Tax What Harms: Canada Needs a Risk-Based Approach to Nicotine Products

June 12, 2025 – Canada’s one-size-fits-all approach to taxing nicotine discourages smokers from switching to much safer alternatives and is fuelling a thriving illicit market, according to a new report from the C.D. Howe Institute.

In “The Taxation and Regulation of Reduced-Harm Nicotine Products,” Ian Irvine and Sam Hampsher-Monk find that while taxes account for about two-thirds of what smokers pay for a pack of cigarettes, many reduced-risk alternatives – such as e-cigarettes (vapes), heated tobacco sticks, and oral nicotine pouches – now face comparable or even higher effective rates in some jurisdictions. This is largely due to overlapping federal and provincial excise regimes, along with sales taxes.

“We’ve ended up with a system that treats vastly different products as if they carry the same health risk,” said Irvine. “That’s not good science, and it’s not good policy.”

The report shows how Canada’s tax design unintentionally pushes consumers toward problematic products. For instance, smaller e-liquid containers and heated tobacco sticks get hit harder by non-linear taxes, while large disposable vapes, often aimed at younger users, are taxed more lightly. Meanwhile, prices for legal products remain high enough to fuel a growing illegal market. In some provinces, illicit cigarettes already account for up to a third of all sales – and vaping products are starting to follow the same trend.

There’s also the issue of fairness, according to the authors. Daily smoking among teens is now down to about 1 percent, but older adults – who face the greatest health risks from smoking – are switching far more slowly. High taxes, widespread misunderstanding about relative risks, and access to cheaper, untaxed cigarettes all make it harder for them to switch to safer options.

The authors highlight international examples – Sweden, New Zealand, and the UK – that have accelerated smoking declines by combining lower taxes on reduced-harm products with tight youth restrictions and clearer public messaging. “When consumers understand the actual risks – and when those risks are reflected in the price – they make better choices,” said Hampsher-Monk. “Canada is capable of doing the same.”

The report recommends moving to a single federal excise schedule that taxes reduced-risk products far less than cigarettes, with a revenue-sharing system to ensure provinces aren’t left out. It also calls for treating pouches and heated tobacco differently than combustible leaf, funding better enforcement to crack down on illicit trade, and lifting federal restrictions that stop vendors from stating basic facts – that switching to vaping or other non-combustible options can dramatically reduce health risks.

“A science-based, risk-proportionate tax system would save lives, shrink the illegal market, and still provide stable revenue,” the authors said. “Canada has a choice: lead on harm reduction, or let the illegal market fill the gap.”

Read the Full Report

For more information, contact: Ian Irvine, Research Fellow, C.D. Howe Institute; Samuel C. Hampsher-Monk, VP Global Regulatory Strategy and Client Operations, Applied Research and Analysis Company (ARAC), and Owner/Managing Director, BOTEC Analysis; Percy Sherwood, Associate Editor and Communications Officer, C.D. Howe Institute, 416-407-4798, psherwood@cdhowe.org.

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

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