Regulations to implement a regulatory charge are published today

 Today's edition of the Canada Gazette (Part II) included the first public release of the regulations that will require tobacco companies to pay some of the federal governments' costs to manage the industry. These regulations are the Tobacco Charges Regulations SOR/2025-80. The regulations were announced two weeks ago by Ya'ara Saks before the change in prime minister and cabinet. 

Under this new regulation Health Canada, the Public Health Agency and Indigenous Services Canada are required to calculate the amount that it spends in its tobacco regulation and then apportions this cost on manufacturers in proportion to their revenues. Companies are required to provide net sales revenues for each category of tobacco products (e.g. cigarettes, little cigars, heated tobacco, etc.). The charge is not applied to vaping products, nicotine pouches or other nicotine products which do not contain tobacco leaf.

The date that the regulation comes into force is not established. The text provides it to come into force no earlier than May 1, 2025, but leaves an option for the incoming government to cancel the approach merely by not completing the registration process. "11 (1) These Regulations, except section 9, come into force on May 1, 2025, but if they are registered after that day, they come into force on the day on which they are registered."

This charge was a key demand of leading health charities during the last federal election, and was the only tobacco- or nicotine- related measure identified in the mandate letter issued to the Minister of Addictions in 2021. The regulation was adopted by cabinet on March 6 - eight days before the change in government.  (The 2021 mandate letter has been removed from the Prime Ministers website, but is available on the Internet Archive.) 

The Tobacco and Vaping Products Act was amended as part of the 2024 budget bill to authorize the government to recoup certain costs provided that they were related to "the carrying out of the purpose of this Act."  

The TVPA purpose with respect to tobacco is narrowly cast. Other than the generalized intent "to protect the health of Canadians", it identifies the protection of young persons and others from inducements to use tobacco products, to restrict the access of young persons to tobacco products, and to enhance public awareness (and avoid misinformation) about the risks of tobacco use.

Nonetheless, the intent of the department at this time is to use this charge to recoup costs associated with activities that are not clearly embraced by the TVPA purpose. The activities listed in the (non-binding) regulatory impact statement (RIAS) are: "compliance and enforcement activities, laboratory analysis, development and implementation of regulations, public education and awareness on the health hazards of tobacco use, supporting improved services and resources to help people quit smoking, and providing funding to First Nations, Inuit and Métis Nation to develop and implement approaches to reducing commercial tobacco use. The costs to administer the tobacco cost recovery framework will also be included. Activities undertaken in relation to vaping are not included at this time, except if they are for the purpose of helping Canadians quit tobacco."

The weakness of the link between these activities and the legislated purpose of the act were the focus of the concerns we expressed about the proposed fee last summer, and our subsequent recommendations for a revised purpose to the law.  These concerns were not identified in the RIAS published today. 

To date Health Canada has not predicted how much it would recover as a result of this new charge. The RIAS identifies that the regulation will cost the industry $42.54 million per year, including their own reporting and administrative costs. The administrative costs for the federal government to administer the program are estimated at $1.3 million per year.   

The RIAS states that the three departments which will participate in this process currently receive 85% of the $66.2 million annual budget for tobacco control (including vaping and other forms of nicotine use). Information from other sources on federal expenditures on tobacco control can be found on our 2024 fact sheet 

PMI boasts that heated tobacco, vaping and pouches increase nicotine use and profits

Last month Philip Morris International (PMI) talked to investors at the CAGNY conference - an annual event held in Florida to connect manufacturers with investors. PMI used the occasion to report on its experience over the past 10 years on smoke-free products. 

This post identifies some take-away facts from this presentation. The slide deck can be viewed here, and the transcript is available courtesy of Seeking Alpha here. 

Little more than a decade has passed since PMI became the first multinational tobacco company to re-invent its business and to expand its product line to include new nicotine technologies. It's initial focus was on heated tobacco (IQOS was launched in Italy and Japan in 2014 and introduced to Canada in 2017). In 2022 it began selling vaping products (for which Canada was its first market) and in the same year it acquired Swedish Match and began marketing Zyn pouches.

New nicotine products have allowed PMI's profits to grow

Over the past 10 years, PMI's revenues from cigarette sales have fallen somewhat - from $26.6 billion in 2015 to $23.2 billion in 2024. This loss in revenue has been more than made up for by increased revenues from non-combustible products: from a mere $199 million in 2015 to $14.7 billion in 2024.

Last year the company made 38 cents of every dollar of earnings from "smoke-free" products - heated tobacco, vaping or pouches. (slide 37)

New products have allowed PMI to sell more nicotine.

Overo the past 10 years, the number of cigarettes sold by Philip Morris have fallen steadily (because they increased prices, the drop in revenues was not as acute). This loss in volume sales has been largely made up for by an increase in the number of other nicotine products sold. Using "stick equivalent units" to compare sales with traditional cigarettes, the company reports that after 2020 newer product sales allowed them to turn an annual 2% decrease in units of nicotine sole to a 2% annual increase. (Slide 9)

New Nicotine Products are more profitable than traditional cigarettes.

It costs PMI much less to manufacture cigarettes than IQOS (at a global level, an average of $13 per 1,000 cigarettes vs. $26 per 1,000 IQOS devices and sticks), but they nonetheless make much more money from IQOS sales ($54 for 1,000 IQOS vs $23 for cigarettes). 

For Zyn, the profit difference is even more dramatic. In the United States, the company makes $185 on 1000 Zyn pouches, which costs them $30 to manufacture. (Slide 16). 

The global nicotine market is not shrinking as alternative product sales grow. 

As the world observes the 20th anniversary of the Framework Convention on Tobacco Control it is disheartening to hear that PMI estimates that global nicotine sales (86% of which are cigarettes) are not falling and that the "Total nicotine market [is] close to stable". (slide 24)

Ignoring other tobacco products (like bidis, hookah, etc), the company estimates that the for every 6 cigarettes sold world wide, there is one equivalent dose of nicotine sold in the form of heated tobacco, vaping liquids or nicotine pouch. 

The proportion of the nicotine market taken up by traditional cigarettes varies greatly by country. PMI presented separate data only for the United States, where slightly less than half of nicotine products sold are cigarettes. (Slide 25)

Smokers who also use vaping or pouches use nicotine more often than those who only smoke or vape.

PMI reported the results of its consumer research into the volume of use by individuals who use one or more product category. They found that those who used more than two non-combustible products (HNB, vaping and oral) "have substantial higher daily consumption" than do those who use only one product. 

Those who use both cigarettes and non-combustible nicotine also increase the volume of product they use. Individuals who use only heated tobacco use about the same quantity of product as do smokers, but those who only vape use less. (Slide 28) 

In his comments, PMI CEO Jacek Olczak alluded to the role that these products have in overcoming regulatory and social restrictions on smoking. "...We start looking into the nicotine, new nicotine market, the smoke-free market more from the multi-category perspective versus the one because we also see this in the marketplace, then the consumers are not really focused on one product category. They're looking at the smoke-free products from the perspective of the repertoire which satisfies or responds to the different needs or moments or situations they might have during the day."

PMI's new products appeal more to wealthier people.

Included in this investor presentation was information on the age and income brackets of individuals who used PMI's brands of cigarettes, heated tobacco, vaping and nicotine pouches. Globally, most of their customers are in middle or higher income brackets, and this is even more true for the non-cigarette categories. Its vaping products are more likely to be purchased by younger people.

Newly-released data on cigarette sales suggests pockets of increased illicit trade

Last week Health Canada updated the information it provides on tobacco sales in Canada, and transferred this information to the department's consolidated data platform (HealthInfobase.canada.ca). Provincial level information is presented for cigarettes; national level data is shown for other forms of tobacco, but provincial level information is downloadable. 

Tobacco manufacturers are required to report to Health Canada the number of each brand of cigarettes and the number of kilograms of fine-cut tobacco they sell in each province each month. 

This information, together with national estimates of the number of smokers in each province, allows the calculation of the average number of cigarettes legally sold per smoker in each province. 

Differences in these estimates over time or between provinces could suggest:

* changing patterns of nicotine use (if smokers are changing how many cigarettes a day they smoke, and/or substituting cigarettes with vaping products on some occasions).

* changes in survey methods which affect the estimates of smoking behaviour (the survey mode for the Canadian Community Health Survey was modified in 2015, 2020 and 2022).

* changes in purchasing behaviour (if smokers increase or decrease the number of cigarettes they buy which are not included in the manufacturers' reports, such as illicit supply, interprovincial sales and duty-free purchases related to travel).

A data sheet showing cigarette sales per smoker is available here. 

As shown in the figures below (and on the data sheet) this information reveals that:

* Over the last 10 years, the number of reported smokers has decreased by about one-third (37%), but the number of cigarettes legally sold has decreased by half (48%).

* In some provinces, the difference between the drop in sales and smokers is very dramatic. The fall in the number of cigarettes sold was twice as large in Newfoundland and New Brunswick than the drop in the number of smokers (19% vs 69% in Newfoundland; 28% vs 61% in New Brunswick.

* The number of cigarettes legally sold per smoker varies considerably across Canada: from 16 cigarettes per day in Saskatchewan to 9 cigarettes per day in British Columbia and Newfoundland.