Written by Darrel H. Pearson, Sabrina A. Bandali and Julie Wilson
The Canada Border Services Agency (CBSA) updated its online statement of its current trade verification (audit) priorities in July 2019. Importers of goods targeted for verification would be wise to ensure that they have reviewed their current customs compliance practices and are ready to respond if they are contacted by the CBSA.
Audits cover tariff classification, customs valuation and origin, and will commonly focus on one of these programs for a defined "verification period" (generally the last complete fiscal year). The result of the verification is considered "reason to believe", on the part of the importer, that it has contravened the Customs Act, and requires the amendment of past import entries made commencing up to four years prior to the date of correction.
Tariff classification, origin and value for duty are the elements that collectively determine the amount of regular customs duties and goods and services tax (GST) payable when goods are imported into Canada:
- The tariff rate (i.e., duty rate) applicable to imported goods is derived from their tariff classification (that is the category of goods in which they fall as set out in the Schedule to the Customs Tariff), and their origin (under rules of origin that determine the applicable tariff preference).
- Customs valuation relates to the basis of appraisal of their import value (value for duty).
- Duty amounts payable are calculated by multiplying the value for duty by the tariff rate.
- GST applicable at the border is calculated by multiplying the duty paid value of the imported goods (the sum of the value for duty and the applicable customs duty) by five percent.
Verification priorities are established throughout the year and reflect the CBSA's assessed risk of non-compliance with customs rules for certain categories of imported goods.
Not all audits are based on verification priorities. To promote compliance, the CBSA also conducts random verifications based on a number of factors including risk assessment, revenue, and complaints. All importers are at risk of random verifications. Compliance with trade rules not only ensures that correct amounts of duties and taxes are collected, but also supports Canada's trade negotiations by ensuring the accuracy of government trade data.
The CBSA's current verification priorities for the programs of tariff classification, customs valuation, and origin are as follows:
|Air Heaters and Hot Air Distributors||Heading 73.22|
|Articles of Apparel and Clothing Accessories||Heading 39.26|
|Articles of Plastics||Subheading 3926.90|
|Castors with Mountings of Base Metal||Heading 83.02|
|Cell Phone Cases||Headings 39.26, 42.02 and 85.17|
|Disposable and Protective Gloves||Subheadings 3926.20.91 and 4015.19|
|Flashlights and Miners’ Safety Lamps||Heading 85.13|
|Footwear ($30 or more per pair)||Heading 64.03|
|Furniture for Non-Domestic Purposes||Headings 94.01 and 94.03|
|Gloves||Headings 39.26 and 42.03|
Import Permit Numbers(i.e., for goods subject to tariff rate quotas under Canada's supply management system)
|Chapters 2 and 4|
|Olive Oil||Headings 15.09 and 15.10|
|Other Chemical Products||Heading 38.24|
|Other Mountings and Fittings, Suitable for Furniture||Heading 83.02|
|Parts for Use with Machinery of Chapter 84||Heading 84.31|
|Parts of Lamps||Heading 94.05|
|Parts of Machines and Mechanical Appliances||Heading 84.79|
|Pickled Vegetables||Heading 20.01|
|Safety Headgear||Subheading 6506.10|
|Spent Fowl||Headings 02.07, 16.01 and 16.02|
|Stone Table and Counter Tops||Heading 94.03|
|Vices and Clamps||Heading 82.05|
|Apparel||Chapters 61 and 62|
|Bedding and Drapery
(risk focuses on U.S. manufacturers using non-NAFTA inputs and NAFTA origin claims)
|Various goods of Headings 63.01, 63.02 and 63.03|
The CBSA provides the identified risks of non-compliance for each verification priority on its website.
While most current verification priorities are continued from previous years, two tariff classification priorities are new: (i) Other Chemical Products, and (ii) Parts of Machines and Mechanical Appliances. Several verification priorities have been removed since the CBSA's last publication in January 2019.
The CBSA also publishes aggregated audit results by verification priority. The rates of non-compliance are high, and exceed 50 percent for the majority of the results published as of July 2019. Several rounds of verification had 100 percent non-compliance. Non-compliance results in assessments of duties, GST, and frequently, administrative monetary penalties, on a retroactive basis.
The high rates of non-compliance serve as a reminder to importers to review their customs practices, especially for goods covered by the CBSA's verification priorities. Related party transactions and transfer pricing arrangements are particularly important aspects of customs valuation practices that should be carefully reviewed on a regular basis to ensure contemporaneous documentation (written intercompany agreements and transfer pricing studies) are appropriate and up to date and that practices conform.
If you would like to discuss your company's compliance with Canada's customs rules, please contact the authors, or any member of the Bennett Jones International Trade and Investment group.