Signed on September 12, 2006, the Agreement provides the framework for the resolution of the softwood lumber dispute between Canada and the United States, and includes provision for the refund of anti-dumping and countervailing duties paid by Canadian lumber producers on exports to the United States, and the introduction of a Canadian export charge and quota regime for lumber shipments to the United States.
Effective October 12, 2006, all exporters of softwood lumber products to the United States are liable for the new export charge and must obtain an export permit for every shipment of softwood lumber products.2
1. The Implementing Legislation
The Act provides the legal and administrative framework to impose export charges on softwood lumber products exported to the United States. It is administered by the Minister of National Revenue and the Canada Revenue Agency. Export permit and export allocation (quota) restrictions are administered under the Export and Import Permits Act ("EIPA") by the Department of Foreign Affairs and International Trade ("DFAIT").
2. Border Measures
The Act sets out how export charges will be calculated, in accordance with the terms of the Agreement.
As per the Agreement, Canada is to apply an export charge which may vary from 5% to 15% (Option A) or use a combination of an export charge and a cap on the volume of exports (Option B). The rate of export charge and the volume cap are dependent on the price of lumber.
The basic charge and its calculation is provided for in subsection 12(3) of the Act. The export charge is payable at the "time of export".3 The time of export is important because it determines in which month the shipment occurs for the purposes of applying the export charge.
Exporters in regions which have chosen Option B, such as Quebec, Ontario, Manitoba and Saskatchewan, are subject to quota restrictions with respect to exports of softwood lumber products originating in those provinces, but pay a lower export charge compared to exporters in regions that have chosen Option A, British Columbia and Alberta. Exporters in Option A regions are not subject to a quota, but pay a higher export charge with respect to exports of softwood lumber products originating in those provinces.
Except in certain cases, a product is deemed to be exported from the region in which the product underwent the first primary processing. "Primary processing"4 is defined to mean "the production of softwood lumber products from softwood logs".
The charge on exports depends on the price of lumber (reference price) as well as the option chosen by the regions from where the export is made. The reference price is calculated on a monthly basis as provided in subsection 12(5) of the Act.
Section 13 of the Act sets out the rules for determining the export price of a product. If the product has only undergone primary processing, the export price is the "FOB value" at the facility where the product underwent its last primary processing before export. The export price of "remanufactured products" by an "independent remanufacturer" is calculated on a first mill basis. An "independent remanufacturer" must be certified as such under the Act. The calculation of export price will be addressed in a future McCarthy Tetrault report.
The export charge on products exported from regions which choose Option A may be subject to an additional charge ("surcharge") under the surge mechanism if exports from the region exceed the trigger volume calculated under section 14.
Section 11 of the Act deals with exports from the Atlantic provinces. With certain exceptions, exports from these provinces are excluded from the export charge. A product is deemed to be exported from these provinces if it underwent its first primary processing in one of these provinces from saw logs originating there or in the State of Maine.5
Under section 16, exports by certain persons (i.e., border mills) whose names are set out in the schedule to the Act are exempted from the application of the export charge provided that prescribed conditions are met. The list of mills provided for in the schedule may be amended by regulation.6
The Act also grants the Governor-in-Council, on recommendation of the Minister of International Trade, the authority to exempt a particular region or particular softwood lumber products from the application of the export charge.7
4. Special Charge on Refund of Duty Deposits
Section 18 of the Act imposes a charge of 18.06% on all duty deposit refunds. The charge is payable by all persons who received a duty deposit refund, either directly from the U.S. government of through the Export Development Corporation ("EDC") mechanism. Remission Orders have been issued to relieve those who participated in the EDC refund mechanism from having to pay the 18.06% charge, and to relieve the charge payable by non-EDC participants on interest that accrued on the duty deposit refunds after October 11, 2006.8 The Special Charge will be the subject of a future McCarthy Tetrault report.
Every person who exports softwood lumber to the United States must be registered under the Act with CRA. The Act contains extensive provisions governing the filing of returns and payment of export charges.
Every person who is required to make a payment must also keep sufficient records that are necessary to determine whether they have complied with the Act.9 Unless otherwise authorized by the Minister, all records must be kept in Canada. Records must be kept for a period of six years, or for any other period that may be prescribed, unless written permission for their disposal is obtained from the Minister.10 The extensive record keeping requirements of the Act and EIPA will be the subject of a future McCarthy Tetrault report.
6. Objections to Assessments
The Minister may assess a person for any export charge payable under the Act.11 A person who has been assessed may file a notice of objection to the assessment within 90 days.12 On receipt of the notice, the Minister shall reconsider the assessment and cancel or confirm it or make a reassessment.13 An assessment may be further appealed to the Tax Court of Canada.14 The Court may either dismiss or allow the appeal. If the appeal is allowed, the Court may vacate the assessment or refer it back to the Minister for reconsideration and reassessment.15
7. Compliance Audits and Offences: Immediate Action Required
There are strict enforcement provisions in both the Act and the EIPA. Exporters should be developing the processes now to comply with the requirements of the Act and EIPA in order to be prepared for an audit by CRA and DFAIT investigators, and to avoid the substantial fines and penalties imposed under the legislation for non-compliance.
The Act imposes penalties for the failure to file a return. In addition, exporters are subject to significant penalties for the failure to answer a demand to file a return, the failure to provide information and the making false statements or omissions.16
Exporters who fail to file a return or maintain adequate records are liable to a fine between $1,000 and $25,000 or for imprisonment for a maximum term of 12 months, or to both.17 Exporters who submit false records, destroy records or evade compliance are liable to penalties, a fine up to 200% of the amount payable sought to be evaded, imprisonment for a maximum term of term of 18 months or, in some cases, both.18
There are extensive provisions for inspections and investigations. Auditors are entitled to inspect, audit or examine records, processes, property or the premises of the exporter and any other person.19
As indicated above, export allocations are issued by the Minister under the EIPA. Exporters who do not comply with permit requirements (for example by falsifying or destroying records, or evading compliance) may be found guilty of (a) an offence punishable on summary conviction and liable to a maximum fine of $25,000 or to imprisonment for a maximum term of one year, or to both; or (b) an indictable offence and liable to a fine in an amount that is in the discretion of the court or to imprisonment for a maximum term of ten years, or to both.
The investigation and enforcement provisions of the Act and the EIPA will be addressed in a future McCarthy Tetrault report.
8. Payment to the Provinces
The Minister must distribute among the provinces from which the softwood lumber products originate, the revenues derived from the imposition of the export charge.20
9. Export Allocations (Quotas) for Option B Provinces
All goods on the Export Control List established under the EIPA require an export permit in order to be exported from Canada. "Softwood lumber products" subject to the Agreement are now listed on the Export Control List and therefore every shipment requires an export permit. The scope of products subject and not subject to the border measures will be the subject of a future McCarthy Tetrault report.
The EIPA authorizes the Minister to determined the quantity of softwood lumber products that may be exported from a province in a month (regional quota volume), and to establish a method for allocating a province’s quota to exporters.
An exporter may seek a review of its quota allocation decision before the Federal Court of Canada. This must be done within 30 days of the date of the decision from DFAIT notifying an exporter of its allocation for the following month. Judicial review of export allocations will be the subject of the next McCarthy Tetrault report.
10. Protection Against Customs Broker Error
Customs brokers play an integral role in the process in terms of obtaining export permits, and reporting and processing transfers of quota with and without the wood. Exporters are advised to review their agency agreements and service contracts with their customs brokers to ensure that they are adequately protected against any errors made by their brokers and possible negligence. Ensuring that your company has adequate protection against the errors and omissions which may be committed by your customs broker will be the subject of a future McCarthy Tetrault report.
11. Future McCarthy Tetrault Reports on the Softwood Lumber Regime
The foregoing has provided a general overview of the implementation of the Agreement under Canadian law. A number of issues raised above deserve special attention on the part of softwood lumber exporters and will be discussed in detail in the following upcoming reports:
1. Judicial Review of Export Allocation Decisions
2. Calculation of the Export Charge
3. Record keeping Requirements
4. Compliance Audits: How to avoid the imposition of penalties and fines
5. Protection Against Customs Broker Error
6. Which products are subject to the Agreement and which are not?
7. The Special Charge
- S.C. 2006, c.13.
- Covered Softwood Lumber Products are identified in item 5105 of the Export Control List. For more information on included and excluded softwood lumber products: see EICB Notice 143 "Softwood Lumber Exports to the United States-Permit Requirements". Export permits are also required during periods of "free trade" when the Prevailing Market Price exceeds US$355 and no export measures (export charge and/or volume restraints) are applied.
- Subsection 10(2) of the Act.
- Subsection 12(4) of the Act.
- Subsection 11(2) of the Act.
- Subsection 16(2) of the Act.
- Subsections 17(2) and 17(3) of the Act.
- Canada Revenue Agency "Softwood Lumber Products Export Charge Notice", January 2007, SWLN-002.
- Section 48.
- Subsection 48(9) of the Act.
- Subsection 50 of the Act.
- Subsection 54(1) of the Act.
- Subsection 54(8) of the Act.
- Subsection 56 of the Act.
- Subsection 61 of the Act.
- Subsections 65 to 67 of the Act.
- Subsection 68 of the Act.
- Subsection 69 of the Act.
- Subsection 77(1) of the Act.
- Subsection 99(1).
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.