Canada: Free Trade Does Not Mean A Free Pass

Last Updated: August 31 2016
Article by Cyndee Todgham Cherniak

Canada has entered into free trade agreements (and has active free trade agreements) with a number of countries, including the United States, Mexico, Israel, Chile, Jordan, Iceland, Norway, Sweden, Lichtenstein, Peru, Colombia, Panama, Honduras, Costa Rica and South Korea. Under these free trade agreements, the duties on certain goods have reduced to 0%. Importers claim the preferential tariff treatment and pay no duties (or reduced duties where applicable). As a result, "free trade" is often equated with tariff elimination or tariff reductions.

Confusion arises when the Canada Border Services Agency ("CBSA") contacts importers of goods from FTA countries and asks to verify origin in order to support the duty free treatment. Often, the importer does not have the necessary information to respond to the CBSA and the duty free treatment is denied for past imports and future imports.

We are often contacted at the start of the verification process and are able to assist with the organization of the documents. When we are contacted after the detailed adjustment statement is issued changing the origin and imposing the MFN (most-favoured-nation) rate of duty, it is a more complicated process to resolve the issues.

The seven most common mistakes that are made are:

  1. Importers think duty free treatment means that the transactions will not be scrutinized: Nothing could be further from the truth. The CBSA likes to verify that importers who claim duty free treatment are properly claiming duty free treatment. The CBSA verifies that the applicable rule of origin has been satisfied. Duty free does not mean free pass. The CBSA would like to collect customs duties on all imports. It is only when there is a rule for duty relief that the CBSA does not charge customs duties.
  2. Importers do not obtain certificates of origin from the exporter/manufacturer: An importer of record must have a duly completed certificate of origin from the exporter prior to importing goods under a preferential tariff treatment. If the importer does not have the certificate of origin, the duty free treatment can be denied.
  3. Importers do not ask sufficient questions to determine if the exporter is the manufacturer of the goods: If the exporter is not the manufacturer, the exporter will have to get information from the manufacturer to determine if the goods satisfy a rule of origin. If the information is not obtained up-front, the exporter may not provide information about their suppliers. The exporter does not want the Canadian importer to buy directly from their supplier and cut them out.
  4. Importers assume that if the exporter is in the United States (or another free trade country), the goods are entitled to duty free treatment: This is not correct. There are specific rules in the applicable free trade agreements on an H.S. Code basis – there are a lot of rules. The rules of origin are sometimes very technical.
  5. Importers do not realize that in order to determined origin, they may have to know every input into the good and the origin of every input. Many rules of origin are not simple. It is often necessary to obtain a bill of materials and then determine if any of the goods are not originating. For each non-originating good, it is necessary to determine if that good goes through the proper tariff shift and regional value content transformation. This can take time and it is often very difficult for importers to track down all the information.
  6. The proof is in the paperwork: If you do not have or cannot provide all the proper paperwork, then duty free treatment will be denied for past transactions under verification and will not be allowed in the future. Usually an assessment is used for the past transactions and can go back many years (even beyond the 4 year limitation period). The amount of money can add up depending on what is the applicable MFN rate of duty.
  7. Importers assume it is the exporter's responsibility: This is not correct. For most free trade agreements, the obligation to report the accurate origin of goods is on the importer of record.
  8. Importers must rely on exporters for accurate information about the origin of the goods and the inputs of the goods and sometimes the exporter is wrong: It is better to take control over customs compliance rather than relying on others.

This article was originally published on Republished with permission.

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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