Written by Darrel H. Pearson, Sabrina A. Bandali and Jessica B. Horwitz
Since July 1, 2018, Canada has imposed 25% and 10% ad valorem surtaxes on the importation of a wide variety of U.S. "originating" goods. Canadian and non-resident importers have been wondering what they can do to avoid the application of the countermeasures to their importations. This blog post provides an overview of options, however, it is no replacement for targeted legal advice. If you are an importer affected by the countermeasures, please contact us to determine how these remedies may apply to your business.
1. Are You Correctly Classifying Your Goods?
The countermeasures are highly targeted, and in many cases identify affected products at the eight-digit tariff item level. Tariff classification is often a complex exercise, which requires legal analysis informed by the General Rules for the Interpretation of the Harmonized System, Canadian rules, relevant legal notes, and jurisprudence. If there is a chance that you have incorrectly classified your goods and that an alternative tariff classification is available that is not subject to the surtax measures, consider exploring that possibility.
Moving to a tariff classification that does not attract surtaxes may lead to a change in application of regular customs duties, upward or downward, or may have no effect. Corrections of tariff classification that result in more duties being payable or that are revenue-neutral must be made within 90 days of an importer having “reason to believe” that the tariff classification made at the time of entry was incorrect. For corrections resulting in a refund, section 74 of the Customs Act permits the importer to choose to file a refund claim up to four years after the date of accounting for the imported goods.
2. Are Your Goods U.S. “Originating”?
The countermeasures are applied to goods that “originate” in the United States as defined by the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations (the “Marking Regulations”). Rules of origin for marking purposes are commonly broader than the rules that determine the origin of goods for preferential tariff purposes. For this reason, some importers may find themselves in the unenviable position of (i) not benefiting from NAFTA or other preferential tariff treatment because they do not satisfy the free trade agreement’s rules of origin, but (ii) still being subject to the countermeasures when importing goods from the United States into Canada due to the looser origin requirements of the Marking Regulations.
On the other hand, the fact that the countermeasures are targeted at goods of U.S. origin means that not all goods exported from the United States to Canada will be subject to the surtax. For example, if a U.S. company imports materials into the United States from a foreign supplier and then subsequently ships all or part of those goods to Canada without further processing the goods in the United States in a manner that would change the origin of the goods, these imports into Canada would not be subject to the Canadian countermeasures. However, because the onus is on the importer to prove that goods are not of U.S. origin for purposes of the countermeasures, it is important to gather adequate documentation to prove the foreign (non-U.S.) originating status of the goods. This will be particularly important for companies that deal in inputs or materials that are interchangeable (fungible) with U.S. origin goods subject to the countermeasures, in which case appropriate inventory tracking records may be critical to be able to establish exemption of the non-U.S. originating goods.
3. Will You or Have You Exported or Re-exported the Goods After Importation Into Canada? Duty Relief or Drawback May be Available.
The Canada Border Services Agency Duty Relief and Duty Drawback programs are still in effect with respect to goods subject to Canada's countermeasures. These programs relieve or refund duties and surtaxes on imported goods on the condition that the imported goods, or goods manufactured using the imported goods, are subsequently exported from Canada within four years.
The Duty Relief program allows qualified importers to apply in advance for relief from the payment of duties (including surtaxes) at the time of entry, again, as long as the imported goods meet the conditions of relief, including that they are subsequently exported within the required time period.
The Duty Drawback program refunds duties, paid on importation, subsequent to the export/re-export of goods from Canada. Claims may be made up to four years after the date of import accounting. Drawbacks or relief on some exports to the United States are limited by the “lesser of” rule under NAFTA, which requires the importer to be refunded the lesser of duties paid on importation into Canada or subsequent importation into the United States.
4. Are the Goods Products of Canada That Have Been “Worked on…” Abroad?
Under subsection 101(1) of the Customs Tariff, the Canadian Goods Abroad program permits a partial relief from duties for products of Canada that are intended for export from and return to Canada, as long as the goods will be worked on, repaired, or have equipment added abroad, and the work cannot be practicably performed in Canada. The goods must return within a year of their export from Canada, and the extent of the duty relief is limited to the duties (including surtaxes) payable on the Canadian portion of the value added by the foreign processing. An application must be made at least three months before the proposed exportation from Canada.
5. Are There Special Circumstances That Justify a General, Discretionary Remission of Duties?
The granting of a remission order involves both political and legal considerations. Section 115 of the Customs Tariff permits the discretionary remission of import duties, including surtaxes, if recommended by the Minister of Public Safety and Emergency Preparedness. The Department of Finance Canada considers requests for remission, either as relief prior to importation, or to effect a refund after importation, and makes a recommendation to the Minister, who in turn makes a recommendation to the Governor in Council. Before doing so, the Minister, through his delegate, must conclude that there are exceptional and compelling circumstances that, from a public policy perspective, outweigh the primary rationale behind the application of duties.
Under subsection 23(3) of the Financial Administration Act, a remission may be “total or partial or conditional or unconditional”. This Act specifies the considerations relevant to an application for remission, i.e., if “the enforcement … is unreasonable or unjust or that it is otherwise in the public interest to remit the tax or penalty.” The Federal Court of Appeal has interpreted these words as being “open-ended terms that enable the Minister to take into account the wider impact of recommending remission” (Waycobah First Nation v. Attorney General of Canada, 2011 FCA 191 at para. 18).Last week, the Department of Finance Canada released a guideline regarding the process for requesting discretionary remissions related to the countermeasures. This guidance states that the government will only consider requests for the remission of surtaxes in the following circumstances:
- to address situations of short supply in the domestic market, either on a national or regional basis;
- where there are contractual requirements, existing prior to May 31, 2018, for Canadian businesses to use U.S. steel or aluminum in their products or projects; or
- to address, on a case-by-case basis, other exceptional circumstances that could have severe adverse impacts on the Canadian economy.
Importers who wish to seek a remission will need to marshal evidence and make submissions to demonstrate why a remission is warranted, and which identify other stakeholders that will be affected by either the grant or refusal of the remission request. Both the advice of legal counsel and government relations consultants may assist in making these submissions and ensuring that a remission application is framed to be both legally sound and politically compelling.