Canada: New Value For Duty Case Spells Trouble For Non-Resident Importers

Last Updated: November 16 2005

Article by Greg Kanargelidis, ©2005, Blake, Cassels & Graydon LLP

On October 6, 2005, the Canadian International Trade Tribunal released its decision in Cherry Stix Ltd. v. President of the Canada Border Services Agency. The CITT’s decision is the first to consider an (until now) untested provision which specifies the circumstances in which a non-resident importer’s acquisition cost could qualify as the appropriate value for duty of imported goods.


The Customs Act and the Valuation for Duty Regulations provide that a non-resident importer may declare its acquisition cost as the value for duty of imported goods if at the time the importer "purchased" the goods, it had not already entered into an "agreement to sell" the goods to a resident of Canada. If these circumstances are met, the non-resident importer qualifies as a "purchaser in Canada". Otherwise, the Canada Border Services Agency takes the position that the importer should value the goods based on the sale price to the resident in Canada, which means that customs duties and taxes must be paid on a value for duty that includes the importer’s mark-up.


The facts in this case are not atypical of commercial dealings between importers and retailers operating in Canada. Cherry Stix Ltd., a non-resident importer based in New York, meets with Wal-Mart Canada buyers with a view to gauging Wal-Mart’s interest in purchasing its women’s and children’s clothing lines. Subsequent to meeting, Wal-Mart buyers issue a "work order" or "assortment plan detail sheet" to Cherry Stix, and the latter negotiates with overseas suppliers for the production of the goods. This is prior to a formal, binding commitment by Wal-Mart to purchase any goods from Cherry Stix. A "master purchase order" (still not binding) is sent by Wal-Mart to Cherry Stix about one month prior to shipment of the goods. Then, some time after the goods arrive in Canada and are inspected by its preferred consolidator, Wal-Mart Canada issues individual "purchase orders" under which it agrees to be bound to purchase the goods then ordered.


Cherry Stix argued that the very last purchase order established a binding "agreement to sell" the goods to Wal-Mart, which was concluded well after the "purchase" of the goods from the overseas supplier. The CITT disagreed. The CITT held that the initial meeting between Cherry Stix sales associates and Wal-Mart buyers established an "agreement to sell" and therefore the purchase of the goods by Cherry Stix could only have happened after this time. As a result, Cherry Stix could not qualify as a "purchaser in Canada" and customs value could not be based on its acquisition cost of the goods sold to Wal-Mart, but instead on the higher sale price charged by Cherry Stix to Wal-Mart.


The decision is significant because it can potentially apply to a great many importers who have similar dealings with retailers in Canada. It is also a concern for importers because the Tribunal appears to have concluded that an activity that is universally considered by the industry to constitute marketing and promotion actually represents a binding "agreement to sell".

The Tribunal does not appear to have considered the unique aspects of the fashion retail industry, where styles change often and consumer demand is not stable. In these circumstances, retailers will seek to avoid the risk of buying out-of-date inventory and, consistent with industry practice, avoid legal obligations in the purchase of such inventory. As further protection, retailers insist on a right to cancel the agreement, if any, that is formed. It is possible that evidence of this nature was not available to the Tribunal or was not introduced as part of the appellant’s case. The Tribunal’s decision perhaps would be different if these unique aspects of the fashion retail industry were before the Tribunal.

The Tribunal’s decision also may have been influenced by credibility issues and the seemingly close relationship between the appellant and Wal-Mart Canada. Therefore, it is arguable that the decision should be limited to its particular facts and should not stand as a precedent for future appeals dealing with the "purchaser in Canada" issue.

Finally, in its analysis, the Tribunal considered principles of general contract law. In doing so, the Tribunal made reference to the United Nations Convention on the International Sale of Goods, 1980 (the CISG), as well as to the Ontario Sale of Goods Act. It is not clear whether this was appropriate in the circumstances, especially in the case of the CISG. In addition, pursuant to a recent Supreme Court of Canada decision on customs valuation, the Tribunal’s decisions are not accorded any deference in matters of law not within the Tribunal’s particular area of expertise. Therefore, it is entirely possible that a present or future challenge to the Tribunal’s decision in Cherry Stix, would be successful.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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