High Taxes Driving Canada's Retail Diamond Industry Underground

High tax rates are driving a large part of Canada's billion-dollar retail diamond industry underground with three out of every four gems in Quebec alone sold under the table, according to a new study.

The survey of the Quebec diamond market carried out by a Montreal consulting firm found that 75 percent of diamonds are sold underground through a parallel network of jewelers. “The effect of taxes in Canada accounts for a large part of the underground sales. The sales declared [by jewelers] do not reflect the value of the market,” the report said.

The report noted that federal and provincial taxes add more than 25 percent to the price of diamonds in Canada, compared with an extra six percent in the United States.

Catherine Sproule, executive director of the Toronto-based Canadian Jewelers Association, disputed the figure, saying she believed it was too high. But she agreed that taxes - especially a 10 percent excise tax on jewelry that the industry has opposed for decades - drive sales underground and hurt the jewelry sector, particularly when it comes to showcasing Canadian-mined diamonds.

Industry officials cite the 86-year-old luxury tax of 10 percent on jewelry as one of the main reasons for the growing underground diamond market. Manufacturers pay the tax on the sale price of items made in Canada while importers pay it on the value of imports.

The Canadian Jewellers Association has lobbied strenuously for the repeal of the excise tax, saying that while the tax is applied to a $10 gold pin no luxury tax is payable on a $50,000 automobile.

Steve Parker, president of Vancouver-based jewelry manufacturer Customgold Manufacturing Ltd, said the excise tax is difficult to administer and results in fewer Canadian diamonds being sold through legitimate retailers.

“Because the tax is paid at the wholesale level, when a retailer decides to put a Canadian diamond in stock he's paying the tax before he sells that diamond - he could afford to stock 10 percent more Canadian diamonds if that tax weren't there,” Parker said.

The Quebec study found other problems plaguing the industry, including artificially inflated prices and a lack of proper quality control. It added that few retailers have qualified gemologists and some stores try to certify their diamonds by using certificates purportedly signed by a gemologist who is actually a store employee.

The Canadian diamond retail market is worth about $1.3 billion a year, according to the De Beers-owned Diamond Information Center, with diamond engagement rings and wedding bands accounting for 42 percent of the total.

A recent Statistics Canada report said Canada is on the verge of becoming the world's third-largest producer of diamonds, accounting for almost 15 percent of the world's diamonds by value - ahead of South Africa, but behind Botswana and Russia.

Canada has two producing diamond mines, both in the Northwest Territories. Additional mines are being developed in the NWT and Nunavut and miners are searching the north for more potential diamond finds.