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1990: Canadian Diamond Excise Tax Is Dropped To Stop Diamond Smuggling

October/November 1998

By Martin Stone

Canadian diamond dealers are part of a vigorous lobbying effort aimed at repealing a ten-percent excise tax on finished gemstones which they say is stifling the growth of the industry.

Colleen Nayuki, a Montreal-based appraiser, told the Diamond Registry Bulletin she feels the federal Goods and Services Tax (GST) and various provincial sales taxes, which combined total a whopping 15 percent, on top of the Canadian excise tax of ten percent on jewelry, is definitely driving buyers away.

Jose Carciente, owner of Trans Universal Diamond Corp. in Montreal agrees, calling the three-tiered tax, “one of the biggest obstacles [to the diamond industry] in Canada.” He bluntly pointed out, “There’s no other country in the world where people pay 25 percent tax.” He says that most Canadian buyers travel to New York to make their diamond purchases and he blames the high Canadian taxes. Trans Universal’s biggest market is in New York and in Europe, Carciente says, lamenting that very little business is derived within Canada. He adds, “Canadians are investing in African diamond mines, but they are not buying diamonds in Canada.”

As for the possibility of rescinding the tax, Carciente asserts it would be a lucrative “cash cow.” He maintains that in Canada, “…we have the skill, the talent and the potential” to become a major diamond-trading capital but the current levels of taxation are driving the industry elsewhere.

Excise Tax History 101

Duncan Parker, president of the Canadian Gemological Association, explains that the excise tax was established in 1918 and applied to a range of so-called luxury items to help finance Canada’s W.W.I expenditures. Over time, the tax was dropped on virtually all items but jewelry. “There’s no excise tax on yachts, for example,” he says. Neither is there an excise on furs, cosmetics or luxury cars.

Fighting the Law

That has become one of the main arguments of a lobbying effort that went into high gear in 1997. The effort is being led by Jonathan Birks of Birks Jewelers and the 800-member Canadian Jewelers Association. The lobbying, says Birks, is two-pronged. The first requirement is that lobbyists satisfy officials that valid technical reasons exist to justify a change in taxation. A 1997 report prepared by Ernst & Young was presented to Canada’s finance minister, Paul Martin.

While Birks says that, “The CJA lobby campaign has resulted in increased awareness, understanding of and respect for the jewelry industry and the effects of the Excise Tax,” Mr. Martin’s 1998 Budget, delivered in February, did not include any tax reductions. The association is awaiting a decision by a government screening body as to whether a second lobby effort will be entertained in Ottawa. Experts agree, Birks argues, that following a repeal of excise, the government will receive larger return from taxes generated by a rejuvenated industry.

A Smugglers Holiday

Parker revealed that, “diamond smuggling has become endemic in Canada.” He blames the excise. The fact that gemstones are small items, easily carried across borders, and the reality of the highly competitive market in Canada which has encouraged buyers to seek bargains has created a burgeoning “underground” market, he contends.

Birks says the association estimates the underground segment of the market is valued at about 1.5 billion Canadian dollars annually and that the excise on legitimate transactions generates about $50 million for government coffers each year.

Sellers who have acquired stones illegally can offer lower prices than their competitors who have paid the tax and that encourages smuggling. It is interesting to note that in the U.S., the excise on diamonds was dropped because a lucrative smuggling trade developed in its wake. In Canada, Parker laments, excise officials seem more interested in catching the avoiders than in considering a repeal of the tax.

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