The Canada Border Services Agency (CBSA) has proposed amendments to Canada’s Value for Duty Regulations which would amend the definitions of “sale” and “purchaser in Canada” for purposes of determining the dutiable “transaction value” of imported merchandise. While the proposal is styled as one to “level the playing field” between Canadian resident importers and Non-Resident Importers (NRIs), it would increase the dutiable value of a wide range of goods imported into Canada by resident and nonresident importers alike. It would also complicate immensely the task of making entry of imported goods with CBSA.

The proposal would require transaction value to be determined on the basis of the “last sale” in Canada which has been arranged or contemplated prior to the importation of the goods in question. It would affect goods which, prior to importation, are “subject to an agreement, understanding or any type of arrangement – regardless of its form – to be transferred, in exchange for payment, for the purpose of being exported to Canada, regardless of whether the transfer of ownership of the goods is completed before the goods are imported”.

The proposal would redefine the term “purchaser in Canada” to mean the purchaser in the “last sale” of the goods, “regardless of whether the person is the importer of the goods or when the person makes payment in respect of the goods”.

The proposal would calculate dutiable value according to the prices in sales which are currently considered purely domestic Canadian sales, and not sales “for export to Canada”. While other countries have adopted a “last sale” rule for determining dutiable “transaction value” of goods, no country, to our knowledge, has adopted a rule so expansive as the one CBSA is proposing now.

The proposal could affect a wide range of imports into Canada by resident and non-resident importers alike, particularly in cases where the importer has, prior to importation, arranged a sale to a Canadian retailer.

How the Proposal Would Work

While Canada’s Customs Act does not define the term “sale”, the Supreme Court of Canada ruled two decades ago that a “sale” for customs valuation purposes, is the transfer of title to goods in exchange for consideration. Canada (Deputy Minister of National Revenue) v. Mattel Canada Inc., 2001 SCC 36 [2001], 2 SCR 100. The proposed new rule would jettison that definition in favor of a much broader one.

CBSA’s new proposal would define the “sale” as the last sale to a customer in Canada – by anyone – as an “agreement, understanding or any other type of arrangement, regardless of its form – to be transferred, in exchange for payment, for the purpose of being exported to Canada, regardless of whether the transfer of ownership of the goods is completed before or after the goods are imported”. So long as the agreement or understanding exists before the goods are imported, it is taken as the “sale for export to Canada”. How would this work?

Current State: Importer X imports goods into Canada for which it paid the foreign producer $20 per unit, FOB foreign port of entry. Prior to importation, however, Importer X has received a purchase order or forecast from a Canadian retailer to acquire the goods for $40, in a domestic transaction.

Currently, the value for duty (VFD) of these goods is $20 per unit.

Under CBSA Proposal: If, prior to entry of the goods, a Canadian retailer has placed a purchase order or forecast to buy the goods for $40 in a domestic transaction, then under the CBSA proposal, the value for duty would be the $40 to be paid by the Canadian retailer. The proposal says nothing about a deduction for international freight and Customs duties, which by law are not dutiable.

If the retailer has arranged a resale to a Canadian customer before the goods are imported, that price would become the basis of dutiable value. How the importer could know about such a sale is unexplained.

CBSA’s rulemaking proposal contains several examples of transactions causing goods to be sent to Canada, and showing the “last sale” which forms the basis of transaction value. The cadence is clear. Only if a Canadian importer purchases “on spec” for its own inventory, or purchases goods for its own use, will the price paid by that importer be the basis for “transaction value”.

Decades ago, the United States briefly took the position that the “sale for export” to the United States was the sale which “most directly caused the goods to be imported”. See, e.g., Brosterhous, Coleman & Co. v. United States, 14 CIT 307, 737 F. Supp. 1197 (1990). However, two years later, in the landmark case of Nissho-Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992), the Court of Appeals for the Federal Circuit expressly rejected this approach and took pains to overrule the Brosterhous decision, embracing the “first sale” rule which the United States follows to this day.

Is the CBSA Proposal Even Administrable?

While other countries, most notably the European Union, have adopted a “last sale” approach to Customs appraisement, these have generally led to appraising goods based on prices paid by the importer of record. The Canadian proposal goes much further, determining “transaction value” on the basis of post-importation domestic sales, and even based on vague “understandings”. It goes beyond what the Customs Act, and the WTO Valuation Agreement on which it is based, allows. CBSA’s proposal would place extreme burdens on importers, their customers and CBSA itself.

Today, the transaction value of imported merchandise is generally reflected in the invoice which travels with the goods. Under the CBSA proposal, this would no longer be the case in many circumstances:

Example: On July 1, Importer A orders 1000 widgets from a foreign manufacturer at a price of $5.00 each, in a sale “for export to Canada”. On July 15, Customer B places a purchase order with Importer A for 200 widgets at a price of $7.00 apiece. On July 20, customer B places a purchase order with Importer A for 150 widgets at a price of $8.00. The shipment of widgets arrives in Canada on August 1.

Under CBSA’s proposal, 650 of the imported widgets would be valued at $5.00 apiece; 200 widgets would be valued at $7.00 apiece; and 150 widgets valued at $8.00 apiece, because the sales to Customers B and C occurred before “importation”. This assumes that Customers B and C did not themselves resell the goods, or have an arrangement to resell them, before the date of importation. If they did, most likely Importer A would have no way of knowing this.

Also, how can CBSA say that the sales to Customers B and C caused the widgets to be exported to Canada, since all the goods were committed to Canada by Importer A’s purchase order, before Customers B and C had placed orders?

Canadian importers and their Customhouse brokers would be tasked with examining resales in order to file accurate entries, and would no doubt be required to file many post-importation adjustments.

Neville Peterson LLP

Neville Peterson LLP

Blog

Neville Peterson LLP

CBSA PROPOSAL WOULD INCREASE DUTIES FOR MANY; PUBLIC COMMENTS DUE BY JULY 26, 2023

Neville Peterson LLP