Import Scenario One: Non-resident Importer with No Permanent Establishment – Prior Sales Agreement
Each year the Canada Border Services Agency ("CBSA") targets non-resident importers for verifications. And each year, a significant number of those non-resident importers have difficulty showing that they have properly valued goods and fall into valuation traps. Consider the following example which illustrates how some importers run into difficulty.
A non-resident importer (with a principal place of business in the USA, for example) carries on business outside of Canada and does not have a permanent establishment in Canada. The non-resident importer receives purchase orders from its Canadian customers for the purchase and sale of goods (say $1,000). The Canadian customers must accept delivery of the goods and pay for them at the time that the non-resident importer delivers them in Canada. The non-resident importer contracts with its foreign supplier to make the goods (say for $500) and takes steps to have the goods shipped to the Canadian customers. The non-resident importer owns the goods and assumes the risk of their loss at the time of their importation prior to delivery.
A CBSA officer is likely to take the position that there was a "sale for export" between the non-resident importer and the Canadian customer on the basis of a sales agreement. Further, the officer will likely regard the Canadian customer to be "purchasers in Canada" and that the price paid or payable for the goods can be determined (that is $1,000). The officer will likely decide that the sale for export from the non-resident importer to the Canadian customer is the relevant sale for customs valuation purposes and, as a result, will serve as the basis for the importer to appraise the customs value of the imported goods under the transaction value method.
Import Scenario Two: Non-resident Importer with a Permanent Establishment
Contrast the facts and the result in the above scenario with the following scenario.
A non-resident importer carries on business outside of Canada and has a permanent establishment in Canada. Note, that the term "permanent establishment" is defined by legislation and includes an office, a workshop or other fixed place of business through which the person carries on business.1 The non-resident importer receives an order for the purchase and sale of goods from its Canadian customers (say at $1,000). The Canadian customers must accept delivery of the goods and pay for them when they are delivered in Canada. The non-resident importer then orders the goods from its foreign supplier (say for $500). The foreign supplier then makes the goods and the non-resident importer takes steps to have them delivered to the Canadian customers in Canada. The non-resident importer owns the goods and assumes the risk of their loss prior to their delivery in Canada.
A CBSA verification officer is likely to take the position that there was a "sale for export" between the non-resident importer and the foreign supplier. The officer should determine that the foreign supply price ($500) should be used for customs valuation purposes because the non-resident importer is a "purchaser in Canada." The price paid by the Canadian customers ($1,000) should be disregarded as the CBSA should consider this "sale" to be a domestic sale (i.e. not a sale for export).
There are various other scenarios that might be considered by non-resident importers. Some involve the importation of inventory on speculation of sale. Others may involve the importation of goods under an agreement that there is no sale unless, and until, goods are inspected for quality control purposes by the Canadian customer. Consequently, in such instances, the Canadian customer has the right not to accept delivery. Non-resident importers should seek the right advice to ensure that the supply methodology and the planned valuation method will "pass" a verification, that it is properly implemented and that it is well-understood by those who must continue to implement it. Any failure in the execution of a good customs plan can be costly.
This article has outlined some issues that non-resident importers may need to address when planning to import goods into Canada. Good customs planning and implementation should take into account what the CBSA will be looking for if, and when, it carries out a trade compliance verification.
1 See the Valuation for Duty Regulations' definition of "permanent establishment."
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.