Tax & Trade Blog

The Customs Act (the “Act”) requires all persons arriving in Canada to report their imported goods brought into Canada. Accordingly, travellers arriving in Canada can expect to be investigated by the Canadian Border Services Agency (“CBSA”) who has been mandated to detect and apprehend violators of the Act. CBSA officers are vested with broad search and seizure powers.

Those in contravention of the Act may face enforcement actions including seizures, ascertained forfeitures, penalties and even potentially criminal smuggling charges!

On the civil side of things, CBSA’s enforcement actions can usually be challenged by acting timely and taking prudent steps such as, by engaging an experienced professional!

As previously discussed in our Customs & Trade Blog, the Government of Canada (“GoC”) has been preparing a “luxury tax” on cars/trucks, personal aircraft and personal boats. The luxury tax was initially proposed in the 2019 Liberal Party of Canada platform, as a 10% tax on cars, boats and personal aircraft over $100,000.

Budget 2021 outlined that the luxury tax would be the lesser of 20% of the vehicle’s value above a threshold, or 10% of the full value of the luxury vehicle. The threshold proposed was $100,000 for cars/trucks and aircraft and $250,000 for boats. The timeline for coming-into-force was January 1, 2022.

Canada’s beef industry has been no stranger to difficulty in the past few years. COVID-19 has required many slaughterhouses and meat processing plants to shut down because of outbreaks, while knock on-effects to the restaurant industry, supply chains and international trade further disrupted long-standing patterns of supply, delivery and demand.

A recent, atypical case of Bovine Spongiform Encephalopathy (commonly known as ‘Mad Cow Disease’) detected on an Alberta farm has compounded these issues and exposed the sensitivity of Canada’s international export industry in this space.

Canada Border Services Agency (“CBSA”) resets it “audit priority areas” twice a year. This sees CBSA designate certain tariff classification codes as CBSA’s priority areas for custom verifications (i.e., “audits”), which is based on the program areas that the CBSA believes pose significant risks for non-compliance generally in tariff classification, valuation and origin of goods imported. 

Right on schedule, CBSA has now released its January 2022 Trade Compliance Verifications, setting the stage for this year, and we have summarized some of the notable issue areas here.

International Trade continues to be a hotbed of action for governments and businesses around the world. We previously wrote in July 2021 about complaints made to the Canada Border Services Agency (the “CBSA”) that Mexico and Austria have been “dumping” certain Oil Country Tubular Goods (“OCTG”) into the Canadian marketplace.

In our previous blog, we discussed the Federal Court of Appeal’s decision in Canada v. Cameco Corporation (“Cameco”) which considered the CRA’s broad audit powers in paragraph 231.1(1)(a) of the Income Tax Act (“ITA”) (and/or 286 of the Excise Tax Act(“ETA”)), ultimately holding that a request for oral interviews was outside of the scope of those powers. Recently, the Federal Court (the “FC”) in Canada (National Revenue) v. Miller (“Miller”) considered the Cameco decision and the same ITA provisions but this time with respect to CRA’s use of Requests for Information (“RFIs”) to compel taxpayers to provide information that ought to be in the taxpayer’s books and records – even if it was not recorded/diarized there. In Miller, the FC upheld the CRA’s use of RFIs as within the scope of legislation, and issued a compliance order.

An oft-forgotten point in Trade and Customs disputes is the lack of legal weight courts will give to CBSA Administrative Policies (i.e., D-Memos) which set out CBSA’s interpretation of customs laws and procedures.

The recent case in Entreprise Robert Thibert Inc., 2021 CanLII 122329 (CA CITT) (“Entreprise”) serves as a useful reminder for importers that there is real risk in relying on these policies, especially in the tariff classification context, even when the CBSA’s published administrative position appears to be clear and unambiguous.

With home prices across Canada skyrocketing (some say on account of a combination on and off-shore buyer speculation as well as a pandemic-induced exodus from major cities), various federal, provincial and municipal governments have been kicking the tires on new vacancy tax policies patterned off of Vancouver’s 2017 politically popular (and revenue generating) measures.

Canadian homeowners and first-time investors will need to brace themselves for the roll-out of these taxes across the country, as it seems that — like the “carbon tax” — these measures are almost sure to come on a broad-based level.

In our prior blog on World Customs Organization (“WCO”)’s five yearly revisions to the Nomenclature of Harmonized System or HS Codes, we discussed the possible amendments to the Canadian Customs Tariff. 

Effective January 1, the Canadian HS Code of tariff classification is being amended!  The Canadian Border Service Agency (“CBSA”) has recently published the proposed changes in the 2022 Customs Tariff.  These changes prompt importers/customs brokers to re-evaluate their tariff classifications and HS Coding systems to avoid any penalties associated with incorrect reporting and plan in advance by requesting validation of any existing CBSA Ruling!

Public law (or restitutionary) remedies are usually relied on as a last resort by taxpayers facing CRA assessments. They are last resorts because they are only available in exceptional circumstances, and the CRA almost never applies them, while the Courts rarely apply them.

One interesting historic restitutionary remedy, first established by the Supreme Court in Kingstreet Investments Ltd. v. New Brunswick (Finance)– and now called the “Kingstreet” remedy – allows a taxpayer the right to recover the taxes levied under unconstitutional legislation which before Kingstreet was doomed to fail under a claim for unjust enrichment against Crown.

The Federal Court in Canadian Pacific Railway Company v. Canada (“CPRC”) had the opportunity to consider this special remedy, and underlines its limited application: only being triggered when a tax charged by a government is constitutionally ultra vires (i.e., by virtue of unlawful legislation), and not triggered because of some unlawful government administrative actions!  

In 2018, eleven counties including Canada and Mexico entered into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) for free trade between the signatory states. Formerly known as “Trans-Pacific Partnership”, CPTPP was initiated by the US to impede China’s non-market trade strategies and influence in the Indo-Pacific.

In 2021, the irony is that the US exited CPTPP in 2017 and China is now requesting to join.

The request does not seem to have been greeting with open arms, as CPTPP members undoubtedly worry about the impact of accepting China on other global trade agreements like the Canada-US-Mexico Trade Agreement (“CUSMA”) and others.

A CRA Audit is often a lengthy and tedious process, but if an assessment is ultimately issued, that can be its own uphill battle! CRA’s dispute resolution process – also referred to as the Notice of Objections (generally “Objections”) process – often takes multiple years to complete, draining taxpayer time and resources along the way!

In this context, taxpayers need to know their right to by-pass the CRA Appeals process after 180 days (or 90 days in case of income tax matters), and bring their tax disputes directly to the Tax Court of Canada (“TCC”) for resolution!

Judicial review applications for injunctive relief attempting to circumscribe or prohibit the CRA’s collections powers are usually doomed to failure – the test requires a high threshold to meet! Such matters must be dealt with immediately on audit, as unlike in the Income Tax situation, all GST/HST is due and payable immediately and cannot be delayed by filing a Notice of Objection!

In Iris Technologies Inc. v. Canada (National Revenue), the Federal Court denied a motion for injunctive relief to prohibit the CRA’s collections actions after a $79 million GST/HST Assessment – demonstrating in spades how difficult it is to obtain an order prohibiting CRA collections!

NEXUS is a bi-national, Canada-US privilege program for pre-approved, low-risk travellers, allowing them to enter either country’s ports of entry swiftly.

Recently, however, thousands of NEXUS cards from Canadian and US citizens, have been confiscated either by the Canada Border Services Agency (“CBSA”) or U.S. Customs and Border Protection (“CBP”) – often for minor infractions.

Generally speaking, this administrative action can and should be challenged!

In what may well be one of the last decisions Canadian Courts make with respect to Chapter 11 of the North American Free Trade Agreement (“NAFTA”), the Ontario Court of Appeal (“OCA”) in United Mexican States v. Burr dismissed Mexico’s appeal from an Ontario Superior Court decision. The Superior Court had upheld the decision of an arbitral tribunal established under Chapter 11 of NAFTA in response to complaints by individual investors against Mexico.

While presenting an interesting issue, the implementation of the Canada – United States – Mexico Agreement (“CUSMA”) has effectively put an end to these investor-state dispute provisions as far as Canada is concerned, although a limited investor-state dispute mechanism remains in effect between Mexico and the United States.

The World Customs Organization (“WCO”) revises its Nomenclature of Harmonized Commodity Description and Coding System used for the uniform classification of goods traded internationally (“Harmonized System” or “HS Codes”), every five years. This is done to adapt to technological advancements and emerging global changes. As this nomenclature forms the basis for the Tariff Schedules of around 211 WCO member countries worldwide (including US and Canada), these changes are important!

Canada is expected to implement these changes in 2022, and importers will need to re-evaluate their tariff classification, declaration, and HS Coding systems to ensure conformity with the new Customs Tariff.

The FCA has ruled against the Bank of Montreal (“BMO”) (2021 FCA 189) in its challenge of the Minister’s decision to deny BMO’s input tax credit (“ITC”) allocation methodology under section 141.02(18) of the Excise Tax Act. This will likely be bad news for certain institutions that elect to use their own methods for allocating ITCs within complex corporate groups.

The Canadian dairy industry is one of the most protected industries in the world, which while good news for Canadian diary producers is decidedly bad news for Canadian importers looking to import and distribute specialty dairy products like fine or specialty cheeses. These importers will face requirements for both import licenses and quota allocation, with the latter usually difficult if not impossible to obtain for first time entrants!

Regulatory Background

As indicated, Canadian importers must have access to a Tariff Rate Quota (“TRQ”) in order to import supply-managed goods that fall within Canada’s Import Control List (“ICL”) at “preferential tariff” rates.

The January 2020 Canadian International Trade Tribunal (“CITT”) decision in Landmark Trade Services v. President of the CBSA (Case No. AP-2019-002) was a welcome relief for customs brokers because the CITT held that Landmark (acting as a customs broker for what can loosely be described as a freight-forwarding situation) was not liable as the "importer" of the goods, despite the fact the import documentation described Landmark as the importer and purchaser. Accordingly Landmark would not be on the hook for the additional duty owing from the incorrect tariff classifications used on those import documents.   

Over a year later, Landmark's victory has resulted in headaches for businesses that use similar freight-forwarding structures, as the CBSA looks to re-assess them and hold them liable for additional duty on the basis they were the owners of the goods at the time of import. To understand why, one must understand what Landmark was doing.

One of the least understood areas of CBSA administrative policy are the rules surrounding the operation and licensing of customs warehouses. These warehouses (of which there are several types) allow goods brought into Canada to be stored within the country while deferring the payment of applicable duties and taxes in respect of their import until they are ‘released’. The rules in this area are administratively complex, and expert legal advice should be considered for any business looking to use or operate a customs warehouse.