Canada: Customs Tariff Classification Of Hockey Gear Goes To Ultimate Referee: The Supreme Court Of Canada

On September 29, 2016, the Supreme Court of Canada ("SCC") issued a significant judgment on customs tariff classification. As noted in the majority opinion of Justice Russell Brown, Canada (Attorney General) v. Igloo Vikski Inc.1 represents the SCC's first foray into the world of Canada's Customs Tariff - federal legislation that adopts the World Customs Organization's "Harmonized System". The ruling includes an important analysis of the Canadian "General Rules for the Interpretation of the Harmonized System" (the "General Rules").

While from the perspective of customs practitioners Igloo Vikski is the most important Canadian decision to date on tariff classification, it appears that the immediate practical importance of the case will be for importers of composite goods - for those in that particular situation, close attention to the Justice Brown's ruling is definitely warranted. For importers of other types of goods, it is yet to be seen whether the SCC's new hierarchical (rather than "cascading") approach in interpreting the General Rules would have an actual impact on how such goods should be classified.

The ruling is also likely to make successful appeals of CITT decisions more difficult, as the SCC majority stressed that "[c]onsiderable prudence must therefore be exercised when reviewing the CITT's interpretation and application of the Customs Tariff"2 in light of the fact that the "CITT has specific expertise in interpreting [rules regarding tariff classification]".3

Background

The Canada Border Services Agency ("CBSA") brought this appeal from a 2014 decision of the Federal Court of Appeal ("FCA").4 That decision overturned a ruling of the Canadian International Trade Tribunal5 ("CITT" or "Tribunal") which had, in turn, upheld the decision of the President of the CBSA to classify goaltender ice-hockey gloves imported by Igloo Vikski Inc. ("Igloo") under heading No. 62.16 of the schedule to the Customs Tariff as "gloves, mittens and mitts" rather than under heading No. 39.26 as "other articles of plastics", as requested by Igloo.

In the Memorandum of Argument filed with the Application for Leave to Appeal to the SCC, the Attorney General of Canada pointed out that:

The Judgment of the Federal Court of Appeal in Igloo Vikski dramatically modifies how a significant number of goods imported into Canada are classified under the Customs Tariff, which determines duties payable.

The Judgment runs contrary to the applicable law and prior Canadian jurisprudence, including the Federal Court of appeal's own decisions.

The Judgment places Canada at risk of breaching its international trade obligations and possibly generating disputes with other countries, as well as causing uncertainty domestically in the classification of imported goods. (we emphasize)

In our view, it is likely the reason that the SCC agreed to hear the appeal - not because the tariff classification of goaltender hockey gloves is of "national importance", even allowing that, as Justice Brown poetically observed (in a Canadianized hommage to Lord Denning), "[i]n wintertime, ice hockey is the delight of everyone."6

The CITT Decision

Igloo, a Canadian manufacturer, seller, distributor and importer of sportswear and equipment, noted that the goaltender hockey gloves in issue consist partly of plastic and partly of textiles. Applying Rules 1 and 2(b) of the General Rules, the CITT concluded that the presence of plastic components did not deprive the hockey gloves of their character as "gloves of textile fabrics". Igloo took the contrary position that, on a proper application of Rules 1 and 2(b), the gloves were prima facie classifiable under both of the headings referred to above - 39.26 and 62.16 - which (in its view) shifted the analysis to the next level (Rule 3 of the General Rules) which (again in its view) would result in the ultimate classification of the gloves as "other articles of plastics."

According to the CITT, the hockey gloves fell into the classification "gloves, mittens and mitts" under heading No. 62.16, but not into the classification "other articles of plastics" under heading No. 39.26. The reason for rejecting the "other articles of plastics" classification was that the gloves were not made of plastic sheets that had been sewn or sealed together. The CITT derived the "sewn or sealed" criterion from an Explanatory Note to the Harmonized Commodity Description and Coding System relating to heading 39.26. These notes (the "Explanatory Notes") are published and amended from time to time by the World Customs Organization.7 The CITT placed additional reliance on a second Explanatory Note, relating to heading No. 62.16, which mandated applying the General Rules if the articles contained non-textile material that constituted "more than mere trimming". After applying Rule 2 in this manner, the CITT concluded that the gloves fell under only one heading - No. 62.16 - and that there was no legal basis for considering Igloo's arguments concerning the application of Rule 3(b) of the General Rules to classify the hockey gloves. As the CITT noted, Rule 3 can be invoked only if, after the application of Rules 1 and 2, the article in question is found to fall prima facie under more than one heading.

The FCA Decision

The CITT decision was appealed by Igloo to the FCA. In its decision, the FCA determined that the CITT's reasoning in interpreting the General Rules contradicts their "cascading" nature. The FCA stated in its decision that the CITT's interpretation of Rule 2(b) of the General Rules is unreasonable since it is not a prerequisite condition to the application of Rule 2(b) that the goods in issue must first meet the description in a heading pursuant to Rule 1. The FCA also stated that while the goods do not meet the description in heading No. 39.26 under Rule 1 (since the textile material is separate from the plastic material), they can be described prima facie in the extended terms of heading 39.26 under Rule 2(b), contrary to the CITT's position.

According to the FCA, the hockey gloves imported by Igloo had a dual nature and fell under the description in the extended terms of heading No. 39.26. Hence, the FCA allowed Igloo's appeal and concluded that the CITT did not properly apply the relevant rule. The CBSA then filed an application for leave to appeal to the SCC, claiming that the FCA erred by setting the CITT's determination concerning the classification of the goods in issue and arguing that the judgment of the FCA would dramatically modify the interpretation and application of the tariff classification system.

The SCC Decision

Justice Brown, delivering the reasons for the 8-1 majority, allowed the CBSA's appeal and determined that the FCA erred in allowing Igloo's appeal and sending the matter back to the CITT. Two main takeaways emerge from the SCC's decision. First, appellate courts will likely be quite deferential when reviewing CITT decisions in the future. Second, the SCC provides much-needed clarity on the interpretation and application of the General Rules.

In applying the reasonableness standard of review to the CITT decision, the SCC gave considerable deference to the Tribunal. The SCC, like the FCA, noted that the questions of law that arise out of the Customs Tariff are of a very technical nature and that the CITT has the specific expertise that will often make it better equipped than an appellate court in answering such questions. Justice Brown also stated the following concerning the standard of review:

While in some respects the CITT's reasons lack perfect clarity, reasonableness review does not require perfection. The CITT's decision is reasonable if its reasons "allow the reviewing court to understand why the tribunal made its decision and permit it to determine whether the conclusion is within the range of acceptable outcomes".

My review of the CITT's reasons satisfies me that they meet this standard.8

The SCC's classification of the CITT's decision as "reasonable" even though its reasons lacked "perfect clarity" sets the stage for appellate courts giving considerable deference to future CITT decisions.

The SCC also provided further guidance with respect to the classification of the nature of the General Rules and their application. The SCC acknowledged the prevailing description of the General Rules as being "cascading" in nature, but stated that classifying the rules as a "hierarchy" is more appropriate. Characterizing the General Rules as "hierarchical" (as opposed to "cascading") better conveys the principle that the General Rules can and should be applied together, rather than one after another with each preceding rule losing all relevance. On this analysis, the CITT had not acted unreasonably in determining that Rule 2(b), respecting composite articles, could not be applied in such a way as to extend the meaning of "other articles of plastics" in heading No. 39.26 beyond what was specified in the Explanatory Note to that heading. In this case, the SCC majority saw no reason to take issue with the CITT's determination that heading No. 39.26 applies only to articles made of plastic pieces that are sewn or sealed together. While the gloves were partly composed of plastic elements, these were not sewn or sealed together, from which it followed that the CITT's refusal to apply rule 2(b) so as to classify them under heading No. 39.26, and its consequential refusal to use such classification as a basis to proceed to a Rule 3 analysis, were reasonable.

The SCC further stated that: "the Federal Court of Appeal erred in supposing that Rule 2(b) can be applied to extend the scope of a heading to include a particular good where no part of that good falls within the heading [...] For Rule 2(b) to apply, the goods under consideration must, in accordance with Rule 1, meet the description contained in that heading in whole or in part (once the relevant Chapter, Section, or Explanatory Notes are taken into account) [...]."9 In fact, the FCA's approach was clearly in violation of the SCC's interpretation of how the General Rules are to be applied.

In the course of its ruling, the SCC provided a detailed analysis of each rule, its role and how it should be applied in relation to the other rules found in the General Rules. While the SCC's guidance with respect to the application of the General Rules does not necessarily change how the rules were already being applied in practice in most cases, it nonetheless provides a clear map of how to carry on a tariff classification exercise moving forward.

In the course of its ruling, the SCC provided a detailed analysis of each rule, its role and how it should be applied in relation to the other rules found in the General Rules. While the SCC's guidance with respect to the application of the General Rules does not necessarily change how the rules were already being applied in practice in most cases, it nonetheless provides a clear map of how to carry on a tariff classification exercise moving forward.

Conclusion

The Igloo Vikski decision represents an important tool for every importer of goods comprised of a mix of materials. All importers should proceed to an internal review of tariff classifications for such imported goods to determine whether the SCC's new "hierarchical" approach could impact the tariff classifications currently used. The decision is also a reminder for importers that appeals to the CITT will have to be really well prepared considering that decisions from this panel will be less likely to be overturned at the FCA level moving forward especially on tariff classification.

The author wishes to thank Jordan Dawson for his help in writing this article.

Footnotes

1 Canada (Attorney General) v. Igloo Vikski Inc., 2016 SCC 38.

2 Id., para. 30.

3 Id., para. 17.

4 Igloo Vikski Inc. v. Canada Border Services Agency , 2014 FCA 266.

5 Igloo Vikski Inc. v. President of the Canada Border Services Agency, 2013 CarswellNat 6770.

6 Supra note 1, para. 1, with reference to Miller v. Jackson, 1 Q. B. 966 (C.A.): "In summer time village cricket is the delight of everyone."

7As noted by the SCC, as per section 11 of the Customs Tariff, while the Explanatory Notes "are not binding, they must be at least considered in determining the classification of goods imported." (supra note 1, para. 8). In this case, it is interesting to note that the CITT went as far as to say that, even if the gloves had been made entirely of plastics, they would not have fallen under heading No. 39.26 because the "sewn or sealed" requirement would still not have been met.

8 Id., para. 42.

9 Id., paras. 44-45.

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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