Cigar sales on First Nations Reserves
This publication provides general information and sets out the Ministry of Finance (ministry) approach for wholesalers and retailers who sell cigars on First Nations reserves. It does not replace the Tobacco Tax Act or the regulations.
As announced in Ontario's 2021 Budget, the ministry is working closely with current wholesalers and new cigar applicants to clarify and strengthen guidance regarding on‐reserve sales.
Starting with the 2022 permit year, there will be changes for cigar wholesalers who operate under the administrative concession and sell cigars on reserve without collecting an amount on account of tax (i.e., untaxed cigars). These wholesalers will be required to consult with the ministry by submitting a cigar sales plan as part of the yearly permit process.
Review of the wholesaler's cigar sales plan will allow the ministry to evaluate whether a wholesaler's proposed cigar sales on reserve represents reasonable retail volumes, and will allow for transparent communication between the ministry and wholesalers towards ensuring that sales volumes represent the ministry's view of reasonable retail volumes.
Requirements for wholesalers
Any wholesaler who wishes to deliver or sell cigars to a retailer in Ontario must first register with the ministry, obtain a wholesaler's permit, and be designated as a cigar tax collector.
Every wholesaler must ensure that every retailer to whom it sells cigars holds a Tobacco Retail Dealer's Permit under the Tobacco Tax Act or is authorized by the ministry as a retailer under Ontario's First Nations Cigarette Allocation System.
In general, wholesalers are required to collect an amount on account of tax on all cigar sales.
However, to facilitate the tax-exempt purchase of cigars by First Nations individuals purchasing cigars on a reserve, the ministry does not generally enforce this pre-collection of tax requirement in situations where the cigars are delivered and sold on a reserve by a wholesaler directly to an authorized on-reserve retailer acting in their capacity as a retailer. This administrative concession helps minimize financial and administrative burden for on-reserve retailers.
The total quantity of cigars sold to each on-reserve retailer must be reported to the ministry on a monthly basis using Schedule 9S – Sales of Tax Exempt Tobacco Products to First Nations Retailers and submitted with the wholesaler's monthly Tobacco Tax Return.
The administrative concession does not apply to sales of cigars to a person on-reserve acting as a wholesaler. Under the Tobacco Tax Act, a wholesaler is a person who sells cigars for the purposes of resale. Depending on the nature of the transaction, a person can be a wholesaler even if the person holds a Tobacco Retail Dealer's Permit under the Tobacco Tax Act or is authorized by the ministry as a retailer under Ontario's First Nations Cigarette Allocation System.
In situations where deliveries and sales of untaxed cigars by a wholesaler to a person exceeds the volumes typically sold to a retailer, the ministry may consider that sale as a sale to a wholesaler and assess the wholesaler for failure to collect tax.
To avoid penalty assessments for failure to collect tax, wholesalers must carefully evaluate and monitor the volume of their untaxed cigar sales to authorized on-reserve retailers to ensure they are in line with the volumes typically sold to retailers.
Wholesalers may also choose to not use the administrative concession and collect the tax on all cigar sales.
To help wholesalers evaluate the volume of their untaxed cigar sales to authorized on-reserve retailers, the ministry has introduced a new cigar sales plan review process.
Starting with the 2022 permit year, as part of the yearly permit process, all cigar wholesalers who operate under the administrative concession and sell untaxed cigars on reserve will be required to consult with the ministry by submitting a plan of their proposed untaxed cigar sales on reserve for the calendar year (January 1 to December 31).
Review of the wholesaler's cigar sales plan on a yearly basis will allow the ministry to evaluate whether a wholesaler's proposed cigar sales on reserve represents reasonable retail volumes.
The annual sales plan for the period January 1st to December 31st of the permit year should have a breakdown of the proposed cigar sales including:
- the name of each on-reserve retailer,
- the location of each retailer including the reserve's name, and
- the total volume of anticipated individual untaxed cigars to be sold to each retailer.
Cigar sales plan review – 2022 transitional measure
As a transitional measure, applicable to only the 2022 permit year, the ministry will not require some wholesalers to submit a sales plan if the wholesaler's historical untaxed cigar sales are considered reasonable cigar sales volumes on reserve as outlined later in this publication. If these wholesalers anticipate that their untaxed cigar sales volumes in 2022 will increase from their historical volumes, the ministry requires these wholesalers to submit a 2022 cigar sales plan to the ministry for review and consultation that includes the anticipated increase in sales.
The ministry will send a letter to ministry authorized cigar wholesalers informing them whether or not the ministry requires them to submit a cigar sales plan for the 2022 permit year.
As the ministry works with wholesalers on this new process, the submission date for the first draft of sales plans to the ministry for 2022 is January 14, 2022.
If a wholesaler has not received a letter from the ministry by November 30, 2021, the wholesaler can email the ministry at firstname.lastname@example.org, or call 1 866 ONT-TAXS (1 866 668-8297) to follow up on this matter.
Wholesalers are required to submit their sales plan by email to email@example.com or by mail to: Ministry of Finance 33 King Street West PO Box 625 Oshawa ON L1H 8E9
New wholesalers are required to submit their plan with their application to register for a wholesaler's permit.
The ministry's review of 2022 sales plans will take place in early 2022. To support this process, permits will be issued for January 1, 2022 to June 30, 2022 while discussions between the ministry and wholesalers occur. Sales plans are expected to be finalized by March 31, 2022.
Once a wholesaler's plan has been accepted by the ministry, permits will be granted for the remainder of 2022.
How will the ministry evaluate what are reasonable retail volumes?
Two methods may be used by the ministry to assist in evaluating whether a wholesaler's anticipated cigar sales represent reasonable retail volumes.
- Retailer purchase analysis
The ministry will review a wholesaler's proposed sales volumes to individual authorized on-reserve retailers to analyze whether those retail transactions represent typical wholesaler-to-retailer sales volumes as opposed to wholesaler-to-wholesaler volumes.
Generally, the ministry views sales of more than 25,000 cigars per retailer per year as exceeding reasonable retail volumes.
Where relevant, the ministry may also take into consideration the wholesaler's average off-reserve retail sales volumes, and how these might compare to their on-reserve sales. A wholesaler's untaxed cigar sales to authorized on-reserve retailers should generally be comparable to its sales to retailers not located on a reserve.
Wholesalers may be asked to: (a) provide evidence to support their sales plan or; (b) revise their sales plan to an acceptable volume, where the sales plan includes proposed sales volumes to individual authorized on-reserve retailers in excess of typical wholesaler-to-retailer sales volumes. For example, if a wholesaler proposes to sell 50,000 untaxed cigars per year to an authorized on-reserve retailer in a given community, further discussions would be required to support these sales since the ministry views sales of more than 25,000 cigars per retailer per year as exceeding reasonable retail volumes.
- Consumer demand analysis
The ministry will also assess whether a wholesaler's proposed untaxed cigar sales to authorized on-reserve retailers in a First Nations community, in a given year, fall within the total estimated demand for cigars in that community.
Therefore, wholesalers are advised to estimate the demand for cigars for each First Nations community for each year that they are supplying based on available data.
Estimates of the demand for cigars in a particular First Nations community, can be made with the assistance of this calculation:
Community Demand = P x 0.09 x 300 Where P = First Nations reserve population (including members who do not live on-reserve) 9% = estimated cigar smoking rate for First Nations people1 300 = estimated number of cigars consumed annually per person2
Wholesalers may be asked to: (a) provide evidence to support their sales plan or; (b) revise their sales plan to an acceptable volume, where the proposed sales plan exceeds estimated consumer demand. For example, if a wholesaler proposes to sell more than two million untaxed cigars per year to on-reserve retailers in a given community, but the community demand analysis suggests that only 500,000 cigars would be required to meet smokers' consumption needs, this sales plan would not be accepted by the ministry and further discussion with the wholesaler would be required.
To obtain yearly First Nations population broken down by individual community, wholesalers can email the ministry at firstname.lastname@example.org, or call 1 866 ONT-TAXS (1 866 668-8297).
1. Based on the 2019 Canadian Tobacco and Nicotine Survey, approximately 3% of the general Canadian population smokes cigars. First Nations smoking rates on-reserve can be as much as three times higher than that of the general population. Hence, it is estimated that cigar smoking rate for First Nations is approximately 9% (3% x 3 times = 9%).
2. Comparing smoking rates to Health Canada cigar sales data suggests that approximately 300 cigars are consumed annually per smoker. However, this may vary based on product type.
What will happen if the proposed cigar sales do not represent reasonable retail volumes based on the two methods outlined by the ministry?
If a wholesaler's sales plan does not meet requirements, the ministry will work with the wholesaler and provide support with aligning the wholesaler's sales plan, or alternatively, provide the wholesaler with an opportunity to communicate justification for the higher sales volumes.
In the event that wholesalers fail to provide a proposed sales plan with reasonable retail volumes under the administrative concession, the ministry may not issue a wholesaler permit. The ministry will notify such wholesalers it intends to refuse permits and afford a hearing opportunity to show cause why their permits should not be refused.
If wholesalers experience challenges in determining a sales plan, they should contact the ministry for assistance.
As with all registrants, wholesalers will continue to be subject to audit under the Tobacco Tax Act. The audit will consider the sales plan submitted to the ministry.
Wholesalers who opt instead to charge tax on all cigar sales to authorized on-reserve retailers are not required to provide a cigar sales plan as part of the permit process. If these wholesalers later decide to operate under the administrative concession during the year, they will need to notify the ministry and provide a plan of their proposed untaxed cigar sales on-reserve for the remainder of the calendar year to the ministry for evaluation before the change occurs.
If a wholesaler's cigar sales volumes further increase during the permit year in comparison with their cigar sales plan, wholesalers are required to notify the ministry and provide an updated cigar sales plan. Any changes will be reviewed by the ministry and evaluated in terms of being reasonable retail volumes.
Requirements for on-reserve retailers
Every on-reserve retailer of cigars must hold a Tobacco Retail Dealer's Permit under the Tobacco Tax Act or be authorized as a retailer under Ontario's First Nations Cigarette Allocation System in order to make sales to consumers.
However, such a permit or authorization does not allow a person to make sales to wholesalers or other retailers. Those types of sales require a person to hold a wholesaler's permit.
If an on-reserve retailer has been charged an amount on account of tax by the wholesaler from whom they purchased cigars, they are eligible for a refund of tax paid on their tax-exempt sales to First Nations consumers. To support a claim for a refund, the retailer must satisfy the ministry that an amount on account of tax was paid on the cigars, and that the person who purchased the cigar is exempt from taxation (i.e., purchaser's name and their Certificate of Status Card number).
On-reserve retailers who have been notified they will be charged tax or have been charged tax on cigars by the wholesaler should contact the ministry at 1 866 668-8297 or email@example.com to obtain information on how to file a refund claim for the exempt of tax sales to eligible purchasers and the required documentation to support such a claim.
Applications for refund must be sent to: Ministry of Finance Commodity Tax Administration Refund Applications 33 King Street West, 4th Floor Oshawa ON L1H 8E9
For any further information, please call 1 866 ONT-TAXS (1 866 668-8297).