In his latest report, John Wiersema, the interim auditor general, outlines a series of problems in the 2008-2009 Tobacco Transition Program.
More than half the people who received money weren't active tobacco farmers at the time, although they were entitled to grow it under the quota system run by the provincial Tobacco Marketing Board.
The department defended those payments in a statement Tuesday, saying one of the goals was to get rid of the quota regime.
"The only way to replace the quota system with a licensing system was to cancel all the quotas. It is only fair then to compensate everyone losing an identical asset in the same way."
Some farmers ended up taking money to get out of the business, then shifted their land and equipment to relatives who kept on growing tobacco.
Tobacco production doubled the next year.
"Design of the Tobacco Transition Program was rushed, making its delivery challenging," Wiersema said.
"In some cases, recipients who received money for exiting the industry continued to produce tobacco, undermining one of the program’s objectives.
"This underscores the importance of sound program design, including considering what could go wrong and how to prevent it."
The report said Agriculture Canada tried to change the rules to stop some of the problems, but that just caused more confusion.
In April 2009, the department tried to keep recipients from renting out their land to relatives to grow tobacco, but the wording of the original agreement with the marketing board wasn't clear enough and the department had to back-track.
The department said it will adopt new procedures to improve the way it handles such programs and to develop strategies to look at risks management.
"The department had to develop the Tobacco Transition Program within a short time frame and did not first conduct a thorough risk analysis," the audit said.
"The agreement implementing the program did not provide clear terms and conditions to ensure that recipients would not enter into business arrangements that would undermine the intent of the program."
The report said Agriculture Canada relied on the provincial marketing board to deliver the program. That could be seen as a conflict of interest because the board is supposed to represent the interests of tobacco farmers.
A spokesman with the auditor general's office said the auditors never provided an opinion on whether the Tobacco Marketing Board was in a conflict of interest or not.
Ghislain Desjardins said that was not part of their audit scope.