Finance Minister Jim Flaherty disregarded advice from senior officials warning him to curb the influx of native-made black-market cigarettes, documents obtained by The Globe and Mail show.

The Finance department documents, obtained under the Access to Information Act, warn that Ottawa is losing substantial tax dollars as smokers switch to illegal untaxed, unregulated, cigarettes.

According to The Globe, Flaherty received the documents a month before the 2007 budget was tabled, yet decided against budget measures to combat the problem in the final document.

The documents state the contraband trade has exploded in recent years, profiting an elaborate cross-border network using native land.

The report states the government's public accounts reveal federal tobacco revenues have plunged by more than $1 billion annually.

According to figures released last month, federal tobacco revenues dropped to $1.6 billion in 2006-07, down from $2.97 bullion two years earlier.

One five-page memo labelled "secret advice to Minister" proposed "new enforcement measures and legislative amendments to protect tax revenues and support the health objective of reducing tobacco consumption."

The newspaper reported the specific recommendations were blacked out as were estimates for how much money would be raised if the advice was followed.

Flaherty's spokesman, Chisholm Pothier, declined to comment on the 2007 budget, but told The Globe the Conservative government has taken a number of measures to curb the illegal trafficking of cigarettes.

Smuggling exceeds peak levels

When the Canadian government raised cigarette taxes in the mid-1990s, the black market for illegal cigarettes quickly developed and reached a historic high in 1994.

Finance officials told Flaherty that seizure of illegal cigarettes now far exceeds 1994 levels due to escalating tax levels.

A recent study by the Canadian Tobacco Manufacturers' Council said the source of contraband tobacco has also changed since the 1990s.

More than a decade ago, the black market was based on popular brands that were exported to the U.S. and then brought back into Canada and sold without charging tax.

Now, bulk contraband tobacco is imported from China and South Africa and then made into cigarettes on aboriginal reserves and sold without taxes.

Currently, only status Indians can purchase tax-free tobacco on reserves by law. Government documents show that increasingly more non-natives are buying legal and illegal cigarettes on reserve without paying tax.

The majority of the illegal cigarettes are concentrated in Quebec and Ontario. Ontario accounts for 53.8 per cent of the contraband and Quebec for 41.1 per cent.

The number of people smoking illegal cigarettes in Ontario has risen to 31.6 per cent this year from 23.5 per cent in 2006, while 37 per cent of smokers in Quebec smoke contraband tobacco.

Health officials troubled

Earlier this month, health officials at the 5th National Conference on Tobacco or Health warned that a new plan to curb contraband tobacco was urgently needed.

"In Canada, tobacco contraband activity is growing," Rob Cunningham, a senior policy analyst with the Canadian Cancer Society said.

"While the new federal steps to implement high-security stamping and increase the number of audits of tobacco factories and farms are steps in the right direction, there is much more that needs to be done."

Smoking remains Canada's largest preventable cause of death, responsible for approximately 37,000 deaths each year. Tobacco-related diseases cost Canada over $17 billion annually, including $4.4 billion in direct health-care costs.

 Two recent studies demonstrate that each percentage-point decline in the prevalence of smoking could save $65-97 million in health care costs in Canada.

With files from The Canadian Press