Background

The CBSA requires the importing community to meet all the requirements governing the accounting of commercial goods imported into Canada, including:

• Classifying commercial goods under the appropriate tariff classification
• Accurately declaring the origin and value of imported goods (in accordance with legislative requirements)
• Paying appropriate duties and taxes on imported goods

The CBSA uses trade compliance verifications to ensure that importers comply with customs legal requirements and programs. The CBSA's main objectives when conducting verifications are to:

• Assess an importer's compliance with CBSA-administered legislation
• Determine compliance within industry sectors
• Review an importer's liabilities and entitlements
• Assess the integrity of trade data received from importer

Trade compliance verifications — target verification priorities

The CBSA manages a significant portion of import trade compliance within three program categories — tariff classification, valuation and origin — by conducting targeted verifications and issuing verification priorities.

Targeted verification priorities are established using a risk-based, evergreen process, which means that new targets are added throughout the year. Verification priorities may also be carried over from previous years. It is important to note, however, that importers dealing in products or industries that are outside the targeted verification priorities should not presume they will never be subject to a verification.

Verification priority: tariff classification

The July 2023 update of the CBSA's verification priorities encompasses 14 tariff classification verification priorities, including two new product categories (freezers and other freezing equipment, and washers and dryers) and one upcoming round for an existing product category (spent fowl²).

The CBSA's continued focus on tariff classification may be due to the relative ease of verifying whether goods have been classified correctly for customs purposes. Increased audit activity in this trade program may also lead to higher revenues for the CBSA.

The following chart lists all current tariff classification priority items:

Verification priority: valuation

The CBSA's valuation verification priority continues to focus solely on apparel. Apparel importers should assess whether they are prepared for a valuation verification audit. CBSA valuation audits targeting these imports have revealed that importers are omitting additions to the price paid or payable of goods mandated by statute, such as design "assists," not taking into account transfer price adjustments made for tax purposes, or not putting proper documentation in place to account for non-dutiable agent commissions, where applicable.

In addition, importers that purchase goods from related parties and use transfer pricing as the basis for customs values should consider their record-keeping obligations and whether the documentary support on record is sufficient to defend the use of a transfer price as the basis for customs value.

Verification priority: origin

The CBSA is not maintaining active origin verification priorities at this time. However, the CBSA is monitoring imports of goods originating in Russia or Belarus to enforce Canada's withdrawal of the Most-Favored-Nation tariff treatment from goods originating in these two countries. Effective 2 March 2022, goods originating in Russia and Belarus are subject to the General Tariff customs duty rate of 35%.³

The list of goods currently being monitored and risk assessed by the CBSA includes:

• Products of iron or steel
• Fertilizer
• Petroleum
• Non-ferrous metals
• Tires

Compliance intervention tools

• Although trade compliance verifications are the CBSA's most comprehensive compliance tool, it is not always efficient for trade chain partners and the CBSA to identify and address instances of noncompliance. The verification process is lengthy, labor-intensive and generally conducted well after importations have occurred.

As part of its Trade Compliance Strategy and in tandem with trade compliance verifications, as of 1 January 2022, the CBSA uses the following three compliance intervention tools to enhance the overall efficiency and effectiveness of its trade compliance regime:

(1) Trade advisory notice

• A letter asking the importer to review a declaration (the letter includes public resources for guidance)
• Intended as a nudge to assist the importing community when there is a potential for noncompliance
• No monetary assessment issued as a result of a trade advisory notice

(2) Compliance validation letter

• A letter asking the importer to provide the CBSA with certain information within 30 days
• Intended to address instances of suspected noncompliance

(3) Directed compliance letter

• A letter making a monetary assessment on the importer
• Intended to address instances of known noncompliance

These trade compliance intervention tools are designed to target specific import transactions, promote voluntary compliance, enable early correction of errors and mitigate future costs of noncompliance in cases where recurring importations repeat undetected errors. Similar to trade compliance verifications, recourse provisions of the Customs Act apply to any resulting assessments.

Takeaways for importers

CBSA verifications can be time-consuming and costly for importers. Companies must be proactive and adopt an informed compliance mindset. Best practices for companies include implementing programs, frameworks and methodologies to help maintain and continuously improve their customs and trade compliance management profile.

———————————————

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (Canada), Toronto

• Sylvain Golsse | sylvain.golsse@ca.ey.com
• Jocelyn Mao | jocelyn.mao@ca.ey.com

Ernst & Young LLP (Canada), Eastern

• Denis Chrissikos | denis.chrissikos@ca.ey.com

Ernst & Young LLP (Canada), Central

• Camilla da Matta | camilla.damatta1@ca.ey.com

Ernst & Young LLP (Canada), Western

• Kristian Kot | kristian.kot@ca.ey.com

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

———————————————

ENDNOTES

¹ Trade compliance verifications (cbsa-asfc.gc.ca).

² Spent fowl are laying hens that are no longer producing eggs, usually due to advanced age.

³ SOR / 2022–0035. For more information, see EY Tax Alert 2022 Issue No. 44, Government of Canada announces withdrawal of Most-Favored-Nation tariff benefit on goods originating in Russia and Belarus.