Chapter V, Section C: Revenue Integrity

Combatting the Underground Economy

In 2013, the total value of the underground economy in Ontario was estimated to be $16.7 billion or roughly 2.4 per cent of Ontario’s GDP.1 Corresponding tax revenue would help fund essential services like health care or education. When people and businesses avoid paying taxes, everyone else is left to make up the shortfall. This puts the competitiveness of legitimate businesses at risk, and gives some businesses an unfair advantage. That is why the government is continuing to deliver on its commitment to fight the underground economy to support a tax system where everyone pays their fair share.

Progress to date:

  • Through the Aggressive International Tax Planning Underground Economy (AITP-UE) agreement with the Canada Revenue Agency (CRA), the Province has recovered over $1.1 billion since 2013–14. This, combined with enhanced audits conducted by the Province, has resulted in over $1.6 billion in revenue since 2013.
  • Building on the success of the AITP-UE, the Province recently signed a new Ontario Extended Services Agreement. This agreement is built on a strong foundation of programs aimed at addressing tax non-compliance, while providing the government with enhanced flexibility, allowing it to tailor additional initiatives to address new areas of high risk as they are identified. The agreement will initially focus on expanding existing audit coverage into additional high risk areas, and target individuals and businesses that do not file income and sales tax through enhanced compliance activities.
  • The government launched a comprehensive education campaign that informs the public on how participation in the underground economy puts people at risk of poor workmanship, lack of warranty, fraud, personal liability, and health and safety issues.

Addressing Electronic Sales Suppression

Electronic sales suppression (ESS) involves the manipulation of point-of-sale systems for the purposes of underreporting income. When businesses underreport income, they avoid paying their fair share of taxes. Ontario loses approximately $500 million annually to ESS activity — revenue that could have gone to important public services like health care and education. That is why the Province has already taken steps to make ESS illegal, and punishable by fines, and in some cases imprisonment. Moving forward, the Province will introduce legislation to address the practice of ESS. The legislation would require prescribed businesses to update their electronic cash register systems to meet legal requirements that will stop the ability to manipulate sales transaction information.

The government is committed to continue to work with businesses to make the transition as easy as possible. Through continued consultation in the coming months, the government will ensure that implementation includes a reasonable transition period and will give consideration to financial or other supports.

Addressing Unregulated Tobacco

Unregulated tobacco products can be purchased for as little as a few dollars, and evidence suggests that profits are sometimes used to fuel other criminal activity. These activities result in a loss of revenue that is needed to support important government services like health care and education, and create unfair competition for those businesses that comply with Ontario laws. That is why the government is committed to addressing unregulated tobacco through a balanced approach of enforcement and partnerships, which includes working with Crime Stoppers to raise consumer awareness.

Since 2008, the Ministry of Finance’s enforcement activities have resulted in penalties of more than $42.6 million assessed against retailers under the Tobacco Tax Act. In addition, more than 265 million untaxed cigarettes, 3.9 million untaxed cigars, and 196 million grams of untaxed fine-cut or other tobacco products have been seized by the Ministry of Finance.

However, the government is aware that there is more to do to reduce the availability of unregulated tobacco and ensure compliance with tobacco laws in Ontario. As such, the government is committed to moving forward with additional compliance measures, including:

  • Proposing amendments to the Tobacco Tax Act to add penalty and offense provisions for failing to notify the Ministry of Finance prior to destroying raw leaf tobacco. Raw leaf tobacco, falsely reported as destroyed, can potentially be made available to the unregulated market. These amendments will allow ministry inspectors to verify destruction, deter false reporting and prevent the diversion of raw leaf tobacco.
  • Exploring the implementation of automated “track and trace” technology and services that will monitor the movement and location of raw leaf tobacco through the supply chain, reduce its diversion into the unregulated market, and make it easier for registrants to comply with regulatory requirements.
  • Supporting the Ontario Provincial Police in expanding the size of the Contraband Tobacco Enforcement Team. This will enable the team to conduct greater enforcement activities to address linkages between organized crime and unregulated tobacco.
  • Expanding its partnerships with regional and local police services by establishing a local law enforcement grants pilot project that will make funding available to law enforcement partners in support of tobacco investigations.
  • Supporting enforcement efforts to address complex unregulated tobacco distribution networks in the province by proposing an amendment to the Tobacco Tax Act that would allow the court to authorize the use of tracking devices in an investigation. This amendment will allow for a more effective way to track and monitor the movement of unregulated tobacco.

The government will continue to work with its partners at all levels of government to share information, develop partnerships and support efforts to address unregulated tobacco.

Supporting Smoke-Free Ontario

Increasing Tobacco Taxes

Tobacco use is the number one cause of preventable disease and premature death in the province. Despite significant progress in reducing the use of tobacco products, nearly 16,000 people in Ontario die each year as a result of smoking. By quitting smoking, people are less likely to develop smoking-related illnesses, such as cancer and heart disease.

Ontario is committed to its goal of having the lowest smoking rate in Canada. Currently, Ontario has the second lowest tobacco tax rate in the country. Recognizing that tobacco taxes are critical in supporting Provincial health objectives, smoking cessation and prevention, in the 2017 Budget, the Province announced a plan to increase the tobacco tax rate by $10 per carton of 200 cigarettes, spread over three years, with an immediate increase of $2 per carton, which came into effect on April 28, 2017. This will bring Ontario’s rate closer to the national average.

Continuing with this plan, Ontario’s tobacco tax will increase from 16.475 cents to 18.475 cents per cigarette and per gram of tobacco products other than cigars, effective 12:01 a.m., March 29, 2018. These changes are equivalent to $4 per carton of cigarettes. The government plans to further increase the tobacco tax rate by an additional $4 per carton of cigarettes in 2019.

Wholesalers of tobacco products who are not collectors of tobacco tax are required to take an inventory of all tobacco products (except cigars) that they hold at the end of day, March 28, 2018, and remit the additional tax on the inventory to the Ministry of Finance.

Footnote

[1] Statistics Canada, “The Underground Economy in Canada, 2013.” The Daily, Component of Statistics Canada Catalogue no. 11-001-X, (June 20, 2016), (accessed March 12, 2018), http://www.statcan.gc.ca/daily-quotidien/160620/dq160620b-eng.htm

Updated: March 28, 2018
Published: March 28, 2018