Ottawa files $1.5-billion lawsuit against Big Tobacco

The federal government is suing major tobacco companies for $1.5 billion, alleging they made profits through tobacco smuggling.

The suit says Big Tobacco avoided paying taxes through the underground trade in tobacco products.

• THE FIFTH ESTATE: Cigarette Smuggling

The government is demanding the firms hand over the profits and pay additional damages.

"We allege that a scheme the companies devised and implemented resulted in them gaining illicit profits from smuggling tobacco," said Gordon Bourgard, a Justice Department lawyer.

Bourgard says the government is calculating an amount measured by lost taxes, duties and other "general damages."

• DISCLOSURE: Cigarette Case

A dozen companies are named as defendants, falling under the R.J. Reynolds and Japan Tobacco groups, including JTI-Macdonald Corp. of Toronto.

JTI-Macdonald blamed the anti-smoking lobby for encouraging the government to bring the lawsuit.

"These worn-out allegations are being pumped up by an overzealous anti-tobacco lobby whose very existence depends on repeatedly attacking the Canadian tobacco industry."

The company says it believes the charges will be dismissed.

• FEBRUARY 28, 2003: Tobacco company charged with smuggling

"This is not just a money issue. It's a public health issue and this is an important step Canada has taken," said Garfield Mahood of the Non-Smokers' Rights Association.

Mahood says the lost revenue in evaded cigarette tax adds up to more than $13 billion.

A four-and-a-half year RCMP investigation concluded in March. Police laid six counts of fraud and one count of conspiracy against JTI-MacDonald Corp. and several of its subsidiaries. Eight former senior executives were also charged.

The RCMP accused Canadian companies of shipping crates of cigarettes to American subsidiaries. The cigarettes were then allegedly sold to smugglers and brought illegally into Canada through native reserves and border checkpoints.

Once in Canada, the cigarettes were sold to consumers at a large discount.

While the smuggling operation was going on, tobacco companies were lobbying governments to reduce cigarette taxes, using the smuggling problem as an argument for tax relief.

Federal and provincial governments relented in 1994 and cut tobacco taxes. They began raising taxes again after 1999 allegations the smuggling operation was backed by Big Tobacco.