Importing goods can be intimidating. The customs rules are complex and inflexible, and the forms full of details and coding that appear undecipherable. That is why we have customs brokers. Many importers to assume that, once they hire a broker, they do not need to invest time and energy in understanding customs and trade concepts. That can be a risky approach. Good customs brokers have a lot of knowledge. However, they can put it to good use only if the importer provides them with complete and correct information.
Customs brokers do not have the time to ask a lot of probing questions. They operate in a volume business where the main task is to obtain release at the border. Insufficient or inaccurate information from the importer may result in the goods being misclassified, over- or under-valued or the wrong type or country of origin being declared. This can cause delays in release and/or duty and penalty costs.
To provide proper customs information, an importer needs knowledge. Online resources make acquiring it easier than it used to be. Drafting and submitting your own customs entry documents is becoming easier and more convenient, and provides an excellent way to learn. The broker is always available to answer questions and review the final product.
The importer is responsible for two key documents: (a) the commercial invoice and (b) the customs accounting declaration. The main customs and trade disclosures- tariff classification, valuation and origin – are made on both.
A useful online tool for tariff classification is the Canada Tariff Finder developed by Global Affairs Canada and two other federal government agencies. Its purpose is to allow one to compare rates of duty for specific goods among countries with whom Canada has a free trade agreement. However, it is also helpful as a place to begin researching the tariff classification of a good. Let’s say you want to classify a bicycle. Under “Find tariff information”, you click on “Importing”, then on a country (I picked the United States) and finally you type “bicycle” under “Describe the product” and click on “Find”. The next screen asks you whether the bicycle is “motorized” or “other”. I clicked on “other”; i.e., a pedal bike. The next screen gives you 5 different options for classification to ten digits under heading 8712 , depending on the size of the wheels. Click on any one and you will learn that the MFN duty rate is 13%, but the bicycle is duty free if it qualifies under the Rules of Origin of the USMCA/CUSMA. The MFN rate would apply if the bicycle did not originate under the USMCA, or if it was imported from a country such as China or India with whom Canada does not have a free trade agreement.
The process is not always that simple. Tariff classification is sometimes complex and obscure. However, the Canada Tariff Finder is generally a good place to start if you haven’t had a lot of experience with the Harmonized System. In all cases, you should review the Customs Tariff, including the section and chapter Explanatory Notes. A more detailed article on tariff classification and the Harmonized system is available elsewhere on this website.
There are many comprehensive reference materials on tariff classification available on the internet. The WCO publishes the HS Classification Handbook, which provides detailed information on the fundamentals of the system. The United States International Trade Commission publishes an online course that takes the reader through all the steps of interpreting the American HTS in about three hours. The examples are excellent. The European Commission publishes its Explanatory Notes to the Combined Nomenclature of the European Union, a 392 page PDF document which provides explanatory notes to many individual tariff items. It goes out to 8 digits, so it includes some tariff item categories unique to the EU, but it is useful everywhere. The system is the same in all countries to six digits.
Adjustments to transaction value
The majority of imports arise from a sale by a non-resident exporter to a Canadian resident importer. Where these two persons are unrelated, the basis of customs valuation will generally be the “transaction value” – the price payable on the commercial invoice prepared by the exporter, expressed in Canadian dollars and adjusted if necessary as described below. If the exporter and importer are related, and the relationship does not influence the price, the basis will also be transaction value.
The adjustments to the invoice price, which are frequently missed, are summarized in fields 23 to 25 of Form CI1, Canada Customs Invoice. If one or more of these adjustments applies, the importer will usually enter the amounts there. Each adjustment is set out in subsection 48(5) of the Customs Act (“Act”) and described in summary in Memorandum D13-4-7 published by the CBSA. There are also a separate CBSA Memoranda, referred to below, that discuss each one in detail.
The following items are deducted from the price payable if they are included in it; i.e., they are incurred by the seller:
- Transportation charges, expenses and insurance from the place within the country of export from which the goods are shipped directly to Canada (Act 48(5)(b)(i); Memorandum D13-3-3);
- Costs for construction, erection and assembly after importation into Canada (Act 48(5)(b)(ii)(A); Memorandum D13-3-11);
- Duties and taxes payable by reason of the importation or sale in Canada of the goods (Act 48(5)(b)(ii)(B); and
- Export packing required by the transportation company (Act 48(5)(b)(i); Memorandum D13-3-3).
The following items are added to the price payable if they are not included in it; i.e., they are incurred separately by the purchaser:
- Transportation charges, expenses and insurance to the place within the country of export from which the goods are shipped directly to Canada (Act 48(5)(a)(vi); Memorandum D13-3-5);
- Amounts for commissions and brokerage, other than fees payable by the purchaser to his agent for the service of representing the purchaser abroad in respect of the sale (Act 48(5)(a)(i); Memorandum D13-4-12);
- Export packing to market and protect the goods, not required by the transportation company (Act 48(5)(a)(ii); Memorandum D13-3-3).
- Royalties and license fees in respect of the goods that the purchaser must pay as a condition of the sale of the goods for export to Canada (Act 48(5)(a)(iv); Memorandum D13-4-9);
- Subsequent proceeds payable to the purchaser (Act 48(5)(a)(v); Memorandum D13-4-13); and
- Goods or services supplied by the purchaser for use in the production of the goods, commonly known as “assists” (Act 48(5)(a)(iii); Memorandum D13-3-12).
There are a number of circumstances where transaction value may not be used as the method of customs valuation. These circumstances include situations where:
- There is no sale for export (e.g., the goods are leased or have been owned by the importer for some time);
- The vendor and purchaser are related and the relationship influences the price;
- There are restrictions on the disposition or use of the goods by the purchaser (other than those imposed by law or geographical area of resale) which substantially affect the value;
- The sale or price is subject to some consideration or condition with respect to the goods for which a value cannot be determined; or
- The price cannot be determined.
The methods of valuation to be used where transaction value may not be used are discussed by the CBSA in their Memorandum D13-3-1. Methods of Determining Value for Duty.
Canada’s customs valuation rules follow the Customs Valuation Agreement adopted by all members of the World Trade Organization in 1994. The World Customs Organization publishes a useful Brief Guide to the Customs Valuation Agreement, which provides an alternative commentary to the CBSA Memoranda referred to above.
There are two kinds of origin in international trade – non preferential and preferential.
Non-preferential origin assigns a home country, or economic nationality, to every good that crosses a border anywhere on Earth. If the good is wholly composed of components or materials derived from and, if applicable, processed in a single country, that is its country of non-preferential origin. For example, wheat grown in Canada is of Canadian non-preferential origin, as is multigrain flour milled in Canada using only grains and other ingredients grown in Canada.
It becomes more complicated where a good contains components or ingredients from more than one country. In that case, the country of non-preferential origin is the country where the last “substantial transformation” in production occurs. Each country interprets this principle in a different way. As an example, the United States Customs and Border Protection (CBP) agency states that, in its view, “substantial transformation means that the good underwent a fundamental change (normally as a result of processing or manufacturing in the country claiming origin) in form, appearance, nature, or character, which adds to its value an amount or percentage that is significant in comparison to the value which the good (or its components or materials) had when exported from the country in which it was first made or grown.”
The CBSA does not provide a definition of substantial transformation. However, they do say in Memorandum D-1-4 that “Certain operations such as packaging, splitting, and sorting may not be considered as sufficient operations to confer origin.”
The country of non-preferential origin is declared by the importer of record on both the commercial invoice and the customs accounting declaration. Certification of origin is not required.
Preferential origin refers to the Rules of Origin in a free trade agreement. Canada has many free trade agreements with individual nations. However, the most important agreements are multi-national: the USMCA with the United States and Mexico, the CPTPP with ten nations around the Pacific Rim and CETA with the 27 countries of the European Union.
Where a good is wholly composed of components or materials derived from and, if applicable, processed in a single country, that is generally its country of preferential as well as non-preferential origin. For example, wheat grown in Canada meets the Rules of Origin under the CPTPP when shipped to Japan. Flour milled entirely in Canada from wheat grown in Canada meets the Rules of Origin under CETA when shipped to Germany, and under the USMCA when shipped to the United States.
However, preferential Rules of Origin for goods containing components or materials originating in countries outside a free trade agreement zone are not based on the broad principle of substantial transformation. Rather, the rules are generally product specific, detailed and often several hundred pages long. These “Product-Specific Rules of Origin” (“PSROs“) follow the Harmonized System (HS) of tariff classification. There are generally two main criteria for qualifying under the PSROs:
- Tariff shift – a comparison of the tariff classification of the raw materials as they existed before production to the tariff classification of the finished good.
- Regional value content – in general terms, the ratio of the value of production within the free trade area (e.g., the United States, Canada and Mexico with the USMCA) to the selling price or cost of the finished good.
The commercial invoice is exactly what the name implies – the invoice sent by the exporter to the importer as the basis of payment. It is one of two key documents provided to the CBSA prior to release. The other is the cargo control document, or manifest, prepared by the carrier.
The customs regulations specify that the commercial invoice contain certain prescribed information set out in paragraph 43(b) of the CBSA’s Memorandum D17-1-4, Release of Commercial Goods and on Form CI1, Canada Customs Invoice. Instructions for providing this information are set out at Appendix A of Memorandum D1-4-1, CBSA Invoice Requirements.
In addition to tariff classification, valuation and non-preferential origin declarations discussed above, the the commercial invoice includes the following prescribed information:
- Details of the sale or other transaction giving rise to the import (vendor, purchaser, consignee, conditions of sale, terms of payment and currency of settlement);
- Details of the shipment (date and place of direct shipment to Canada, mode of shipment and, if applicable, country of transshipment); and
- Description of the goods, including quantities, weight and references to package markings and contents.
To provide complete third party evidence of the terms of the underlying sales contract, the CBSA would prefer that the commercial invoice be prepared entirely by the exporter. However the importer often has to add certain information, either on a separate page or on Form CI1.
Customs accounting declaration
The main purpose of the customs accounting declaration is to calculate the duties and taxes owing. Where the importer or broker has provided security, it is submitted after release. Much of it is a coding exercise that repeats the substantive declarations made on the commercial invoice. The coding takes awhile to get used to but once you do it is fairly straightforward. Instructions are available on the CBSA’s Memorandum D17-1-10, Coding of Customs Accounting Documents.
As part of the CBSA’s new Assessment and Revenue Management (CARM) online system, importers will be able to file their customs accounting declarations directly to the CBSA starting in the spring of 2022. The existing Form B3-3 will be replaced by a new electronic form. It is likely that the currently awkward coding system will be made more user friendly to the importer by drop-down menus and similar tools.
Calculation of duties
Duties are calculated by applying a particular “tariff treatment” to the tariff classification of a good. Tariff treatment is determined by origin, either non-preferential or preferential. The tariff treatments available for each country of origin are published by the CBSA in a Schedule. There is not enough space in this article to explain tariff treatment completely. However, we can summarize the main points. The Most Favoured Nation (MFN) treatment is available to substantially all countries. The main notable exception is North Korea. The General Preferential Tariff (GPT) and Least Developed Country Tariff (LDCT) generally provide rates of duty lower than MFN for goods originating in the world’s developing nations. The “Other” column in the Schedule includes other preferential tariff programs (for example, the Commonwealth Caribbean Countries Tariff, or CCCT) and the treatments that apply where goods originating in a country with whom Canada has a free trade agreement satisfy the Rules of Origin under the agreement. The main free trade agreement tariff treatments include:
- United States Tariff (UST) – USMCA/CUSMA
- Mexico Tariff (MXT) – USMCA/CUSMA
- Canada-European Union Tariff (CEUT)
- Comprehensive and Progressive Trans-Pacific Partnership Tariff (CPTPT)
The duty rates applicable to each tariff treatment in each item of tariff classification are set out in a Schedule organized by Chapter of the Harmonized System. Where more than one tariff treatment is available to a country, the importer may choose the most advantageous one. For example, all countries with whom Canada has a free trade agreement also qualify for MFN treatment. Where goods are duty free under MFN, the importer will usually choose that treatment, as there is no point in doing the work to determine whether the goods meet the Rules of Origin. Where goods are dutiable under MFN and meet the Rules of Origin, the importer will usually choose the free trade agreement category to save the duty.
Goods and Services Tax (GST)
Most commercial goods that enter Canada are subject to the federal goods and services tax (GST), a value added form of sales tax. The current rate is 5% of the value plus any duties. The major exceptions are certain basic groceries, prescription drugs and biologicals, medical and assistive devices and products of agriculture and fishing. The full list of exceptions may be found in Schedule VI and Schedule VII to the Excise Tax Act.
For most business inputs such as raw materials, capital equipment and goods acquired for resale, this GST is recoverable as an input tax credit on the importer’s GST return filed monthly, quarterly or annually. However, importers involved in certain businesses (for example: financial services, rental of residential real estate, health care and education) may not be able to recover the tax, or may be able to recover only part of it.