A new 50-officer RCMP unit will target contraband tobacco smugglers.
Criminal gangs should not be able to benefit from illegal tobacco sales while Canadians pay the price through higher health care costs, said Public Safety Minister Vic Toews.
"Tobacco trafficking is a serious threat to the public safety of Canadians, our communities and our economy," Toews told a news conference.
"Contraband tobacco fuels the growth of organized criminal networks, contributing to the increased availability of illegal drugs and guns in our communities."
The RCMP unit would go after organized crime groups and anyone who sells, transports or is in possession of contraband tobacco.
Legislation introduced in the Senate would create a new Criminal Code offence for trafficking in contraband.
If the bill becomes law, penalties would range from six months behind bars for a first offence to five years in jail for committing an indictable offence.
Repeat offenders would also receive mandatory minimum penalties of between 90 and 180 days incarceration when high volumes of illegal tobacco products are involved.
The government defines "high volume" as more than 10,000 cigarettes or 10 kilograms of other tobacco products.
Having less contraband tobacco on the streets means a reduced chance that young people will take up smoking, said Health Minister Leona Aglukkaq.
"Baggies of cheap, illegal tobacco can make it easier for children and teens to get cigarettes into their hands and start smoking, which obviously has a negative impact on their health," Aglukkaq said.
"There is no place for contraband tobacco in our communities."
The National Coalition Against Contraband Tobacco applauded the measures and urged the Harper Conservatives to work with other levels of government to combat tobacco smuggling.
"We are pleased to see the federal government following through on its campaign commitment to make contraband tobacco a priority, as illegal cigarettes negatively impact communities across the country," coalition spokesman Gary Grant said in a statement.
"But it's important to remember that this is a problem that crosses political and departmental boundaries."