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".