Direct sellers (also known as network sellers) enter the lucrative Canadian market, often without asking questions about whether there are any Canadian laws that apply to the import of goods into or sale of the goods in Canada. Canadians sign up as independent sales contractors and start to build their sales networks before all questions are asked and answers are received about compliance with Canadian laws. As a result, many direct sellers sell to Canadian consumers and are not in compliance with Canadian laws. Often sales to Canadian consumers increase exponentially and compliance with Canadian laws is not addressed before audits commence. What this means is that successful businesses may face significant assessments and must pay penalties and interest adding to the cost of non-compliance. Sometimes, there is publicity on social media concerning the non-compliance, which has a negative impact on the reputation of the direct seller.
We cannot cover all Canadian laws in this article. We are covering the tops 10 trade issues that we see on a regular basis when dealing with direct selling companies. Direct sellers should take steps to comply with Canadian laws before they are selected for an audit. Here are some of the areas of Canadian law to address:
1. Provincial licenses: Most Canadian provinces require direct selling companies obtain a provincial license to engage in direct selling to consumers. Here are some of the links: Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland/Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, Saskatchewan, and Nunavut.
2. Health Canada approvals for products: Many products require Health Canada approval before they can be shipped to Canada. Depending on the product, different approvals may be required. With respect to cosmetics, manufacturers and/or importers must complete a Cosmetic Notification Form for each cosmetic product before offering cosmetics for sale in Canada. With respect to natural health products, manufacturers and importers must obtain a Health Canada license for each product. If approvals have not been obtained, the Canada Border Services Agency ("CBSA") may detain the goods at the border and prevent future shipments by creating a lookout.
3. Safe Foods for Canadians Act: If an item shipped to Canada is considered to be food, restrictions in the Safe Foods for Canadians Act may apply. There are restrictions on non-resident importers importing food into Canada for sale to consumers. Direct sellers who sell supplements and other goods that are consumed by Canadians should ask whether Canada considers their goods to be food and covered by the Safe Foods for Canadians Act. See Do food import businesses need an import license to import foreign food into Canada?
4. Goods and Services Tax ("GST")/Harmonized Sales Tax ("HST"): If sales will be made in Canada, it will be necessary to register for Canada's federal sales tax, known as the goods and services tax. The provinces of Ontario, New Brunswick, Nova Scotia, Newfoundland/Labrador and Prince Edward Island have harmonized their sales taxes with the federal GST. The direct seller will have to address many GST/HST issues, including:
- collecting the correct amount of GST/HST on invoices;
- filing GST/HST returns and remitting GST/HST collected from consumers;
- claiming input tax credits; and
- determining whether it is possible to become an approved network seller to use an Alternative Calculation Method relating to commissions paid to independent sales contractors.
5. Provincial Sales Taxes: If sales will be made in the provinces of British Columbia, Saskatchewan, Alberta or Quebec, it will be necessary to register to collect sales taxes in those provinces.
6. Decide who will be the importer of record if goods are shipped into Canada: This is an important decision. If goods are shipped direct to consumers, the consumer will be the importer of record. If the direct selling company is the importer of record, the company will have to obtain a importer number. Depending on which option is selected, there will be a number of other issues to consider.
7. Tariff Classification: When goods are shipped to Canada, even if shipped directly to a consumer, the correct Canadian tariff classification number must be provided to the CBSA. Based on our experience, insufficient time is spent determining the H.S. tariff classification number for goods shipped to Canada. Customs brokers do not always ask questions about the goods resulting in the incorrect tariff classification being used. Direct sellers should not jsut plan to use the U.S. HTUS codes and Canada's H.S. codes may be different and case law may rdictate that importers to CAnada use a particular H.S. Code.
8. Origin: When goods are shipped to Canada, even if shipped directly to a consumer, the correct origin of the goods must be provided to the CBSA. Just because the goods are shipped from the United States does not mean the origin of the goods is the United States. Often an analysis must be undertaken to determine the correct origin of the goods.
9. Valuation: When goods are shipped to Canada, it is necessary to report to the CBSA the value of each good. The CBSA is actively auditing direct selling businesses because errors are common when Canadian customs laws have not been reviewed prior to starting to sell into Canada. Often the manufacturer incorrectly uses the cost of the goods as the value for customs duties. The reason is that the direct seller does not want to limit sales opportunities in Canada because duties and taxes at the border add to the ultimate price paid by consumers. Providing the incorrect value to the CBSA can lead to large assessments of customs duties. The CBSA could assess the consumer if the consumer is the importer of record – and this would be bad for future business. The correct valuation method will depend on how Canadian sales are structured. Valuation issues also arise with respect to replacement goods. A corrolary issue is transfer pricing for both income tax and customs purposes.
10. Labeling: Labels on goods sold into Canada may require both French and English on the labels.
Bonus: Direct sellers entering the Canadian market must post bonds for a number of purposes.
Bonus#2: Direct sellers should ensure that they are not selling counterfeit goods to Canadian consumers. The CBSA can seize counterfeit goods at the time of importation in certain circumstances.
We have not addressed in this article compensation plans and whether the compensation programs comply with Canadian competition laws, including Canada's anti-pyrimid rules. We have not addressed Canadian employment laws. We also have not addressed Canada's privacy laws requirements and Canada's anti-SPAM laws. We also have not addressed restrictions on websites directed at Canadian consumers.
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.