Vol. 149, No. 12 — June 17, 2015

Registration

SOR/2015-126 June 5, 2015

TOBACCO ACT

Order Amending the Schedule to the Tobacco Act

P.C. 2015-753 June 4, 2015

His Excellency the Governor General in Council, on the recommendation of the Minister of Health, pursuant to subsection 7.1(1) (see footnote a) of the Tobacco Act (see footnote b), makes the annexed Order Amending the Schedule to the Tobacco Act.

ORDER AMENDING THE SCHEDULE TO THE TOBACCO ACT

AMENDMENTS

1. The portion of item 1 of the schedule to the Tobacco Act (see footnote 1) in column 2 is replaced by the following:

Item	Column 2 Tobacco Product
1.	(1) Cigarettes (2) Cigars that have a wrapper that is not fitted in spiral form, cigars that have tipping paper and little cigars (3) Blunt wraps

2. The schedule to the Act is amended by adding the following after item 1:

Item	Column 1 Additive	Column 2 Tobacco Product
1.1	The prohibited additives referred to in item 1, excluding those that impart a flavour that is generally attributed to port, wine, rum or whisky	Cigars that have a wrapper fitted in spiral form and that weigh more than 1.4 g but not more than 6 g, excluding the weight of any mouthpiece or tip, other than those referred to in item 1

3. The portion of items 2 and 3 of the schedule to the Act in column 2 is replaced by the following:

Item	Column 2 Tobacco Product
2.	(1) Cigarettes (2) Little cigars (3) All other cigars, except those that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper (4) Blunt wraps
3.	(1) Cigarettes (2) Little cigars (3) All other cigars, except those that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper (4) Blunt wraps

4. Items 4.1 and 4.2 of the schedule to the Act are replaced by the following:

Item	Column 1 Additive	Column 2 Tobacco Product
4.1	Colouring agents	Blunt wraps
4.2	Colouring agents, excluding those used to render mouthpieces or tips white or bronze	Cigars, except (1) little cigars (2) cigars that have tipping paper, and (3) cigars that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper
4.3	Colouring agents, excluding those used to whiten plug wrap paper, to render tipping paper brown or bronze, to imitate a cork pattern on tipping paper or to render mouthpieces or tips white or bronze	Little cigars
4.4	Colouring agents, excluding those used to render tipping paper brown or bronze or to render mouthpieces or tips white or bronze	Cigars that have tipping paper, other than little cigars

5. The portion of items 5 to 13 of the schedule to the Act in column 2 is replaced by the following:

Item	Column 2 Tobacco Product
5.	(1) Cigarettes (2) Little cigars (3) All other cigars, except those that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper (4) Blunt wraps
6.	(1) Cigarettes (2) Little cigars (3) All other cigars, except those that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper (4) Blunt wraps
7.	(1) Cigarettes (2) Little cigars (3) All other cigars, except those that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper (4) Blunt wraps
8.	(1) Cigarettes (2) Little cigars (3) All other cigars, except those that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper (4) Blunt wraps
9.	(1) Cigarettes (2) Little cigars (3) All other cigars, except those that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper (4) Blunt wraps
10.	(1) Cigarettes (2) Little cigars (3) All other cigars, except those that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper (4) Blunt wraps
11.	(1) Cigarettes (2) Little cigars (3) All other cigars, except those that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper (4) Blunt wraps
12.	(1) Cigarettes (2) Little cigars (3) All other cigars, except those that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper (4) Blunt wraps
13.	(1) Cigarettes (2) Little cigars (3) All other cigars, except those that weigh more than 6 g excluding the weight of any mouthpiece or tip, have a wrapper fitted in spiral form and do not have tipping paper (4) Blunt wraps

6. The note to the schedule to the Act is renumbered as Note 1.

7. The schedule to the Act is amended by adding the following after Note 1:

Note 2: In column 2, “wrapper fitted in spiral form” means a wrapper of a cigar that is fitted with an acute angle of at least 30° to the longitudinal axis of the cigar.

COMING INTO FORCE

8. This Order comes into force 180 days after the day on which it is published in the Canada Gazette, Part II.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Order.)

Executive summary

Background

Tobacco use is the leading preventable cause of illness and premature death in Canada. It is a known or probable cause of more than 30 debilitating and often fatal diseases of the lungs, heart, and other organs, and is responsible for more than 37 000 premature deaths each year. It is estimated that the attributable health care costs of tobacco use in Canada are more than $4 billion a year; the Canadian Centre on Substance Abuse estimated that the societal costs of tobacco reached $17 billion in 2002.

The Government of Canada addresses the public health problem of tobacco use through its Federal Tobacco Control Strategy (FTCS). Built on the pillars of prevention, protection, cessation and product regulation, the FTCS aims to reduce tobacco-related death and disease among Canadians. A fundamental component of the FTCS is the Tobacco Act (TA), whose purpose includes the protection of young persons from inducements to use tobacco products. Preventing initiation of tobacco use by youth is one of the most effective means of reducing lifetime tobacco use.

In the 2000s, small flavoured cigars, similar in size to cigarettes, became increasingly popular among youth. The sales of cigars increased threefold from 200 million units in 2001 to about 649 million units in 2009. Over the same period, the sale of flavoured cigars increased rapidly while the sale of traditional cigars remained stable at around 180 million units, as reported to the Department of Health (“the Department”) by the tobacco industry, pursuant to the Tobacco Reporting Regulations (TRR). As well, results from the 2008 Canadian Tobacco Use Monitoring Survey (CTUMS) showed that 23% of youth aged 15 to 17 years reported having tried smoking a little cigar or cigarillo.

In 2009, the federal government responded by introducing the Cracking Down on Tobacco Marketing Aimed at Youth Act (which amended the Tobacco Act and is referred to here as “the 2009 amendment”) to limit the marketing of tobacco products to youth. A key measure of the 2009 amendment was to prohibit the addition of flavours (other than menthol) and other additives to little cigars, cigarettes and blunt wraps. This was achieved through the addition of a Schedule of prohibited additives (“the Schedule”) [http://laws-lois.justice.gc.ca/eng/acts/T-11.5/page-16.html] to the Tobacco Act. The Schedule identifies the tobacco products for which selected additives are prohibited, and then lists these selected additives: those with flavouring properties, sweeteners, colouring agents and several others that can be used to increase the appeal of tobacco products.

Little cigars, defined as cigars weighing no more than 1.4 g or having a cigarette filter, are already subject to the 2009 amendment whereby flavouring additives, with the exception of menthol, are prohibited. These cigars are also required to be sold in packages of at least 20 units and, since 2012, the packages must display health warnings pursuant to the Tobacco Products Labelling Regulations (Cigarettes and Little Cigars).

CTUMS data indicate that the rate of past-30-day use of little cigars or cigarillos among youth aged 15 to 19 years declined from 8% in 2009 to 5% in 2012. In addition, according to data submitted pursuant to the TRR, cigar sales in Canada declined by 31%, from 649 million units sold in 2009 to 445 million units sold in 2012. Although it is not possible to attribute these reductions in prevalence and sales directly to the 2009 amendment without further analysis, given various other tobacco control measures aimed at youth prevention, it is reasonable to postulate that the 2009 amendment contributed to these declines.

Shortly after the implementation date of the 2009 amendment, the Prime Minister stated that the Government would monitor and enforce compliance with the amendment — including monitoring adherence to the spirit of the legislation. The Prime Minister also stated that, if necessary, the legislation would be revisited.

As part of the 2009 amendment, Parliament added section 7.1 to the TA, thereby providing the Governor in Council with the authority to amend the Schedule through an order.

Situation in Canadian provinces and foreign jurisdictions

In 2009, Canada became the first country in the world to pass legislation to prohibit the use of flavouring additives that contribute to making cigarettes, little cigars and blunt wraps more appealing to youth. Among the provinces, Alberta has passed legislation on flavoured tobacco products; it comes into effect on June 1, 2015. The legislation will prohibit characterizing flavours, excluding menthol, in smokeless tobacco, bidis, kreteks and cigars weighing up to 5 g, or that have a retail price of less than $4.00 per unit. In June 2014, Manitoba amended the Non-Smokers Health Protection Act to prohibit the supply of flavoured tobacco products, except for smokeless tobacco, chewing tobacco, pipe tobacco or a menthol tobacco product; the amendment has not yet been proclaimed into force. Ontario recently introduced proposed legislation that would prohibit the sale of flavoured tobacco products. Nova Scotia introduced legislation to ban the sale of most flavoured tobacco products, including menthol tobacco products in the province. Other flavoured products such as smokeless tobacco, pipe tobacco, cigarette papers will also be subject to the flavour prohibition. Rum, wine, port and whisky flavours will be permitted in cigars weighing 5 g or more or that cost $4.00 or more per unit. British Columbia, New Brunswick, Quebec and Saskatchewan already have legislative authority to restrict or ban flavours in tobacco products.

Internationally, the European Union and the United States have taken action on flavoured tobacco products. The European Union and the United States have banned most characterizing flavours in cigarettes, although the European Union measure has not yet been implemented.

The Partial Guidelines for the implementation of Articles 9 and 10 of the World Health Organization Framework Convention on Tobacco Control, a treaty ratified by Canada in 2004, provide guidance to the Parties to this Convention on, among other things, the regulation of the contents of tobacco products to reduce their attractiveness. The 2009 amendment and the proposal presented here are both in line with these Guidelines.

Issues

The Department has observed that certain cigars (i.e. those over the 1.4 g weight limit set out for little cigars in the 2009 amendment, or those without a cigarette filter) have been introduced into the Canadian market in the same flavours targeted by the 2009 amendment; these flavoured cigars now amount to 66% of the total cigar market in Canada. Moreover, many of these new cigars have physical characteristics, such as the presence of tipping paper or of a wrapper with a straight seam, that give them a cigarette-like or little cigar-like appearance and make them appealing to youth.

Among Canadians who have ever smoked a cigarette, 82% did so by the age of 18 years, and it is estimated that more than three quarters of this group will go on to become lifetime smokers. Evidence also shows that youth and young adults are significantly more likely to report smoking a cigar brand that is flavoured. This preference for flavoured cigars decreases significantly with age. Youth who use flavoured tobacco products are at risk for developing tobacco-use patterns that persist throughout their lifetime.

CTUMS findings show that in 2012, among youth aged 15–19 years who had smoked any type of cigar in the 30 days prior to being surveyed (i.e. past 30 days), 60% (representing about 59 608 youth) reported using only a flavoured product, compared to 71% (representing about 122 228 youth) in 2009. Furthermore, the Youth Smoking Survey 2012–2013 (which covers youth in grades 6 to 12, and youth in grade 6 to secondary V in Quebec) shows that among youth who reported having used at least one tobacco product in the past 30 days, two in five (40%) reported using a type of flavoured cigar. This represents approximately 126 000 young Canadians. These findings demonstrate that young persons continue to use flavoured tobacco products in significant numbers. Further action is therefore warranted to restrict the availability of flavoured cigars in the Canadian market by prohibiting additives, including flavours, that make these products more appealing to youth. The prevention of smoking initiation among young persons will help decrease smoking prevalence over the next decade.

Objectives

The objective of the Order Amending the Schedule to the Tobacco Act (“the Order”) is to protect young persons from inducements to use tobacco products by further limiting the availability of flavoured cigar types that are attractive to youth. The Order will remove the ability of the tobacco industry to market most flavoured cigars in Canada.

Description

In order to achieve the objective outlined above, Health Canada is introducing the following three amendments to the Schedule:

1. Expand the prohibition of additives, including those that have flavouring properties or that enhance flavour, in

• cigars that have tipping paper;
• cigars that have an outer wrapper that is not in spiral form; and
• cigars that weigh over 1.4 g, but no more than 6 g, excluding the weight of any mouthpiece or tip.

This modification will clearly specify that the above-mentioned cigars (referred to here as the “targeted cigars”) cannot contain any of the additives (including flavours) listed in the Schedule, excluding the additives mentioned below. It is to be noted that the exceptions to the additives ban set out in the 2009 amendment, including for menthol additives, will be maintained for the targeted cigars, however with some minor adjustments for the use of colouring agents in certain cigars.

2. Provide exceptions for the use of traditional flavours in cigars weighing over 1.4 g, but not more than 6 g that have a wrapper that is fitted in spiral form, do not have tipping paper and are not little cigars.

Through the addition of a new item to the Schedule (Item 1.1), specific exceptions will be provided for traditional alcohol flavours — specifically port, wine, rum and whisky — in these cigars, to limit the impact on adult choice. The selection of these flavours was based on a review of the most common cigar flavours that were used in traditional cigars prior to the rise in flavoured cigar sales in Canada. The exceptions will not apply to cigars with tipping paper or those with a wrapper that is not fitted in spiral form, irrespective of their weight.

3. Provide exceptions for the use of certain colouring agents.

Among additives that will be prohibited by the Order are colouring agents used to render cigars visually attractive (e.g. coloured tipping papers and mouthpieces). Similar provisions were included in the 2009 amendment to prevent the use of colours to render little cigars, cigarettes and blunt wraps more attractive to youth.

Exceptions will be made for colouring agents needed to render the tipping paper brown or bronze, or to render mouth pieces or tips white or bronze, so manufacturers can maintain the ordinary look of these products.

Regulatory and non-regulatory options considered

Status quo

This option would have maintained the existing legislative regime with respect to additive restrictions, including flavours in cigarettes, little cigars and blunt wraps.

Despite the 2009 amendment, the same flavours as those prohibited in little cigars would have remained available in other types of cigars that make them appealing to youth. These products would not have been captured by the definition of “little cigar” in the TA. Given this situation, the status quo would not have addressed the continued use of additives, including flavours, in cigars that make them appealing to youth; consequently, it is not considered to be an appropriate option.

Market-based instruments

Evidence demonstrates that effective and sustainable tobacco tax policies can significantly contribute to reducing the consumption of tobacco products, particularly among youth. Market-based instruments, such as taxes or other levies, have been considered, in line with the World Health Organization Framework Convention on Tobacco Control guidelines. For example, a tax could be applied to make cigars less affordable to youth. If properly designed, the application of additional tax to cigars could create a disincentive to youth purchases, assuming the average youth does not have the income base from which to allocate spending on tobacco products. However, raising tobacco taxes would not make the targeted cigars less attractive to youth. It is important to note that the Government recently raised the excise duty on cigars by approximately 24% in February 2014 as part of the federal budget. For these reasons, using higher taxes to achieve the desired policy objective of preventing youth from using the targeted cigars is not considered a viable option.

Regulatory options

(a) Order to amend the Schedule to target all flavoured cigars

This option considered amending the Schedule to prohibit all additives, including all flavours (excluding menthol), in all cigars. All flavoured cigars, including the larger, more expensive, premium cigars, would have been subject to the prohibition. This option was deemed to be too broad, considering the intent of the proposed amendment, as it would also apply to adult-oriented cigars. The Department’s intent is to specifically address flavoured cigar types introduced into the market after the 2009 amendment that continue to be attractive to youth.

(b) Recommended option: Order to amend the Schedule to specifically target certain types of flavoured cigars marketed to youth

Amending the Schedule to specifically target most flavoured cigars and cigars with cigarette-like features is considered the most appropriate option. Several of these products appeared recently on the Canadian market in the same appealing flavours as those prohibited in little cigars pursuant to the 2009 amendment. The Order will specifically target additives, including flavours, in certain cigar types. It is important to note that restrictions do not prohibit the sale of any type of cigar, only the use of appealing additives. It will address the identified issues in the most effective manner, while allowing adults access to traditionally flavoured cigars. For these reasons, amending the Schedule to address certain types of flavoured cigars is the recommended option.

Benefits and costs

A cost-benefit analysis was carried out by the Department to quantify the anticipated costs and benefits of the Order. (see footnote 2) The analysis uses 2012 CTUMS data and 2012 tobacco sales data collected by the Department pursuant to the TRR to estimate the benefits and costs of the Order. Although the 2013 tobacco use prevalence data have become available since prepublication of the proposed Order, the 2012 CTUMS data was used in the cost-benefit analysis for consistency purposes. The analysis is based on the assumption that the Order will have a minimal impact on the adult consumption of cigars and that the 2009 amendment contributed to declines in cigar sales and youth smoking prevalence. This section provides a brief summary of the results of the analysis.

The estimated costs and benefits of the Order are shown in Table 1 (below), with a net health benefit at a present value of $148 million over a 10-year period. Estimated costs to industry and to the Government amount to a present value of $30.1 million, while estimated benefits amount to a present value of $178.2 million.

Table 1: Summary of estimated costs and benefits of the Order

Cost-Benefit Statement			Monetized Impacts (2012 $), Discounted at 7%
			Year 1	Annualized Average	Year 10	Undiscounted Total	Present Value
Benefits	Reduced morbidity and mortality		25,369,272	25,369,272	25,369,272	253,692,720	178,183,150
Total benefits						253,692,720	178,183,150
Costs	Industry	Foregone profits	1,935,837	1,935,837	1,935,837	19,358,370	13,596,509
		Recurring compliance costs	90,915	90,915	90,915	909,148	638,547
		One-time compliance costs (value of unsold inventories)	15,673,383	2,231,537	–	15,673,383	15,673,383
	Government	Compliance and enforcement regime (one-time costs)	123,335	17,560	–	123,335	123,335
		Recurring enforcement costs	16,650	16,650	16,650	166,495	116,939
Total costs						36,230,731	30,148,713
Net benefits						217,461,989	148,034,437
Qualitative impacts
Stakeholder	Impacts		Description
Smokers	Positive impacts		Smokers who quit may benefit from improved quality of life and reduced disease-induced pain and suffering.
General public	Positive impacts		Health improvements associated with reduced tobacco use may reduce the overall demand on the health care system, freeing resources to address other health issues more effectively and efficiently.
Industry	Negative impacts		Manufacturers and importers may experience short-term operational disruptions during the transition.
Retailers	Negative impacts		Retailers may experience a reduction in sales.

Benefits

The analysis relied on studies of young smokers’ preferences for flavoured tobacco products and on observed trends in the manner in which Canadian youth smokers use flavoured cigars. The resulting estimate of impacts is expressed as the number of youth who would be prevented from becoming “typical” smokers (smokers who start smoking before age 18 years) as a result of the Order.

It is expected that the Order would remove inducements to tobacco use, which will result in a decrease in the number of youth experimenting with flavoured tobacco products. It is also anticipated that a decrease in experimentation with flavoured tobacco products will lead to a lower smoking initiation rate, therefore contributing to a reduction in the number of youth who transition into long-term tobacco users. Preventing sustained tobacco use will result in significant benefits in terms of disease prevention and lives saved.

Experimentation with smoking may involve the use of multiple tobacco products. A study of two U.S. national surveys concluded that little cigar/cigarillo use may promote initiation and maintenance of cigarette smoking, especially among younger smokers. CTUMS 2012 results show that among youth aged 15 to 19 years who smoked a cigarette in the 30 days preceding the survey, 32% also smoked a little cigar over the same period. The data show that dual use of little cigars and cigarettes in 2012 was relatively high among youth. For the purpose of modelling the benefits, it is assumed that a decrease in the number of youth who experiment with flavoured cigars when the proposed Order takes effect would lead to a reduction in the number of cigarette smokers in the future.

Baseline scenario and incremental impacts

The analysis focuses on youth aged 15 to 19 years who smoked cigarettes and cigars, or little cigars, in the 30 days preceding the survey. This group represents 72 322 individuals based on the 2012 CTUMS results and is the baseline for the current analysis. At the time of the 2009 amendment, this group represented 91 401 individuals according to 2009 CTUMS results. Although the decrease in young smokers from 2009 to 2012 cannot be directly linked to the 2009 amendment without further analysis, it is postulated that the amendment had some impact on the observed decline. The current analysis therefore anticipates that the Order will have a similar impact on youth experimentation with cigars. The analysis estimates that the Order will result in a 10% reduction in the baseline scenario, which would translate into approximately 7 000 fewer youths who will try cigars or little cigars and become cigarette smokers over a 10-year period.

Benefits due to reduced risk of premature death and illnesses

The bulk of the benefits of the Order will likely result from reductions in the risk of premature death due to smoking and from a reduced economic burden of illnesses attributable to smoking. To estimate these benefits, the analysis takes advantage of a detailed accounting of the cost of smoking by Sloan et al. in their 2004 book entitled The Price of Smoking. Using the Sloan et al. estimates has the advantage that they are based on nationally representative samples and that their derivation is well documented. Furthermore, Sloan et al. use a life cycle approach in estimating their costs, capturing the impacts of smokers’ increased resource utilization during their lives and of their decreased survival. Life cycle estimates are more difficult to derive, but they have the advantage of creating a direct conceptual link between smoking initiation and its long-term costs (Miller, V. P., James, C. R., Ernst, C., and F. Collin. Smoking Attributable Medical Care Costs: Models and Results. Berkeley, CA: Berkeley Economic Research Associates; 1997). This link is especially important when looking at the benefits of programs focused on reducing smoking initiation.

Based on Sloan et al. estimates, the lifetime cost of smoking to society for a typical 24-year-old smoker is $148,446 in 2012 Canadian dollars. That is, if this typical smoker had not taken up smoking (or had quit smoking before his or her 24th birthday), society as a whole would have incurred $148,446 less in costs over his or her lifetime. It is worth noting that this estimate only includes costs to the smokers themselves as a result of future years of lost life, disability and lost earnings caused by smoking-related illnesses. Given the differences in U.S. and Canadian health care systems, this analysis excluded health care costs from the estimate developed by Sloan et al. These omissions would lead to a conservative estimate of the benefits and would likely underestimate the true social cost of a 24-year-old becoming a smoker.

The cost estimate derived by Sloan et al. represents the value of future years of lost life (i.e. the extra years a smoker would have lived had he or she never smoked) and were obtained by discounting the stream of costs up to the smoker’s 24th birthday. Because this analysis focuses on the cohort of 15- to 19-year-olds, this value was further discounted to each of the 15 to 19 age groups. Averaging these values across the 15 to 19 age groups, the analysis estimates that the savings to society from preventing the average 15- to 19-year-old from becoming a “typical” smoker has a present value of $120,806.

Because of difficulties in tracking the flow of smokers in the cohort of 15- to 19-year-olds throughout the 10-year period, the analysis assumes a yearly average value of 700 youth prevented from becoming regular smokers. For the purpose of this analysis, we then estimate that 30% of the 700 current smokers will transition into “typical” smokers (i.e. smokers who start smoking before the age of 18 and quit at some point during their life — Sloan et al.). It is to be noted that this estimate is conservative given that studies have shown that 60% to 90% of smokers who start smoking in their youth become addicted and continue smoking into adulthood. Based on the conservative 30% estimate, it is anticipated that the Order will result in 210 fewer “typical” smokers per year. This number is then multiplied by the cost of preventing an average 15- to 19-year-old from becoming a “typical” smoker. The benefits are calculated over the 10-year period, discounted to year one, and added to obtain the present value of benefits resulting from the proposed Order.

At an annual discount rate of 7%, the present value of these benefits amounts to $178.2 million over 10 years, which corresponds to an annualized average of $25.4 million.

Costs

Overview of the cigar industry in Canada

In 2012, according to data submitted pursuant to the TRR, the tobacco industry in Canada was worth about $5.8 billion (including federal excise tax) in terms of wholesale trade. Cigarette sales comprise about 93% of that value and the rest is attributed to other types of tobacco products such as cigars, kreteks, cigarette tobacco or loose tobacco, smokeless tobacco and pipe tobacco combined.

In the same year, the value of the cigar market was $192 million, representing 3.3% of the total tobacco market in Canada. Targeted cigars with flavours represented about 66% of the total cigar market in terms of unit sales, with a reported wholesale value estimated at $117 million, or approximately 2% of the entire tobacco industry in Canada.

In 2012, there were 23 businesses that imported or manufactured cigars in Canada, 8 of which sold targeted cigars with flavours. These 8 companies accounted for 93.7% of the value of total cigar sales. Cigars are either manufactured in Canada or imported for distribution from the United States, Latin America, the Caribbean, or Europe. Some of the importers/distributors are multinational companies with centres of operation and distribution in the United States or in Europe; some have diversified product lines and specialize in the sale of goods other than tobacco products.

The Order will result in costs to the industry and to Government and may have some cost impact on consumers. The section below describes the methodology used to estimate costs and discusses the various costs that will be assumed by all stakeholders.

Costs to industry

Data collected by the Department pursuant to the TRR show that a total of eight companies comprising both manufacturers and importers/distributors will be impacted by the Order. Given that the manufacturing process of the targeted cigar types is not expected to be significantly different from that of other cigar types, manufacturers will not need to commit any additional capital investment to manufacture compliant products. The main costs to these companies will be related to switching production or importing compliant products. There will also be sunk costs associated with the disposal of targeted input materials and unsold products, to the extent that they cannot be returned to the original suppliers. The cost estimates in the analysis account for the tobacco industry’s capacity to innovate and to modify its cigar product lines to meet the new requirements. Manufacturers and importers/distributors are expected to assume the costs in the categories set out below.

a. Cost to manufacturers

Canadian manufacturers will incur costs by switching their production of targeted cigars with flavours to production of ones that will be permitted under the Order. The availability of ingredients and packaging cost data submitted pursuant to the TRR makes it possible to determine the incremental per-unit costs to produce compliant cigars. It is important to note that incremental changes in the costs of ingredients and packaging only are considered for the calculation of compliance costs. These costs are estimated to be $638,547 in present value terms. A considerable portion of this amount consists of the incremental cost of permitted tobacco blends. Remaining materials such as wrappers and tipping paper could be used for other products. Furthermore, as a result of the Order, both manufacturers and importers are expected to experience a loss in profit of $13.6 million compared to the baseline over the 10-year period of analysis, with manufacturers bearing 3% of the loss. This loss is explained by foregone investment and revenues that would not be foregone in the absence of the Order.

b. Cost to importers

It is expected that importers will face significant costs if they are not able to distribute or sell their imported products to retailers, despite the proposed 180 days lead time before the implementation of the provisions of the Order. This situation may arise as a result of retailers not being able to sell the products acquired from the importers in time. If importers are not able to return their excess inventory to suppliers, they will be burdened by the associated costs. Information reported by importers under the TRR indicates that for a given quarter, importers sell an average of $30 million of impacted products to retailers. Assuming that after the coming into force of the Order, these importers still have an inventory of products that cannot be returned, they will have to absorb the associated costs — including the cost of destroying the products in the event that they cannot be exported. These costs are estimated to be $15.7 million. Importers will also assume about 97% of the estimated $13.6 million in loss of expected profit over the period of the analysis. The overall impact will be more significant for small businesses, as most of their business is in flavoured cigars. However, it is not expected that the affected small businesses will leave the market or go out of business as they are also involved in other activities or business lines.

c. Impacts on retailers

Retailers — consisting mainly of gas stations and convenience stores — are not expected to be materially impacted by the Order, which is consistent with the assumption that current adult smokers will continue to purchase cigars after the implementation of the Order. Although the sale of tobacco products is an important part of their business, it is not their main line of business and the sale of flavoured cigars is a small component of their overall sales of tobacco products. It is expected that, as per existing business arrangements, retailers will be able to return any unsold products to their suppliers, thereby negating any associated financial impact. Given the expected minor potential impacts on retailers, these costs have not been included in the overall industry cost estimate.

Cost to consumers

It is possible that there will be a spillover effect on other categories of tobacco products not directly affected by the Order, resulting in increased costs to consumers. It is assumed that, in an effort to recoup the incremental profit losses from discontinued products, manufacturers and importers/distributors could increase the price of products in certain categories (e.g. cigars with the excepted flavours), which would be reflected in retail prices. The magnitude of the impact of this potential price increase on consumers is difficult to estimate. However, following the 2009 amendment that prohibited the use of additives, including flavouring additives, in cigarettes, little cigars and blunt wraps, no noticeable product price increases were observed, despite the reduction in sales of certain categories of products. Given this observation, and for the purpose of this cost-benefit analysis, it is assumed that any incremental product price increase will be negligible and will not significantly impact consumers. As a result, no cost to consumers is included in the quantitative estimates of the regulatory impacts.

Cost to Government

The Government will incur costs for the implementation and administration of the Order. These costs would stem from compliance promotion and enforcement activities associated with the prohibitions. Estimates for these costs are described below.

Compliance promotion: Promotional materials will be developed to raise stakeholders awareness of the prohibitions. The materials will be distributed to stakeholders during inspections. In addition, outreach activities may be conducted during the first two years of implementation. The costs associated with these activities are estimated to have a present value of $123,335.

Compliance monitoring and enforcement: Incremental compliance monitoring and enforcement costs are expected to be incurred by the Government for inspectors’ training, ongoing site inspections and related travel, tobacco products sampling and analysis, investigations to verify compliance and measures to deal with cases of non-compliance. These activities are estimated to have a present value of $116,939.

The total cost to Government for compliance and enforcement activities is estimated at $240,274 in present value terms over 10 years.

Summary of costs and benefits

The cost-benefit analysis estimates that the costs of the proposed Order are $30.1 million over a 10-year period that includes government costs of $240,274 over 10 years and industry costs of $29.9 million.

The analysis estimates that the benefits of the Order will have a present value of $178.2 million over a 10-year period. These benefits will accrue from the reduced morbidity and mortality effects resulting from a lower number of youth who will become smokers. The estimated benefits of the Order will exceed the estimated costs by a factor of six.

Sensitivity analysis

The results of this analysis are based on key parameter estimates, which can be higher or lower than indicated by available evidence. Given this uncertainty, alternate estimates of monetized costs, quantified benefits and discount rate have been considered. A wider range of uncertainty was considered for alternate benefit estimates, since there is a higher degree of uncertainty about the benefit modelling estimates than there is about the cost estimates. A worst-case scenario of both higher costs and lower benefits was also considered. An alternate discount rate of 3% was also considered, as per Treasury Board Secretariat (TBS) guidance. The worst-case scenario (as shown in row 4 of Table 2, below) of 25% higher costs and 50% lower benefits yields net benefits of $51.4 million, with benefits outweighing costs by a factor of two; this suggests that the results are robust.

Table 2: Sensitivity analysis for alternate estimates of costs, benefits and discount rate (2012 dollars discounted to present value using a 7% discount rate unless otherwise indicated)

Alternate Impact Analysis Estimates	Net Benefits ($)
1. Central case	148,034,437
2. Costs 25% higher than estimated	140,497,259
3. Benefits 50% lower than estimated	58,942,862
4. Costs 25% higher and benefits 50% lower	51,405,683
5. Costs and benefits discounted at 3% per year	183,177,690

“One-for-One” Rule

The “One-for-One” Rule does not apply to this proposal. The Order will amend the existing Schedule and will not impose any new requirements of an administrative nature on regulatees.

Small business lens

There are currently fewer than three small businesses (importers/distributors) that will be materially affected by the proposed Order.

The potentially affected small businesses are importers/ distributors of targeted cigars. The Department estimates that a 180-day delay in implementing the Order will allow these businesses to realign their operations and, should they so choose, switch to other cigar products that are not affected by the Order.

Flexible option

In developing the Order, the Department considered options that would balance minimizing the regulatory burden on small businesses with protecting youth from inducements to use tobacco products. The Order will allow cigar manufacturers/importers a transition period of 180 days. Providing an implementation period of more than 180 days for these businesses to alleviate compliance costs was deemed to be counter-effective to the protection of youth. Allowing youth-appealing flavoured cigars from small businesses to remain on the Canadian market any longer than this period will undermine the purpose of this Order. Delaying implementation past 180 days from the publication date is not considered to be part of an effective approach, given that the total costs to all stakeholders would have exceeded the costs assumed under the flexible option.

Table 3: Flexibility analysis

	Initial Option		Flexible Option
Short description	Six-month delay for implementation		Twelve-month delay for implementation
Number of businesses impacted	8		8
	Annualized Average ($)	Present Value ($)	Annualized Average ($)	Present Value ($)
Compliance costs (see reference *)	4,167,374	29,269,892	2,922,811	20,528,604
Administrative costs	0	0	0	0
Total costs (all businesses)	4,167,374	29,269,892	2,922,811	20,528,604
Average cost per business	520,922	3,658,737	365,351	2,566,075
Total costs (all small businesses)	41,333	290,305	30,458	213,922
Considerations	Small businesses are at a higher risk for decreased profits due to the inability to clear inventories and a shorter operating period. Small business costs have been estimated to be $76,000 (2012 $) greater with a 180-day delay compared with a one-year delay.		The extension of the delay in implementation from 180 days to one year would increase the risk of youth in Canada becoming lifelong smokers. This would compromise the health of Canadians at a cost valued at $11.8 million when comparing the 180-day option with the one-year option (2012 $).

• Reference *
  These exclude recurring costs.

The compliance costs in Table 3 do not include recurring costs (see Table 1) due to the manufacturers’ ability to change production in fewer than 180 days. These costs are therefore not relevant in the calculation of either of the implementation delay options.

The initial option value combines foregone profits and one-time compliance costs. The reason for including the one-time costs in the initial option but not in the flexible option is that businesses may not have enough time to clear their inventories in 180 days (approximately six months), but would likely manage to clear most of them within one year. Foregone profits were included in the calculation of both options because of the lower level of sales, the only difference being that in the one-year delay option, businesses would carry half the amount of the first year foregone profits (they would have approximately six more months to sell flavoured targeted cigars).

Although the flexible option is the lower-cost option for small business in terms of compliance costs, it is not the lower-cost option for all stakeholders. An increase in the transition period to one year would reduce the estimated benefits by half in the first year as there would be approximately six more months for youth to try flavoured targeted cigars. The reduction in benefits, estimated at $11.8 million, would outweigh the gain by businesses.

Consultation

Notice of proposed order to amend the schedule to the Tobacco Act

The Department published a notice entitled Notice of proposed order to amend the schedule to the Tobacco Act (http://www. gazette.gc.ca/rp-pr/p1/2014/2014-10-11/html/notice-avis-eng.php) in the Canada Gazette, Part I, on October 11, 2014, providing interested stakeholders with a 30-day period to comment on the proposal. A total of 45 stakeholders provided comments to the Department from the following stakeholder groups (with the number of responses given for each): local, regional, provincial and territorial health authorities (11); non-governmental organizations (NGOs) [11]; cigar manufacturers and importers (5); cigarette manufacturers and importers (3); retailer associations (2); associations of health professionals (2); academia (1); and individual members of the general public (10). The comments are summarized below by sector, followed by the Department’s response to key issues and themes raised in the submissions.

Summary of comments from stakeholders

Local, regional, provincial and territorial health authorities

Comments from 11 local, regional, provincial and territorial health authorities demonstrated support for the proposed amendments; at the same time, these stakeholders suggested that the scope of the proposal be broader and more comprehensive, and that it capture all flavours in all tobacco products in order to be effective in protecting youth from the marketing tactics of the tobacco industry. They all called for a total ban on all flavoured tobacco products, including menthol products.

One provincial authority highlighted that several Canadian provinces are moving to amend their respective tobacco control legislation to address the issue of flavourings and, given this, that the most efficient and effective approach would be to have federal legislation that would apply consistently across the country.

Non-governmental organizations

Overall, the NGOs expressed support for the proposal; at the same time, all 11 that commented called upon the Department to broaden the scope of the flavour prohibition to cover all flavours (including menthol) in all tobacco products. Three NGOs argued against the exception of adult-oriented flavours in cigars weighing over 1.4 g, but no more than 6 g, stating that such exclusions would encourage youth to try or use these products, on the basis that all flavours mask the harsh taste of tobacco. Another NGO suggested that if rum, wine, port and whisky flavours were allowed, the measure would need to prevent their combination with other flavours (e.g. rum and cola flavour) to prevent possible abuse.

Cigar manufacturers and importers

Several of the companies that made submissions argued that the basis of the proposal is misguided and that there is no evidence to suggest that youth are using or experimenting with the flavoured cigars targeted by the proposal. Comments from this sector are presented by theme below.

• Job losses and market competition: Two stakeholders indicated that the proposal will put their companies out of business and hurt other businesses across the country. Two stated that the proposal is advantageous to a particular multinational company at the expense of Canadian businesses and that the proposal would undermine competition in the Canadian cigar industry. Two cigar importers pointed out that the cigarette industry would benefit from this ban.
• Flavour exception: One company suggested that flavours be permitted in “all natural” cigars (i.e. those with no homogenized components and cigars that have a wrapper fitted in spiral form and weighing more than 1.4 g, but no more than 6 g). Another suggested that additives that do not impart a distinctive or characteristic aroma or flavour of general appeal to youth should be allowed. One company requested that certain aromas such as sweet, vanilla, cherry and grape should be allowed in traditional cigars with a wrapper in spiral form.
• Cigars weighing more than 1.4 g, but not more than 6 g: One stakeholder suggested decreasing the upper weight limit from 6 g to 2.9 g.
• Menthol: Three of the five cigar companies stated that menthol should also be prohibited.
• Rum, wine, port and whisky flavour exception: Two companies proposed widening the range of exceptions to include other alcohol flavours such as cognac, amaretto and Kahlua or other flavours (such as coffee, tobacco-base flavouring, cherry and vanilla) or including an exception for additives that impart flavours of “generally recognized adult alcoholic beverages.” “Coffee” was proposed for exemption on the basis that it is deemed to be an adult-oriented beverage.
• Colouring agents: One company suggested that colouring agents be allowed in the wrappers of traditional spiral-wrapped cigars weighing more than 1.4 g, but no more than 6 g (usually made with homogenized tobacco leaf), provided the colours are similar to those in natural leaves and cured natural leaves.
• Other additives: Suggestions were made to except certain classes of additives such as sugars and sweeteners in traditional cigars and to allow “additives that perform a functional role” in the manufacturing of tobacco products.
• Transition period: One company asked that a two- to three-year transition period be given in order for suppliers and retailers to sell down inventory.

Cigarette manufacturers and importers

Of the three companies that provided comments, two stated that they do not manufacture or sell flavoured cigars and both supported the proposed measures (including not prohibiting menthol use). They also commented that the federal government should address the more serious issues of contraband tobacco and youth access, as they undermine tobacco control measures.

One of the companies stated that the proposal captures several traditional tobacco products that are used only by adult smokers. The company requested that the Department give manufacturers, retailers and distributors 12 months to manage existing inventories and to adapt to the Regulations, so that there continues to be competition in the industry and to ensure that illicit products do not fill the void created once these products are banned.

Retailer associations

Two retailer associations stated that the proposal would impact the bottom line of their small business owners, who only sell these products to adults in a highly regulated environment. They stated that eliminating the availability of legal tobacco products from retailers’ shelves would not address the demand for these products and that the void would be filled by illegal tobacco products indiscriminately sold to youth in an unregulated market. Both stakeholders suggested that a better alternative would be the introduction of penalties for youth who are found in possession of tobacco products.

Associations of health professionals

Both associations supported the proposed Order and both commented that it needs to be strengthened by banning all flavours, including menthol, in all tobacco products.

Academia

The stakeholder offered evidence and conclusions based on an analysis of the Youth Smoking Survey 2012–2013 and called for a complete ban on all flavours, including menthol, in all tobacco products.

General public

All but one of the 10 members of the general public who commented on the proposed Order called upon the Department to ban all flavours, including menthol, in all tobacco products. One member of the general public strongly disagreed with the proposal on the basis that his liberties as an adult to access flavoured tobacco products would be taken away.

Proposed Order published in the Canada Gazette, Part I

The proposed Order and the accompanying Regulatory Impact Analysis Statement (RIAS) were prepublished in the Canada Gazette, Part I, on March 7, 2015, followed by a 30-day comment period that ended on April 6, 2015. A total of 58 submissions were received from the following stakeholder groups (with the number of responses given for each): local, regional, provincial and territorial health authorities (3); non-governmental organizations (NGOs) [9]; cigar manufacturers and importers (6); retailer associations (1); academia (6, including 3 submissions from 1 organization); and individual members of the general public (33). Below is a summary of the comments that were received during the comment period.

Of the 58 submissions, 50 specifically called for a comprehensive ban of all flavours, including menthol in all tobacco products. Two NGOs expressed their disappointment on the absence of measures addressing flavoured cigars that weigh above 6 g. Another NGO stated that Canadian youth deserve the same level of consistent and comprehensive protection as proposed in legislation being considered in the Ontario legislature at the time of this consultation, which proposes to prohibit all flavours in additional types of tobacco products.

Cigar manufacturers and importers reiterated the same comments they made during the comment period following the Notice of proposed order to amend the schedule to the Tobacco Act published on October 11, 2014, which are described in the previous section. They submitted the following additional comments:

• One company suggested that sweeteners such as saccharin in mouthpieces should be allowed. Two companies suggested that colorants used to render wrappers made of reconstituted paper brown and black should be allowed.
• Cigars made with 100% natural tobacco leaf and/or wrapper should be excluded from the flavour ban.
• Another company suggested that cigars with wrappers in spiral form with pipe tobacco fillers should be exempted.
• One company reiterated that ingredients that provide a functional role (e.g. saccharin) and do not by themselves impart a flavour or aroma should be allowed. These additives are referred to as casings that are used to smooth out the harsh taste of tobacco.
• One company suggested that the flavour exceptions should be based on all the flavoured cigars that existed or were sold in Canada prior to 2007. This would allow a wider range of permitted flavours in cigars on the Canadian market.
• Another company suggested that the excepted flavours (port, wine, rum and whisky) in cigars weighing over 1.4 g but not more than 6 g that have a wrapper that is fitted in spiral form, do not have tipping paper and are not little cigars should also be allowed in cigars with straight seam wrappers.

Comments on the benefits and cost analysis

• Of the six submissions from cigar manufacturers and importers, three stated that the 180-day delay in coming into force date was too short and should be increased to at least one year. They also mentioned that the cost analysis underestimated the time needed to dispose of or sell their existing inventories. One stakeholder indicated that it would be able to comply with the proposed coming into force date.
• The one retailer association that commented pointed out the RIAS did not factor in the loss of cross-purchasing potential. The organization also stated that the benefits in terms of revenue saved as a result of the proposed Order may be overstated, as there was no evidence base to support the assertion that the removal of flavoured tobacco products from the legal market will prevent youth from accessing these products illegally or smoking altogether.
• The retailer association mentioned that the loss of government tax revenues due to a potential increase in contraband was not taken into account.
• One of the cigar importers indicated that it would need to invest in new machinery to make spiral wrapped cigars.
• One NGO stated that the RIAS completely overlooked any potential impact of menthol substitution in the targeted cigars among youth and that menthol makes it more difficult for dependent smokers to quit.

Response of the Department of Health to key stakeholder concerns

Prohibiting menthol and other flavours

While the Department is concerned about the use of flavours, including menthol in cigars as well as in other tobacco products, it has chosen at this time to focus its attention on reducing the appeal of certain types of flavoured cigars to counter industry innovation since the 2009 amendment. The Department plans to continue to closely monitor the use and sales of flavoured tobacco products, including those with menthol.

Exempting other flavours and colouring agents

The intent of the Order is to limit the ability of the tobacco industry to use additives including flavouring to market tobacco products to youth and to eliminate further avenues for product innovation. Furthermore, permitting colouring agents to alter the appearance of cigars wrappers compared to those of traditional cigars would also be counter to the intent of the Order. The Department has therefore decided not to incorporate these suggestions in the final Order.

Increase in contraband products

The Government has introduced a number of measures to combat the illicit trade in tobacco. As part of its strengthened anti-contraband enforcement strategy, the Government announced the establishment of the Royal Canadian Mounted Police Anti-Contraband Force in March 2013. In 2014, Parliament amended the Criminal Code (Tackling Contraband Tobacco Act) to create a new offence for trafficking in contraband tobacco and to provide for minimum penalties of imprisonment for repeat offenders. To further strengthen efforts to address contraband tobacco, the 2014 federal budget provided $91.7 million over five years for the Royal Canadian Mounted Police to enhance its efforts to combat contraband, and for the deployment of new technology at the Canada–United States border to target cross-border smuggling and related criminal activities.

Penalizing youth for possession of tobacco products

There is no conclusive evidence that youth possession laws are effective in preventing youth from starting to smoke. During the development of the Tobacco Sales to Young Persons Act in the 1990s (now part of the TA), Parliament decided that the most effective approach was to concentrate on prohibiting the furnishing of tobacco products to youth, on the assumption that retailers catering to adults would be better able to cope with the responsibility of not selling tobacco to young persons. For this reason, the TA contains provisions restricting youth access to tobacco products, such as prohibiting the furnishing of tobacco products to a person under the age of 18.

Cost-benefit analysis

• Cost to manufacturers and importers

The cost-benefit analysis was updated to reflect comments made by manufacturers and importers. The cost analysis was modified to include the additional cost to manufacturers and importers to dispose of their inventories after the implementation of the new restrictions. In response to the request to extend the implementation period, after revising the costs, the analysis still confirmed that the 180-day implementation period was optimal, as the increase in benefits still outweighs the increase in costs compared to a 12-month implementation period. In response to the comment on the additional investment in cigar making machinery, the cost-benefit analysis focuses on impacts on the Canadian society and therefore includes only the capital costs incurred by domestic manufacturers. The comment refers to capital costs that will be incurred by foreign manufacturers, which may or may not be passed on the importers and are therefore not included in the analysis.

• Cost to retailers

In response to the comment that cross-purchasing potential was not considered, while the analysis acknowledges that there may be a reduction in retail sales, this outcome is mostly due to reduction in future sales as a result of preventing youth from becoming tobacco users. The analysis assumes that the impact on adult consumption, which constitutes the majority of flavoured cigar consumption, will be negligible due to the continued availability of cigars which retailers will continue to sell. This implies that the potential loss in revenues due to lower cigar sales will be minor.

• Reduction in government tax revenues

The government excise tax revenue from the sale of cigars is a transfer of payments from manufacturers/importers to taxpayers. The net impact of such a transfer on society is zero. Therefore, foregone excise tax revenues were omitted from the calculation of costs and benefits.

• Benefit analysis

In response the comment about the consideration of a menthol substitution in targeted cigars, the benefit portion of the cost-benefit analysis was based on an observed decrease in the youth prevalence rate after the 2009 amendment and used conservative estimates which accounted for the event that some youth will continue to experiment with cigars including those with menthol or excepted flavours.

Regulatory cooperation

Although the Order is not being introduced to achieve alignment with tobacco control measures that exist in other jurisdictions, Canada will be in step with international actions aimed at addressing the appeal of flavoured tobacco products. The Order will also be in line with the Partial Guidelines for implementation of Articles 9 and 10 of the World Health Organization Framework Convention on Tobacco Control.

Rationale

In 2009, the Government introduced the Cracking Down on Tobacco Marketing Aimed at Youth Act, thereby amending the Tobacco Act to limit the marketing of tobacco products, especially little cigars, to youth. However, new cigar types weighing slightly more than little cigars were brought onto the Canadian market by tobacco manufacturers and importers and were sold in the same flavours as those of the cigars targeted by the 2009 amendment. Data from the Youth Smoking Survey 2012–2013 indicate that youth continue to use flavoured tobacco products, including cigars.

To address this issue, a number of options were considered and analyzed. Amending the Schedule to include only the flavoured cigars with cigarette-like features and flavoured cigars weighing more than 1.4 g, but not more than 6 g, fitted with a wrapper in spiral form (with the exception of cigars that have traditional adult-oriented flavours) was considered to be the most effective option, for two reasons: only cigar types with characteristics that appeal to youth would be targeted, and the impact on cigar choices for adults would be minimized since traditional adult-oriented flavours (rum, wine, port and whisky flavours) would be allowed. It is expected that by further restricting the availability of flavoured cigars in the Canadian market, the proposed Order would help reduce youth inducements to experiment and use tobacco products.

Stakeholders, in particular cigar manufacturers and importers who will be impacted by the Order, have raised a number of concerns — especially regarding the economic impact of the proposed Order. The Department took these concerns into consideration; however, given that preventing initiation of tobacco use by youth is one of the most effective means of reducing lifetime tobacco use, the Department determined that amending the Schedule was the best course of action for protecting Canadian youth from the dangers of tobacco use. It is estimated that the Order will result in net benefits to society with a present value of $148 million over a 10-year period.

To comply with the Order, cigar manufacturers and importers will carry costs resulting from (i) the disposal of unused inventories and unsold products, (ii) incremental costs associated with the manufacture of cigars with excepted flavours or of unflavoured cigars, and (iii) foregone profits resulting from the discontinued sales under the recommended regulatory scenario. These costs are estimated at a present value of $29.9 million over 10 years at a 7% discount rate. The costs may be passed on to consumers in the form of incremental increases in the price of other tobacco products; however, the incremental price increases are expected to be negligible (i.e. less than two cents per cigar).

The Order will be consistent with actions underway and/or being considered in other Canadian jurisdictions with respect to addressing flavoured tobacco products that are attractive to youth. Canada will also be in line internationally with recent efforts taken by other countries to curb tobacco product attractiveness.

Implementation, enforcement and service standards

Coming into force

The Order will come into force 180 days after the day of its registration. Upon the coming into force date, the use of additives including flavours specified in the Schedule will be prohibited in the manufacture and sale of the targeted cigar types. This transition period will provide time for an orderly transition in the marketplace and will also help mitigate profit losses.

Compliance promotion and outreach activities

Compliance promotion activities aimed at informing manufacturers, importers/distributors and retailers of the affected tobacco products will be conducted in order to increase their level of awareness to the Order and to assist them in achieving compliance. These activities will include developing and distributing information materials (e.g. fact sheets, copies of the amended Schedule) during routine inspections, and/or conducting information sessions to describe the amendments to the Schedule.

Enforcement

Compliance monitoring and enforcement activities targeting the affected products will be undertaken by tobacco inspectors in the Department’s Regions and Programs Bureau under the authority of the TA. The Department will actively monitor compliance along the supply chain, including manufacturers, importers and retailers. Compliance and enforcement strategies will be consistent with the current overall approach to other prohibitions set out in the Tobacco Act or its regulations.

Service standards

Responses to enquiries regarding the Order will be provided in a timely manner.

Contact

Mathew Cook
Manager
Regulations Division
Tobacco Products Regulatory Office
Controlled Substances and Tobacco Directorate
Health Canada
Address Locator: 0301A
150 Tunney’s Pasture Driveway
Ottawa, Ontario
K1A 0K9
Fax: 613-948-8495
Email: pregs@hc-sc.gc.ca

Small Business Lens Checklist

1. Name of the sponsoring regulatory organization:

2. Title of the regulatory proposal:

3. Is the checklist submitted with a RIAS for the Canada Gazette, Part I or Part II?

Canada Gazette, Part I Canada Gazette, Part II

A. Small business regulatory design

I	Communication and transparency	Yes	No	N/A
1.	Are the proposed Regulations or requirements easily understandable in everyday language?
The current Schedule of Prohibited Additives has been in place since 2009 and lists certain additives, including most flavouring additives other than menthol, that are prohibited from use in the manufacture of cigarettes, little cigars and blunt wraps. This proposal modifies the Schedule to prohibit the use of the same additives (with some exceptions) in other types of cigars: cigars weighing more than 1.4 g, but not more than 6.0 g with a spiral wrapper, cigars with tipping paper and cigars with a wrapper that is not fitted in spiral form. Manufacturers and importers of tobacco products are familiar with the terms used in the proposed Order.
2.	Is there a clear connection between the requirements and the purpose (or intent) of the proposed Regulations?
The intent of the proposed Order Amending the Schedule to the Tobacco Act (proposed Order) is to further restrict the use of additives, including flavouring additives, that are used to market cigars that appeal to youth. The proposed Order will prohibit the use of most flavours and selected additives in additional types of cigars that are likely appealing to youth. The targeted cigars are those that weigh more than 1.4 g, but no more than 6.0 g, or those that have a similar physical appearance to cigarettes or little cigars.
3.	Will there be an implementation plan that includes communications and compliance promotion activities, that informs small business of a regulatory change and guides them on how to comply with it (e.g. information sessions, sample assessments, toolkits, Web sites)?
An implementation plan for the Order will be prepared that will include communication and outreach activities. Tobacco inspectors in the Department’s Regions and Programs Branch will conduct compliance promotion activities to inform manufacturers and importers of the Order Amending the Schedule to the Tobacco Act in relation to prohibited additives and of its implications. Tobacco inspectors are available to answer questions with regard to the application of the Tobacco Act and its associated regulations.
4.	If new forms, reports or processes are introduced, are they consistent in appearance and format with other relevant government forms, reports or processes?
There are no new forms, reports or processes introduced in this proposal. Manufacturers and importers of cigars would only have to comply with the prohibition on the use of certain additives in their products. There are no reporting requirements linked to this proposal.
II	Simplification and streamlining	Yes	No	N/A
1.	Will streamlined processes be put in place (e.g., through BizPaL, Canada Border Services Agency single window) to collect information from small businesses where possible?
This proposal does not aim at collecting information from small businesses. All businesses, including small businesses, are already required to provide information on their company, their products and some of their activities under the Tobacco Reporting Regulations. The Department relies on information that is already submitted as per the requirements of the Tobacco Reporting Regulations to conduct its activities.
2.	Have opportunities to align with other obligations imposed on business by federal, provincial, municipal or international or multinational regulatory bodies been assessed?
Several Canadian provinces have legislation or have introduced bills to establish regulatory authorities to prohibit or restrict the use of flavours in tobacco products. For example, Alberta has passed legislation (to take effect on June 1, 2015) that prohibits characterizing flavours, but not menthol, in smokeless tobacco, bidis, kreteks and cigars weighing up to 5 g or with a retail value of less than $4.00 per unit. Nova Scotia introduced proposed legislation in April 2015 to ban the sale of most flavoured tobacco products, including menthol tobacco products in the province. Ontario has also recently introduced proposed legislation that would prohibit the sale of flavoured tobacco products. The proposed Order is complementary to the amendments made to the Tobacco Act in 2009 in order to limit the marketing of flavoured products to youth. While the proposed Order is not being introduced to achieve alignment with existing tobacco control measures in other jurisdictions, Canada would be part of an international convergence of actions towards addressing the appeal of flavoured tobacco products. The proposed Order would also be in line with the Partial Guidelines on implementation of Articles 9 and 10 of the World Health Organization Framework Convention on Tobacco Control (WHO FCTC).
3.	Has the impact of the proposed Regulations on international or interprovincial trade been assessed?
The proposal would impact only cigars that are manufactured or sold in Canada, regardless of origin, and would apply to all Canadian jurisdictions. Alberta has introduced legislation that will ban flavours, excluding menthol, in cigars weighing under 5 g (see response to II[2]). The proposed Order does not ban any cigar types, only the use of specific additives, and, therefore it is expected that the cigar market will adjust to the new requirements. Member countries of the World Trade Organization have been notified of this proposal as per the WTO — Technical Barrier to Trade Agreement requirement.
4.	If the data or information, other than personal information, required to comply with the proposed Regulations is already collected by another department or jurisdiction, will this information be obtained from that department or jurisdiction instead of requesting the same information from small businesses or other stakeholders? (The collection, retention, use, disclosure and disposal of personal information are all subject to the requirements of the Privacy Act. Any questions with respect to compliance with the Privacy Act should be referred to the department’s or agency’s ATIP office or legal services unit.)
There are no new requirements for submitting data or information to comply with the proposed Regulations. As stated in II(1), the Department already has access to information on tobacco products sold in Canada and on Canadian tobacco manufacturers and importers.
5.	Will forms be pre-populated with information or data already available to the department to reduce the time and cost necessary to complete them? (Example: When a business completes an online application for a licence, upon entering an identifier or a name, the system pre-populates the application with the applicant’s personal particulars such as contact information, date, etc. when that information is already available to the department.)
There are no forms that businesses would be required to submit to the Department as a result of this proposal.
6.	Will electronic reporting and data collection be used, including electronic validation and confirmation of receipt of reports where appropriate?
This proposal does not entail any reporting of information to the Department. The Department already has access to information on tobacco products and on manufacturers and importers and their activities under the Tobacco Reporting Regulations.
7.	Will reporting, if required by the proposed Regulations, be aligned with generally used business processes or international standards if possible?
No reporting will be required under this proposal.
8.	If additional forms are required, can they be streamlined with existing forms that must be completed for other government information requirements?
No forms will be required to be filled out under this proposal.
III	Implementation, compliance and service standards	Yes	No	N/A
1.	Has consideration been given to small businesses in remote areas, with special consideration to those that do not have access to high-speed (broadband) Internet?
No small businesses that would be affected by this proposal are located in a remote area. All businesses that would be affected already submitted the information required under the Tobacco Reporting Regulations electronically to Health Canada.
2.	If regulatory authorizations (e.g. licences, permits or certifications) are introduced, will service standards addressing timeliness of decision-making be developed that are inclusive of complaints about poor service?
No regulatory authorizations will be introduced in this proposal.
3.	Is there a clearly identified contact point or help desk for small businesses and other stakeholders?
Tobacco inspectors in the Department’s Regions and Programs Branch are in contact with all businesses, including small businesses, that are involved in the sale and manufacture of tobacco products in Canada. They remain the main point of contact whereby all businesses direct all their queries with regard to the requirements of the Tobacco Act and its associated regulations.

B. Regulatory flexibility analysis and reverse onus

IV	Regulatory flexibility analysis	Yes	No	N/A
1.	Does the RIAS identify at least one flexible option that has lower compliance or administrative costs for small businesses in the small business lens section? Examples of flexible options to minimize costs are as follows: Longer time periods to comply with the requirements, longer transition periods or temporary exemptions; Performance-based standards; Partial or complete exemptions from compliance, especially for firms that have good track records (legal advice should be sought when considering such an option); Reduced compliance costs; Reduced fees or other charges or penalties; Use of market incentives; A range of options to comply with requirements, including lower-cost options; Simplified and less frequent reporting obligations and inspections; and Licences granted on a permanent basis or renewed less frequently.
A flexible option was identified for small businesses in the RIAS. The proposal, as it is presented, would allow cigar manufacturers/importers a transition period of 180 days, which is also the usual minimum requirement for Canada to comply with its obligations under the World Trade Organization’s Technical Barrier to Trade Agreement. A flexible option providing an implementation period of more than 180 days was considered for these businesses to alleviate compliance costs. However, allowing youth-appealing flavoured cigars from small businesses to remain on the Canadian market any longer than this period would undermine the purpose of this proposal. In addition, delaying implementation past 180 days from the publication date is not considered to be part of an effective approach, given that the total costs to all stakeholders would exceed the costs assumed under the flexible option.
2.	Does the RIAS include, as part of the Regulatory Flexibility Analysis Statement, quantified and monetized compliance and administrative costs for small businesses associated with the initial option assessed, as well as the flexible, lower-cost option? Use the Regulatory Cost Calculator to quantify and monetize administrative and compliance costs and include the completed calculator in your submission to TBS-RAS.
The RIAS includes a statement about why a flexible option could not be provided to small businesses and includes the quantified and monetized compliance costs for small businesses associated with both options.
3.	Does the RIAS include, as part of the Regulatory Flexibility Analysis Statement, a consideration of the risks associated with the flexible option? (Minimizing administrative or compliance costs for small business cannot be at the expense of greater health, security or safety or create environmental risks for Canadians.)
As stated in (1), allowing a flexible option for the small businesses that would be affected by the proposal was not provided, as minimizing compliance costs for small businesses cannot be at the expense of greater health protection for Canadian youth.
4.	Does the RIAS include a summary of feedback provided by small business during consultations?
Two consultations on the proposal, both providing a 30-day comment period, were launched namely by (i) the publication of the Notice of proposed order to amend the schedule to the Tobacco Act on October 11, 2014, in the Canada Gazette, Part I, and (ii) by the prepublication in the Canada Gazette, Part I, of the Proposed Order Amending the Schedule to the Tobacco Act on March 7, 2015. Summaries of the comments, including those from small businesses from the consultations, were included in the RIAS.
V	Reverse onus	Yes	No	N/A
1.	If the recommended option is not the lower-cost option for small business in terms of administrative or compliance costs, is a reasonable justification provided in the RIAS?
Yes, as per responses to Part IV above.

• Footnote a
  S.C. 2009, c. 27, s. 9
• Footnote b
  S.C. 1997, c. 13
• Footnote 1
  S.C. 1997, c. 13
• Footnote 2
  The cost-benefit analysis is available upon request from the contact identified at the end of this document.