Peter Mitchell

Preparing your customs documents using online resources

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.

Tariff classification

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.

Origin

There are two kinds of origin in international trade – non preferential and preferential.

Non-preferential origin

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

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.

Commercial invoice

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.

The Customs Challenges of Importing by Pipeline: A Proposed Solution

The transportation of natural gas, crude oil and other liquids by pipeline has unique attributes that make customs reporting and accounting difficult, and easy to miss altogether. A pipeline is buried in the ground, out of sight and mind. The hydrocarbons continue moving to their destination as if the border does not exist. Crude oil and other liquids move in consecutive batches, like rail cars on a train of infinite length. Natural gas moves in a continuous stream, with all shippers’ goods commingled. A shipper does not own any particular molecules in the stream, and takes instant delivery of different molecules than it put in.

All hydrocarbons imported into Canada by pipeline are duty free regardless of origin. They are subject to GST (unless in-transit through the United States); however, that tax is recoverable as an input tax credit by substantially all importers. There are no “admissibility” issues. It is difficult to smuggle narcotics, used mattresses or firearms in a batch of crude oil.

The legal obligation to account for imports by pipeline is the same as it is for imports by other means. Under section 17 of the Customs Act, the duties and taxes remain an in rem charge on the goods until someone takes responsibility to account for and pay them. The primary liability rests with the importer of record – the person who arranges for release. The owner at the point of release is jointly and severally liable.

The identity of the importer of record is not specified in the Customs Act the way a taxpayer is in the Income Tax Act or Excise Tax Act. Rather, the importer of record may be anyone with an interest in the import of the goods who comes forward to accept the obligations associated with importation, in return for obtaining release.

It is physically impossible to release goods imported by pipeline using the normal shipment-by-shipment process. Consequently, there is currently no mechanism in Canada for the importer of record to be identified before a shipment enters the commerce of the country. The CBSA allows importers to account for importations by pipeline on a monthly basis following importation. Where this happens, the identity of the importer of record becomes clear after the fact. However, if reporting and accounting do not happen, how does the CBSA determine the importer of record, and therefore liability?

To illustrate the problem, let’s assume that a Canadian marketing company purchases a batch crude oil in the United States from an American seller and resells it for delivery to a refinery in Ontario. Either the marketing company or the refiner could act as importer of record. If neither files the monthly accounting entry, and their contract is silent on the responsibility for customs entry, who has the primary liability under section 17? Could joint and several liability be enforced against one of them as owner when release does not occur?

The situation becomes more complicated as more persons become involved. What if the marketing company delivers portions of the batch to two different refinery customers?

The issue is more complex still with natural gas. An importer does not own any particular molecules in the commingled stream, and the size of its contractual right to a portion of the stream varies as it buys and sells gas while in the pipeline. Further, imported gas is generally commingled with Canadian gas before it is delivered.

Fortunately, our American neighbours provide a model to show us how we might approach these issues.

The American Approach

The American policy for imports by pipeline is based on a U.S. Customs and Border Protection (“CPB”) policy called the Monthly Consolidated Entry of Non-Dutiable Merchandise Procedure (“Monthly Entry Procedure”) published in 1970. This policy provides for the optional filing of monthly entries to cover high volume repetitive shipments (at least 2 per week or 7 per month) of duty-free goods. The shipments must be consigned by one carrier to one importer through one port. Importers who do not use the Monthly Entry Procedure must file daily entries.

An importer wishing to use the Monthly Entry Procedure makes application to the director of the port. The format of the application must include the following information.

A detailed description of the merchandise to be shipped.
The identity of the seller and importer and their business relationship.
The points of origination of the goods.
Copies of pertinent orders, instructions and correspondence between the shipper and importer including an indication of the expected volume and number of shipments per month.
Sample copies of documents which will be employed under the monthly entry procedure.

If its application to use the Monthly Entry Procedure is accepted, the importer files a consolidated entry within 10 days from the end of each calendar month. Unlike other carriers, pipeline operators are not required to present manifests or packing lists at the time of importation. However, they are required to keep records and make them available to the CPB. A manifest is filed by the importer of record with the consolidated monthly entry. This may be done on a spreadsheet. Pipeline operators must provide facilities through which the CPB may sample the goods being imported.

In 1992 and 2006, the CPB issued instructions to their district offices to inform importers by pipeline, particularly natural gas importers, of their reporting responsibilities, and the penalties, civil and criminal, they might face for ignoring customs laws. The fact they had to do this indicates that non-compliance for pipeline importations remained a significant problem.

The key feature and advantage of the American approach is that it requires someone to commit to being the importer of record before an importation occurs, making it clear who has the related customs liabilities. If the entries are not made, or questions need to be answered, the CBP knows who to contact.

A potential Canadian Solution

A similar system could be established in Canada. The key to success would be regular tracking and follow-up by the Canada Border Services Agency (“CBSA“). They would have to register importers and their proposed transactions, check carriers’ records regularly for any unregistered transactions and check and review the entries made against registered transactions. This would involve some additional work, but likely much less than is involved in the normal monitoring and releasing of imports by other means.

As far as I am aware, the CBSA has paid limited attention to imports by pipeline for many years. This is a comfortable situation for importers as long as it persists; however, the situation is dangerous for both importers and the CBSA. While an assessment of GST would generally be recoverable as an input tax credit, the related interest would be a cost unless waived by the CBSA. The penalties for failure to report and account for imported goods can be significant – anything up to the full value of the goods. However, there may be some question whether a court would uphold such penalties when the mechanism for assigning liability at the point of importation was not present.

Should the CBSA adopt a policy akin to the one outlined above, the approach should be to bring all importers into compliance without assessing penalties or interest, until the process had been operating for some time and is generally understood.

The Essentials of the USMCA

The United States-Mexico-Canada Agreement (“USMCA”) replaced NAFTA effective July 1, 2020. Except for certain agricultural products, it provides duty free treatment for all goods traded between the three countries which “originate” among them.

What does that term – originate – mean? We’ll start by describing two types of exports that do not originate under the USMCA, or indeed any free trade agreement. We will then move on to those that do.

First, a good does not originate simply because it is exported from one member country to another. For example, a television set manufactured in China, shipped to a warehouse in Mexico for storage, and then shipped to a retailer in the United States, is not entitled to duty free treatment under the USMCA. It will be subject to duties, if any, under the American tariff code for television sets that originate in China.

Second, a good manufactured in the United States, Mexico or Canada does not automatically qualify as originating under the USMCA. This appears counter-intuitive. The confusion arises because there are two types 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 substantially all these kinds of goods, the country of non-preferential origin will also be the country of preferential origin under a free trade agreement such as the USMCA. For example, wheat grown in Canada is of Canadian origin (preferential and non-preferential), as is multigrain flour milled in Canada using only grains and other ingredients grown in Canada.

Unless the last production process is minor, a television set assembled in Mexico from components made in numerous countries will be of Mexican non-preferential origin. However, it may or may not be of Mexican preferential origin under the USMCA.

The USMCA Rules of Origin for goods containing components or materials originating outside the United States, Canada or Mexico are not based on the broad principle of substantial transformation. Rather, these rules are product specific, quite detailed and 208 pages long. The Product-Specific Rules of Origin (“PSROs“) follow the Harmonized System (HS) of tariff classification used by almost all developed countries. There are 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 United States, Canada and Mexico to the selling price or cost of the finished good.

For example, a television set is classified under subheading 8528.72, which forms part of heading 85.28. The PSRO for heading 85.28 provides that a finished good classified within it will qualify a originating if either (a) every non-originating component or material used to make it is classified outside heading 85.28 (tariff shift test), or (b) there is a regional value content of not less than 60% under the transaction value method or 50% under the net cost method.

The tariff shift test is generally easiest to apply. In addition to television sets, heading 85.28 includes monitors (8528.59) and reception apparatus for television without a monitor (8528.71). If either of these components originates in a country outside the United States, Canada or Mexico, the finished set will not qualify under the tariff shift test. However, it might qualify under the regional value content test, which involves some cost accounting.

Not all tariff codes in the PSROs provide an option between tariff shift and regional value content tests. Some specify one or the other and some require both. Further, there are four origin criteria under the USMCA, of which three relate to different circumstances where the good contains materials or components from outside North America.

Details of how the tariff shift and regional value content categories are applied are further described in an article entitled Determining Origin Under the USMCA available elsewhere on this website.

If the goods you make meet the Rules of Origin, you will need to document your conclusions. The basic document is a list of all the raw materials, organized into two categories: originating and non-originating. This is known as a Bill of Materials. You will generally need letters or certifications of origin from suppliers of originating materials indicating that they qualify. If a tariff shift test is being applied, the non-originating materials must be classified under the HS to demonstrate that all of them meet the test. If the regional value content test is being applied, you will need to value all the non-originating materials and calculate the transaction value or net cost.

This may involve a fair amount of work. There is no point in doing it if the goods are duty free in the country of import under general international trade rules (known as Most Favored Nation, or MFN). The work may also not be worthwhile if the rate of duty is nominal, say 2% or less.

An importer who claims duty free treatment under the USMCA must have a certification of origin in its possession. This certification is not provided with the import documents; however, it may be requested by the customs authority in the country of import. There is no prescribed form of certification (as there had been with NAFTA). However, a specified set of data elements must be set out on the invoice or other document.

The certification of origin may be prepared by the producer, exporter or importer. The documentation that each is requited to maintain is described in a separate article on this website.

If you have questions or comments on these issues, please email peter@mitchelltrade.com or call us at 403-462-0835.

The basics of exporting to Canada

High resolution digital render of Canada flag.

Introduction

Most companies who export goods to Canada transfer title and possession in their home country or in international waters and let their Canadian customer handle customs clearance. The customer acts as the “importer of record”, arranging for release by the CBSA (the customs authority) and paying any duties and taxes owing.

Most of Canada’s trade is with countries that are partners in free trade agreements, principally the United States, Mexico, the United Kingdom, Japan, South Korea, Israel, Singapore, Australia, New Zealand and the 27 countries of the European Union. Where goods being exported from those countries are dutiable under Canada’s general MFN tariff schedule, the exporter’s principal contribution is to ascertain whether the goods meet the Rules of Origin under the free trade agreement. If they do, the goods may usually be imported duty free or, in certain cases, at a reduced rate.

The producer of goods within a free trade area has most of the knowledge required to support the certification of origin that allows the importer to claim preferential tariff treatment. The producer, or the exporter if that is someone other than the producer, may generally prepare and sign this certification. However, the exporter will often have to rely on information or certification provided by the producer. In some agreements, notably the USMCA, the importer may also sign the certification. However, the importer may do this only with full knowledge, much of which must come from the producer.

Most commercial goods that enter Canada are subject to the federal goods and services tax (GST), the Canadian VAT. The current rate is 5% of the duty paid value. 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. 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.

Where the exporter acts as importer of record

When goods arrive in Canada, a non-residents may act as importer under substantially the same rules as residents. The essence of the system is that, shortly before a shipment arrives at the port of entry, the carrier reports it electronically to the CBSA on a “cargo control document”, identifying the goods, the shipper and the consignee. When the importer receives notification of this, the importer provides a customs declaration to the CBSA, either paying the duties and taxes or, more often, posting security and providing a final accounting and payment later. The CBSA matches the two documents and, if all is in order, it releases the goods, allowing the carrier to unload the cargo or proceed inland to its destination. The CBSA has the right to ask questions of the carrier and/or importer and to inspect the goods. Release is sometimes delayed until questions have been answered, and the goods inspected, to the CBSA’s satisfaction. On occasion release is denied.

The importer is not a specifically identified person under the Customs Act, the way a taxpayer is under income and other tax legislation. Rather, the importer is the person who takes on the liability associated with having the goods released – known generally as the “importer of record”. Anyone with a financial interest in the import transactions may generally do this. If the importer is not the owner, the owner at the point of release becomes jointly and severally liable.

Where a non-resident of Canada, typically the exporter, acts as importer of record the most difficult issue is often ensuring that GST paid may be recovered as an input tax credit, where such credit is available. An input tax credit may only be claimed on a GST return filed by a “registrant”. A registrant is required to collect tax on “supplies” (in general, sales) of goods and services made in Canada. A non-resident of Canada is required to register if it is carrying on business in Canada, or making supplies from a permanent establishment in Canada. Most non-resident importers do not reach these thresholds.

In most cases, a non-resident may register voluntarily for GST purposes. However, non-residents are generally reluctant to do this. They don’t want to deal with the administration of collecting tax and filing returns, and they want to stay off the radar of the Canada Revenue Agency. Fortunately, there is another method for recovering the GST. Where the non-resident is not registered, the input tax credit may generally be claimed by the Canadian customer. However, the non-resident must provide evidence of payment to the customer – usually a copy of the customs accounting document. That document also discloses the customs valuation, which in some cases will be the non-resident’s cost.

Most non-resident importers hire a Canadian customs broker to deal with customs clearance and payment of duties and taxes. The broker will handle the customs declaration and be the initial point of contact for any questions or issues raised by the CBSA. The broker can also advise where other costs, such as excise taxes and duties or anti-dumping or countervail duties, may be payable. For now, they may also provide to the CBSA the security that allows final accounting and payment to be deferred until after release. However, in early 2023 all importers will have to begin providing their own security in the form of a bond or cash.

The Power of Canada’s Free Trade Agreements

Most Canadian business executives are aware of the USMCA, the successor to NAFTA, which opened the American and Mexican markets in 1989 and 1994, respectively. However, fewer are aware that Canada entered into similar free trade agreements with the European Union in 2017 and ten countries around the Pacific Rim in 2018. These three agreements together give Canada more international trading power than almost any country on earth, and far more than the United States.

The essence of a free trade agreement is that it removes tariffs on substantially all goods traded between the participating countries, and makes it easier for companies in one country to provide services in another. However, obtaining duty free access for goods that would otherwise be subject to tariffs requires time and effort, especially for the producer in the exporting country. The producer is usually the person who must ensure that the goods satisfy the Rules of Origin, which are often complex, and maintain documentary evidence to support its conclusions.

The European Union (EU) is a customs union of 27 countries, including Germany, France, Italy, Spain, Sweden, the Netherlands, Austria, Belgium and Ireland. All share the same tariff schedule. Once a good has been imported into one country, it may be moved freely into the other 26. On implementation in 2017 98% of the tariff lines became duty free for goods that satisfy the agreement’s Rules of Origin. A further 1% become duty free in stages ending in 2024, and 1% will remain dutiable. Canada entered into a separate continuing free trade agreement with the United Kingdom when that country withdrew from the EU at the beginning of 2021.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) came into force in 2018 between Canada, Australia, New Zealand, Mexico, Japan and Singapore. Vietnam joined in 2019. Chile, Peru, Malaysia and Brunei have not yet ratified. Approximately 86% of the tariff lines for all countries collectively become duty free on entry into force. A further 13% of tariff lines become duty free on various schedules ending at various times over the succeeding 15 years. Tariffs will remain for approximately 1% of tariff lines. Each country has its own tariff reduction schedule.

Canada also has separate individual free trade agreements with Chile, Colombia, Costa Rica, Honduras, Israel, Jordan, South Korea, Panama, Peru and Ukraine.

The CPTPP is a successor agreement to the Trans-Pacific Partnership (TPP) signed in 2016 by the countries mentioned above plus the United States. However, in January 2017, shortly after taking office, President Trump signed an order declaring that the United States would not ratify the TPP. The remaining 11 countries renegotiated the Agreement, rebranding it as the CPTPP. Around the same time, the Trump administration suspended ongoing negotiations for a free trade agreement with the European Union. Trade does not appear to be a major policy initiative of the Biden administration.

In addition to the USMCA, the United States has free trade agreements with Australia, Bahrain, Chile, Colombia, Israel, Jordan, South Korea, Morocco, Oman, Panama, Peru, Singapore, Costa Rica, the Dominican Republic, El Salvador, Nicaragua, Honduras and Guatemala. The United States and Japan recently entered into a limited trade agreement regarding market access for certain agricultural and industrial goods.