What Happened in the 1990s Smuggling Crisis? Who Pleaded?

The smuggling years are the origin story of Canada’s contraband tobacco debate. They explain why taxes, enforcement and the conduct of manufacturers are still argued about together. This page sticks to what government and court-related documents say.

How the tax gap opened

On 1 April 1989 the combined federal excise tax and duty on cigarettes rose by more than 53%, to $48.851 per thousand cigarettes. In 1991 Ottawa introduced an export tax on manufacturers and then withdrew it, according to the Library of Parliament’s chronology.

Public Safety Canada describes what followed. Seizures rose sharply in the 1990s, mainly because legitimate Canadian manufacturers were exporting their products to the United States. The same cartons were smuggled back into Canada and sold at a discount to tax-paid cigarettes. The archived report adds that since 2001 the largest share of illicit tobacco has instead come from manufacturing on First Nation territory on both sides of the border, including the U.S. side of Akwesasne. That is a different supply chain, and it is why a 1990s story cannot be read onto today’s market.

The February 1994 tax cut

By early 1994 federal and provincial governments were estimated to be losing about $2 billion a year in tax to smuggling. In February 1994 the federal government cut its excise tax by $5 per carton and offered to match any deeper provincial cut dollar for dollar, up to another $5. Quebec, New Brunswick, Ontario, Prince Edward Island and Nova Scotia accepted. The other provinces left their rates alone.

Ottawa then reimposed an export tax of $8 per carton and added a $200-million surtax on tobacco company profits, with enforcement and education programs on top. Exported cigarettes dropped from 17 billion in 1993 to 7 billion in 1994 and 5 billion in 1995. Quebec and Prince Edward Island raised their excise taxes again in 1995. How those choices fed into later prices is covered in tobacco taxation in Canada.

The guilty pleas of 2008

On 31 July 2008 the federal government and all provinces announced civil settlements with two manufacturers. Each company also pleaded guilty to one count of aiding persons to sell or be in possession of tobacco products, for conduct between 1989 and 1994. Combined fines and civil settlements came to $1.15 billion. The civil portion was about $400 million from one company and $450 million from the other, paid over 15 years.

The agreements also bind the companies to compliance measures: internal controls, sharing information with governments to fight contraband, and programs to control the movement of tobacco products. The Canada Revenue Agency administers them.

The 2010 settlements

On 13 April 2010 the federal government, ten provinces and three territories settled with three more companies, in an agreement that acknowledges “the growth in the contraband tobacco products market” during the period it covers (1985 to 1999). The total was $550 million:

Party	Outcome	Amount
First company	Guilty plea under the Excise Act, Ontario Court of Justice	$150 million fine
Second company	Guilty plea to a Criminal Code charge	$75 million fine
Third company	Civil claims only, no plea	$325 million

The criminal proceedings covered 1 January 1991 to 31 December 1996. A government backgrounder says that across the 2008 and 2010 settlements and convictions, manufacturers have paid $1.7 billion. The 2010 terms include a compliance protocol, a “know your customer” program for distribution and anti-money laundering procedures.

Why it still matters

Two lessons come up in official documents. First, tax rates and smuggling are linked, which is why governments are cautious about both deep cuts and sudden rises; the contraband tobacco overview covers current estimates. Second, the pleas and settlements are the reason compliance duties such as supply-chain controls are written into manufacturer agreements. For how the market is arranged today, see who makes cigarettes in Canada, and for the broader record of court cases, tobacco litigation in Canada.