This evening a proposed settlement to resolve the many Canadian tobacco lawsuits was made public. The 1437 page draft agreement can be downloaded here. 

The litigation efforts behind this effort have spanned a generation. The first provincial lawsuit was filed by British Columbia in November 1998 and resubmitted in January 2001). During this time, tobacco companies continued to sell cigarettes, governments continued to collect taxes, and smokers continued to die. 

Over the past 66 months, there has been complete secrecy by the provincial governments in their handling of negotiations with tobacco companies. With the proposed settlement now made public, there is an opportunity for legislators and the public to engage in an assessment of the proposal and to offer guidance to government with respect to the next steps in this process.

In evaluating the proposal, Canadians might consider the following questions:

• Will this settlement change the behaviour of the tobacco companies? 
• Does this settlement provide justice to smokers?
• Are there important and relevant issues which are not resolved by this settlement?

Included in the plan

In brief, the plan proposes that the companies will pay a total of $32.5 billion, of which the amount that has been held in reserve during the insolvency process (about $12.5 billion) will be available after the agreement is approved by court. $20 billion will be provided to provincial governments in deferred payments.

* $24.8 billion will be paid to the provinces, including a deferred payment of about $18 billion. This will settle the claims of over $500 billion filed by the provinces since 2001.  Unlike the U.S. agreements, these payments will be made as a percentage of revenue from tobacco sales, starting with a remittance of 85% of net after tax income from tobacco sales. (The companies will keep all of their revenue from vaping or other products). 

* $6.75 billion will be paid to some smokers who have suffered from lung cancer, throat cancer or emphysema. Of this, $4.25 billion will be paid to smokers in Quebec whose claim was upheld by the Quebec courts following a class action suit. $2.5 billion will be paid to injured smokers in other parts of Canada, even though there were no lawsuits resolved for these cases.  Up to $100,000 will be paid to each Quebec victim, and up to $60,000 to each victim in other parts of Canada. Money for these payments will be made available soon after the agreement is approved by court.

* $1 billion will be used to establish a foundation focused on activities to support victims who do not direct compensation. $131 million from the Quebec Class Action will be directed to this fund. These payments will not be deferred.

* Lesser amounts to additional claimants (tobacco farmers, the "Knight" class action", etc). 

Not included in the plan

This agreement contains no admission of liability on the part of the companies. Nor does it include any concessions or undertakings by the industry with respect to the way they market tobacco, nicotine or other products. 

The next steps

Because this settlement is being negotiated through Canada's insolvency laws, the settlement is not final until the provincial government, class action and other "creditors" of the three companies vote to approve it. That vote is scheduled for December 12, 2024.  Court hearings to formally approve the agreement would be held at a later date.

A claims procedure has been established for injured Quebec smokers, who can submit their claim through the following portal: www.recourstabac.com

Financial Context:

Over the period of these lawsuits:

• 784,000 Canadians have died as a result of tobacco use.
  Under the settlement the companies will pay just over $40,000 for each Canadian killed by their products in the last 24 years. 
• Canadian governments have collected $166.6 billion in tobacco taxes ($98.7 billion by provincial and $68.9 by the federal government.) 
  Under the settlement, the companies will pay the equivalent of a 20% increase in the tobacco taxes they collected from smokers over the past 24 years. 
• Over 666 billion cigarettes (33 billion standard packages) have been legally sold 
  Under the agreement, the companies will pay the equivalent of $1 for each package of cigarettes sold over the past 24 years. 
• Industry revenue from cigarette sales has exceeded $72 billion.
  Under the agreement, the companies will pay about 40% of their cigarette revenue over the past 24 years.

Mistakes happen

The bad news is that the data from the Canadian Community Health Survey released by Statistics Canada earlier this week were incorrect. The good news is that the growth in vaping rates is lower than indicated by the data published on Wednesday.

Statistics Canada reached out earlier today to inform us that "the numbers cited in your message have actually been revised for the 2022 reference period. When we published yesterday, we had not known that there was an error in the coding of the indicator for past 30 day vaping/e-cigarette use. ... we have released the corrected numbers for 2022 (Health indicator statistics, annual estimates (statcan.gc.ca)), which show 1.7 million vapers or 5.7% of the adult population, rather than the numbers we had mistakenly published yesterday (1.3 million/4.8%)."

The corrected figures are shown below:

The growth in the vaping population as measured by this survey between 2022 and 2023 was thus 168,700. We still do not know whether these individuals are people who used vaping to quit smoking, or whether vaping products are their introduction to nicotine use, or whether they both smoke and vape. Such tabulations are not difficult, but they require access to the data files (not currently available to non-University-based researchers).

Information on smoking status was readily available to the public when the Canadian Tobacco and Nicotine Survey was in the field from late 2019 to early 2013. The last wave of that now-defunct survey found 240,100 more vapers in 2022-23 than in 2021-22. Of those, 206,900 (86%) were never smokers. 

Health Canada needs a new legislated purpose for tobacco

This post discusses the increasing importance of amending the Tobacco and Vaping Products Act to give Health Canada a broader scope for action and clearer instructions from Parliament. This reflection is prompted by two actions recently taken by Health Canada.

The first of these was the release of the department's proposed framework for cost recovery from tobacco companies.  As reported here earlier, the department's capacity to apply the polluter pay principle to this industry is severely limited by the narrowly-constructed purpose of the current law. Only those costs which are linked to the legislative objectives of the Tobacco and Vaping Products Act (TVPA) can be claimed from the industry.

The second action was the Ministerial Order made public and formally published in August which set specific rules for the marketing and distribution of nicotine pouches regulated under the Food and Drugs Act (FDA). The order is a reminder that as tobacco companies morph into other product categories, health authorities need flexible and wrap-around powers to manage this transformation. The 'belt' of this Ministerial Order would be more secure if the department had the 'suspenders' of integrating the use of these products in its tobacco strategy.

The TVPA's purpose is well past its best before date

The TVPA's purpose was conceived in the 1980s and reflects the priorities and limitations of that era. Despite two major legislative overhauls, the intent and purpose of the federal tobacco law has not substantially changed in almost 40 years. 

The evolution in the purpose of the Tobacco Products Control Act (1988), the Tobacco Act (1997) and the Tobacco and Vaping Products Act (2018) is shown below and can be downloaded here. The articulated purpose is limited to (a) preventing people from starting to use vaping or tobacco products and (b) providing information and countering disinformation on health risks of vaping or using tobacco products. 

The tobacco industry has gone through substantial re-invention since that mandate was conceptualized, and Canadian support for stronger laws has steadily grown. Nonetheless, Parliament has not returned to its vision of how to manage tobacco and has yet to give Health Canada stronger powers and clearer directions on how to manage the problems caused by this industry. 

The current law does not authorize Health Canada to adopt strategies to end tobacco use -- or even to promote smoking cessation. It sets no goals to reduce the number of people who smoke, or to reduce the injuries caused by these products. The vagueness of this legislated mandate is reflected in the minimalist documentation for "Canada's Tobacco Strategy". The narrowness of the legislative mandate means that Health Canada will have difficulty demanding that the industry pay for many of the costs that it causes.

Parliament has given Health Canada clear instructions in other laws

The Canadian Environmental Protection Act (CEPA) provides an example of an expanded and robust legislative purpose, and is a model for how the TVPA could re-invigorate the federal strategy. Like the tobacco law, CEPA was first passed by Parliament in 1988. It however, has been the subject of more detailed Parliamentary study. Parliament's instructions to CEPA are outlined in 3 mutually-reinforcing sections:

1) DECLARATION. A 35-word legislative objective that gives the law broad application: "It is hereby declared that the protection of the environment is essential to the well-being of Canadians and that the primary purpose of this Act is to contribute to sustainable development through pollution prevention."

2) PREAMBLE. An 800 word expansion of the values behind the law, with 24 clauses outlining specific values.

3) DIRECTION. CEPA gives a dozen or more specific instructions to the federal government in how the law should be administered. Examples of these obligations include a mandate to ... "apply the precautionary principle ....", "protect the right of every individual in Canada to a healthy environment...", "take the necessity of protecting the environment into account in making social and economic decisions."

The CEPA approach can be adapted for tobacco control

Adapting the CEPA approach to modify the federal tobacco law would provide a number of benefits and could help:

• clarify the goals that should guide Health Canada's strategy
• expand the scope of activities that can be charged to the tobacco and nicotine industry
• provide instructions, guidance and support to health ministers in managing this long-standing health problem
• authorize the department to engage in activities to discourage the use of nicotine products other than tobacco- and vaping products.
• provide the public with transparency about the mandate of Health Canada

An example of a revised purpose section is shown below (and can be downloaded here). This text adds only 200 more words to the law, but greatly expands and clarifies Health Canada's responsibilities. 

In this example, the core purpose of the federal tobacco law is simply stated: "The primary purpose of this Act is to contribute to the elimination of the harms to human and environmental health caused by commercial tobacco and nicotine products."

The suggested text instructs Health Canada on key aspects of addressing the harms caused by the tobacco industry. These include: 

• Developing a nicotine reduction strategy with measurable objectives 
• Fully implementing the Framework Convention on Tobacco Control
• Respecting and supporting traditional non-commercial tobacco use in First Nations
• Adopting measures to protect the environment with respect to tobacco and nicotine products
• Reducing health disparities with respect to the use of tobacco and nicotine products
• Appling the precautionary principle.

Filling a crucial gap

As it is currently written, the TVPA governs tobacco products (those made with tobacco) and vaping products (aerosolized nicotine) but has no power over novel nicotine products. Nicotine pouches are one example of tobacco industry products which are left unaddressed in the law, but there are others on the horizon. 

Over the last year Philip Morris began selling its zero-tobacco LEVIA heat sticks in Czechia, and  Romania and over the past month has launched them in the Netherlands. (They have signalled their intention to market them in Canada by registering the trademark). BAT also sells a tobacco-free heat stick. Both companies also have hybrid products (mixture of vaping and heated tobacco) in development or on the market.

It is not too early to anticipate that these products will be introduced to Canada, whether or not they are legal for sale under federal law. In its public documents (including the Departmental Plan) Health Canada has not made public whether or how it is analyzing the potential benefits or harms of these products being sold in Canada. 

Our organization is among those calling for a fulsome revision and modernization of the federal law, but Health Canada has largely responded to these recommendations by ignoring them. The proposed revisions to the purpose and direction sections would give the department the responsibility and authority to initiate this process.

Canada's Health Minister breaks new ground to regulate nicotine pouches

Physicians for a Smoke-Free Canada joined other health agencies and concerned Canadians in applauding the Health Minister for ordering Imperial Tobacco (British American Tobacco) to change the way it markets nicotine pouches in Canada

"The measures announced today will put these novel nicotine products where they belong: behind the pharmacist's counter," said executive director Cynthia Callard. "The new controls will protect kids by ending advertising, labelling and flavourings which are inappropriate for smoking cessation aids."

"By the time Canadian children are back in the classroom, these products will no longer be displayed and sold in the convenience stores where kids stop to buy snacks or candies."  The Ministerial Order will require Zonnic pouches to be removed from convenience stores and gas stations before Labour Day weekend. 

ZONNIC display at 
Giant Tiger, Wellington St,
Ottawa. Aug 2024

Nicotine pouches are small sachets containing plant fibre, nicotine,  flavourings and sweeteners. In Canada they are not permitted for sale as tobacco products. Instead they are regulated as Natural Health Products and are subject to the same rules as traditional nicotine replacement products like gum and patches. 

In July 2023, Imperial Tobacco became the first company to receive authorization from Health Canada to sell nicotine pouches as smoking cessation products. When the products entered the market in the early fall, Canadians were alarmed to see the company was using lifestyle imagery and marketing strategies similar to those they used to sell cigarettes, and at the absence of regulations which would prevent this from happening. 

"We are deeply appreciative of the urgency with which Minister Holland responded to these concerns, and of the measure he is taking to ensure that the marketing of nicotine pouches is appropriate for their authorized use," said Ms. Callard. 

"We also want to acknowledge the speedy contribution of departmental officials who designed flexible and tailored regulatory tools to protect vulnerable citizens, and to thank the parliamentarians who gave the Minister the authority to use these new powers in late June. We also value the initiative of governments like British Columbia which initiated some of these restrictions."

Ms. Callard noted that health departments in other countries are also grappling with the recent introduction of nicotine pouches and their growing popularity among youth. "By making Canada the first country where nicotine pouches are dispensed by pharmacists and where flavours are restricted,  Minister Holland is setting an important regulatory precedent." (Australia allows e-cigarettes (vaping products) to be sold only through pharmacies.)

"We can expect tobacco companies and their retail allies to use their their extensive legal and public relations resources to try to defeat these measures." cautioned Ms. Callard. "Canadians should apply the 'scream test' to their response: the more the industry objects to a measure, the more important it is to implement it."

"This fall Canadian children will be better protected from nicotine addiction, but much more needs to be done," said Ms. Callard. "Minister Saks has not finalized the federal regulations to restrict e-cigarette flavours. As a result, this back-to-school season will see even more kids experiment with and become addicted to these fun flavoured products." 

Nicotine pouches are regulated under the Food and Drugs Act (which is the responsibility of Health Minister Mark Holland) and tobacco and vaping products are regulated under the Tobacco and Vaping Products Act (which is the responsibility of Minister of Addictions Ya'ara Saks). 

Health Canada's Tobacco Cost Recovery Fee: no new money, but more administration

Responses to consultation on the
tobacco cost recovery
framework are
due by October 10

This week Health Canada formally articulated how it intends to collect and spend the tobacco cost-recovery fee which was mandated by the Prime Ministers office some 31 months ago.  The details are provided in the Consultation document: Proposed tobacco cost recovery framework, with public comments being invited until October 10th.

This document confirms that Health Canada's budget for tobacco control will not increase as a result of tobacco companies being charged for a sub-set of its tobacco control activities. 

What will significantly increase is the administrative burden on the tobacco control directorate. Some staff will be redirected from health-oriented activities to financial administration.

This post identifies eight concerns about the proposed framework. A subsequent post will suggest ways to overcome some of these challenges.

Health Canada's proposal in brief:

As described in the consultation document, the federal government proposes that:

1. The budget for Canada's Tobacco Strategy will be continued at the levels set in 2018, with $66.2 million allocated to cover the activities of the six federal departments involved. There has been no inflationary increase and none is forecast, meaning the budget is worth 17% less than when set in 2018 and continues to devalue.

2. Three of the departments involved (Health Canada, Public Health Agency and Indigenous Services) will monitor how much they spend in a given fiscal year on eligible expenses. Eligible expenses are for activities (a) connected to conventional tobacco products and (b) related to the purpose of the Tobacco and Vaping Products Act. 

4. Health Canada will require tobacco manufacturers to provide a statement at the end of each April saying how much revenue they received from sales in Canada in the previous fiscal period (April 1 to March 31).

5. On October 1st of each year, Health Canada will issue an invoice to each manufacturer (unless their market share is under 0.001%). The amount of each company's invoice will be the total eligible expenses times that company's share of tobacco revenues. The companies will be given one month to submit payment.

6. The costs of administering this program will be taken from the existing tobacco control budget.

Concern #1: The cost-recovery fee will recover only a fraction of the federal costs related to tobacco industry products

The cost-recovery fee will apply only to activities which are related to the use of traditional tobacco products and which are carried out by Health Canada, the Public Health Agency and Indigenous Services Canada. The current tobacco-control budget for those three agencies is $55.3 million - but much less than that will be recoverable. 

Even though the youth vaping and pouch-use crisis is arguably the most pressing issue facing the health department and even though tobacco companies contribute largely to this problem, none of the federal costs for nicotine use outside of conventional tobacco will be charged to the companies.

The activities of half of the federal departments involved will not be included in the program. These represent 15% of the budget for Canada's Tobacco Strategy. Similarly, federal costs by other departments which do not participate in the strategy will not be recovered. Examples of such activities include developing strategies to address plastic filter waste, managing smoking in federally-regulated workplaces, or addressing the tobacco-related health costs of prisoners, the military, etc.

Concern #2: The objectives of the Tobacco and Vaping Product Act are so narrow that the department will face challenges in assessing fees for many activities.

There are further restrictions in applying the fee to federal activities related to traditional tobacco products. As stipulated in the law that permits the fee, the department can only use the fee to recoup "costs incurred by His Majesty in right of Canada in relation to the carrying out of the purpose of this [Tobacco and Vaping Products] Act, including regulations." 

The purpose of the Tobacco and Vaping Products Act (TVPA) is narrow and arguably antiquated. This section of the law was drafted in the mid 1980s as part of the Canada's first efforts to impose regulatory controls on the industry and at a time when the priorities and challenges were very different than today. 

The law is silent about encouraging cessation, preventing addiction, protecting people from second-hand smoke, or reducing environmental and economic harm caused by this industry.

The TVPA has 4 specific objectives with respect to tobacco:

• "To protect young persons and others from inducements to use tobacco products and the consequent dependence on them"
• To protect the health of young persons by restricting access to tobacco products
• To prevent the public from being deceived or misled with respect to the health hazards of using tobacco products
• To enhance public awareness of the health hazards of using tobacco products."
  

Health Canada recognizes this limitation in the Consultation document, and provides a list of the costs which it considers can and cannot be recovered. 

However, many of the activities which the department says will be eligible are unlikely to be recovered without a fight from the companies. These are the activities which go beyond the explicit purpose of the Act and regulations - such as "resources to help people quit smoking" and providing "access to less harmful sources of nicotine."  

Given this industry's litigious past, such disputes are likely to land in court. The department's chariness about defending its policies in court will put pressure on staff to use a much narrower scope when recovering the costs than it is proposing in this consultation paper.

Concern #3: This framework creates an incentive for the department to de-fund non-eligible activities

Cost-cutting exercises are common place in Ottawa, especially following changes in governments. The proposed tobacco cost recovery framework provides a mechanism for ongoing reimbursement, but does not insure public health from decisions to 'de-prioritize' tobacco control. (The approaches used in other countries are better for this purpose, as discussed below). 

The limitations on which activities can be covered, combined with pressure to avoid disputes over eligible costs will create an incentive for departmental planners to focus expenditures on activities tightly aligned with the TVPA. 

The following hypothetical scenario describes this potential vulnerability: Health Canada focuses half its tobacco control activities on activities eligible for reimbursement, and recoups $23 million annually from tobacco companies. A government decision to cut programming costs by 15% across the board prompts the deputy minister to instruct that 80% of the work be on reimbursable activities in order that $13 million in departmental funding can be saved. Programs directed at researching and regulating vaping products are disproportionately cut.

Concern #4: The framework imposes a significant administrative burden 

The design of this cost recovery fee requires the department to calculate how much it spends on eligible activities before requesting reimbursement from manufacturers. 

Because only a subset of current activities are eligible, cost-accounting will be required to establish the eligible tobacco-share of all costs. This will impose a significant new burden on staff, and establishing criteria for eligibility will be a major management undertaking.

All of this will have to be done at an auditable standard. As the Consultation Document makes clear, the regulatory fee comes with requirements for transparency in recording costs. "There are also a number of legislative and government policy requirements to ensure proper accountability and transparency when fees and charges are introduced through ministerial regulations."

Concern #5: The transparency required by this framework may not be achievable for Indigenous Services, which will reduce the amount that can be recovered

Fifteen percent of the funds for Canada's Tobacco Strategy are transferred by Indigenous Services Canada to First Nations agencies. To date, that department has elected to not make the details of how --- or indeed if -- the money provided for tobacco control is spent as intended. 

When asked by parliamentarians for details on components of tobacco control funding, for example, Indigenous Services Canada has dodged giving any specific information and has instead said only that it was used "according to the priorities" of the recipient communities. (An example of such a response can be seen here and is pictured below).

There is little incentive for Indigenous Services Canada to force the issue with recipient agencies. Transparency is required to recover the costs, but cost recovery is not required for the department to receive its share of the CTS allocation. How Health Canada will address this issue is not spelled out in the Consultation Document.

Government reply to Order Paper Question
asked by Don Davies, MP, 2018

Concern #6: This framework does not borrow from good examples in other countries.

Health Canada has taken a different approach than that in the United States, France or other countries which have implemented regulatory fees on tobacco companies. These countries do not bill the industry for past expenses, but instead impose an up-front contribution based on sales revenue. This has had the effect of increasing their resources and expanding their range of activities.

United States: Since 2009, U.S. law has imposed a user fee on tobacco product manufacturers which is provided to the Food and Drug Authority for use at its discretion. Current revenues are USD $712 million (equivalent to CAD $985 million). No fee is imposed on the manufacturers of e-cigarettes. 

The FDA currently invests these fees in a wide range of activities, including in campaigns aimed at discouraging youth vaping.  If Canada adopted the U.S. approach, it could engage in additional work to reduce the onset of nicotine use as well as increasing cessation.

France: Since 2016, France has demanded a "social contribution" from tobacco companies, originally assessed at 5.6% of the wholesale revenues and providing about 120 million euros per year.  The revenue was assigned to a new tobacco control fund, whose purpose was later expanded to include all addictions. (Fonds de lutte contre les addictions). The funds are used to support a wide range of activities managed by government and non-government agencies. 

Unlike Canada, France chose to use a cost recovery system to expand the resources available. Instead of restricting activities to those by national government, it divides resources among regions and has appointed stakeholders to the oversight board which allocates funds.

Concern # 7: More efficient ways to recover costs are available

Unless the constraints identified above are addressed, the approach proposed by Health Canada is unlikely to generate more than $25 million in revenues. This estimate is calculated as the departmental tobacco control budget less 45% for expenses on vaping-related activities or other ineligible expenses.

While it is not possible at this point to quantify the cost of administering the cost recovery fee, it is likely to be non-trivial. Estimating the cost base, allocating the charge across different manufacturers, providing transparency about the process and defending the system in courts will take time and money. This time and money will be provided from the existing budget for federal tobacco control, which will impact other activities of the branch.

Other frameworks for cost recovery are available,  including options which generate more money with fewer strings and less administrative overhead.

Concern # 8: The recovery fee does not reflect the industry's capacity to pay 

The amount being proposed for recovery is less than a rounding error on any of these companies budgets. Because the companies are currently sheltered by insolvency protection, they have been required to provide semi-annual financial statements. From these, we know that a typical annual net revenue of the three large companies is about 2 billion per year.

The smallest of the three companies (JTI-Macdonald, whose revenues are about 17% of the industry total) reports that it spends $150 million a year on promotional activities. (Monitor's Report, page 12). Based on its recent revenue share, its contribution to a $30 million annual regulatory fee would only be $5 million.