Canada: Reduction of Canadian Customs Duties

Last Updated: September 22 1998

With the global trend towards free trade, open borders and "just in time" sourcing within many business operations, Revenue Canada is moving to facilitate faster and simpler customs clearance in a number of ways, including tariff simplification and electronic transmission of customs documents. Given the greater reliance on the Canadian importer's customs declaration and "self-policing", the more diligent application of the custom penalty regimes are a natural result. Whether your organization handles its own customs documentation, or uses a broker, cross-border operations should be kept under review to ensure that physical delays and financial penalties are kept to a minimum.

Some Common Compliance Errors

One of the most common customs errors is the failure to report all merchandise imported. Non-reporting of imported property can be a serious problem, as an import "overage" (more goods in the shipment than reported) may be viewed as a form of smuggling and can lead to the seizure of the shipment. Appropriate control linkages among the importer's purchasing, receiving, payables and the customs accounting areas must be functioning. Lack of attention here is a recipe for a customs disaster!

Just because we have the North American Free Trade Agreement (NAFTA) does not mean imports from the United States or Mexico can be ignored from a customs perspective. To obtain the NAFTA benefits (lower duties or duty-free importation) requires the Canadian importer to possess a signed and correctly-completed NAFTA Certificate of Origin from the foreign supplier.

Importers should have in place a system that identifies NAFTA products entitled to benefits and ensures certificates are on file for the goods. Certificates can be date-specific or issued for a "blanket period", such as 6 or 12 months. Importers should ensure that expiring certificates are renewed and that certificate suppliers advise of any change to the NAFTA qualification of the specific products during the period covered by any blanket certificate.

Import Authorizations and Quotas

Before attempting to import merchandise into Canada, one must determine whether an item is restricted, controlled or prohibited. Failure to obtain required import authorizations or meet Canadian standards may preclude merchandise from entry into Canada.

Federal agencies that have import requirements over and above Revenue Canada's custom requirements include: Industry Canada, Transport Canada, Agri-food Canada, Foreign Affairs and International Trade, Fisheries & Oceans, and Health Canada.

Certain commodities are subject to import quotas. Failure to obtain the required "Tariff Rate Quota" can result in customs duties being applied at rates exceeding 200% in some cases.

Tariff Classification

Generally, custom duty rates are ad valorem (based on a percentage of value), but in some cases may be specifically based on weight or established units. The amount of duty charged on imported goods is dictated by the specific tariff classification number of the imported good, determined by the applicable Schedule of customs Tariff, with reference to published guidelines and interpretive rules. Proper tariff classification is obviously the key to the correct amount of duty being paid - no more than required.

Value for Duty

Having certified the correct duty rate, what is the correct value upon which the import custom duty will be charged? In most instances, the value for duty will be based upon price paid or payable - the sale price for export charged by the foreign exporter to the purchaser in Canada. This basic sale price, or "transaction value", may be required to be adjusted for various items in order to determine the correct value for customs duty purposes.

Items that may increase the value and hence the amount of duty include: certain selling commissions, royalties related to the imported goods, subsequent proceeds, and certain transportation or insurance. Failure to correctly account for such items can give rise to unexpected duty increases and, in some cases, penalties.

The "transaction value" method of appraisal cannot be used in every circumstance. More complex methods apply for related-party transactions, where the relationship influences the price paid or payable, and in cases where there are limitations on, or conditions imposed upon, the disposition of the imported goods after importation.

Country of Origin and Reduced Rates

The "country of origin" of imported goods can bring entitlement to reduced duty rates. Given that one product can now be sourced and partly manufactured in a number of countries, determining the "country of origin" of the end result may not be simple. Indeed, the resulting "country of origin" should be a factor in the design of the sourcing and manufacturing process. Reduced "country of origin" duty rates are available for goods made in several countries, including the U.S., Mexico, Chile, Israel and certain Commonwealth countries.

Duty Remission, Deferral and Cash Planning

There are specific programs of duty remission and/or statutory relief available depending on particular circumstances. These will further reduce the amount of duty payable. Where customs duties are payable, then often the timing of the payment can be controlled by choosing from a menu of duty deferral programs such as bonded warehousing. This can mitigate the cash flow impact on the importer, especially where large importations of inventory occur, with resale in Canada being phased over a lengthy period.

The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.

While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a PricewaterhouseCoopers. Should you have any questions concerning the information provided herein or require specific advice, please contact your PricewaterhouseCoopers advisor, or:

David W. Steele
145 King Street West
Toronto, Ontario  M5H 1V8

Fax:    1-416-941-8415
E-mail:    Click Contact Link 

For further information on taxation in Canada, enter a text search "PricewaterhouseCoopers" and "Canada" and "Mondaq Business Briefing".

Click Contact Link

PricewaterhouseCoopers is a Canadian member firm of PricewaterhouseCoopers International Limited, an English company limited by guarantee.

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