Nova Scotia Seeks Tobacco Smuggling Costs from JTI-Macdonald

The province of Nova Scotia has filed a legal claim against tobacco manufacturer JTI-Macdonald Corporation (JTI) to recover $326 million in taxes given up when taxes were reduced to prevent smuggling in the early 1990s.

A notice of Crown claim was filed Friday, June 24, with Ernst and Young in Toronto, the court-appointed monitor who will evaluate the claims for JTI under provisions of the Companies and Creditors Arrangement Act, a form of bankruptcy protection.

"We reduced taxes to try and curb smuggling in 1994 and gave up hundreds of millions of dollars of revenue as a result," said Finance Minister Peter Christie. "Since JTI Macdonald profited from its participation in a smuggling scheme, we believe they should cover the cost picked up by Nova Scotians."

The tobacco manufacturer is already facing billions of dollars of tax-related claims from the governments of Quebec, Ontario, and Canada. June 27 was the deadline set by the court monitor to receive any other claims, and Nova Scotia may be among a number of provinces to file.

The government of Canada launched a lawsuit against JTI in 2003, after RCMP laid charges against JTI and related companies for smuggling tobacco products between 1991 and 1996. It is alleged that the tobacco companies supplied U.S. smugglers with untaxed Canadian blend cigarettes that were shipped back to Canada through the Akwesasne Reserve near Cornwall, Ont., for sale on the black market.

Nova Scotia was one of several provinces that reduced taxes in the early 1990s to try to curb tobacco smuggling. The notice of claim says JTI profited from illegal activities by "engaging in smuggling, deceit, fraudulent misrepresentation, and civil conspiracy resulting in a tax liability owed to the province of Nova Scotia."

The government of Nova Scotia is seeking a total of $326 million from JTI Macdonald. The majority of the claim is for forgone revenues from 1994 to 2001, a period when tobacco taxes were kept lower to curb smuggling. The remainder includes taxes that should have been paid on cigarettes and other tobacco products sold illegally between 1989 and 1995.

The province has raised tobacco taxes in recent years as a health-promotion strategy to reduce consumption.

In the government of Canada action, JTI acknowledged that smuggling, fraud and deceit did occur but it submitted that little could be done to stop the smuggling activities, that it was dealing only with legitimate wholesalers and did not know the identity of the criminals involved.

The Ernst and Young monitor is expected to evaluate the claims and develop a process to respond to them over the next few months.