Tax & Trade Blog

---

USMCA ORIGIN: ANALYTICAL RULES

PLANNING FOR TRUMP TARIFFS

While President Trump has instituted a pause on his tariffs implemented through executive orders on March 6 and April 2, 2025, many Canadian businesses may be unaware that this reprieve  only extends to Canadian exports that qualify for preferential treatment under the United States Mexico Canada Agreement (“USMCA”). 

Accordingly, Canadian businesses need to place a premium on understanding and properly applying USMCA origin status.

This is the first of a two-part series on how one can claim USMCA preferential tariff treatment and focuses on the substantive origin analysis, following which the “formal” certification requirements must be met.

---

AUTOMOTIVE REPORT: TARIFF HEADING 9966

CBSA'S VERIFICATION AUDITS TARGET RESTORATION INDUSTRY

A good part of our Tax and Trade practice involves advising Clients in the Automotive Industry on matters involving the application of Canadian taxation and customs duties to motor vehicles and parts.

Recently, we have seen an increase in audits and assessment of automotive restoration businesses, which seem to be currently targeted by the Canada Border Services Agency (“CBSA”).

One focal point seems to be the application of Tariff Concessionary Item 9966.00.00 (“Concessionary Code 9966”), which allows for the duty-free importation of certain vintage vehicles and repair parts.

As we blogged on here, the threatened Trump and Canadian retaliatory tariffs stand to have a serious impact on Canadian businesses.  Beyond the anticipatory steps we described previously that can be taken now, businesses should begin seriously considering their options for avoiding or recovering any retaliatory tariffs.

In this Report, we will review some of those options.

Tariff Exemptions

In compelling circumstances, it may be possible for a business to obtain an exemption from the retaliatory tariffs.  Exemptions may be available for businesses that can demonstrate they will be unduly harmed by the tariffs.  For example, if it can be established there are no viable alternatives in the supply chain for inputs required for goods that a business produces, an exemption may be made. 

One of the more difficult things I have run into in my 35+ years of practice in customs, trade, and indirect tax, is navigating through extremely difficult to understand appeals processes, buried in multiple similar and parallel sections in the Customs Act (“Act”).

A recent case makes me think that I am not alone in this world (!), with the Canadian International Trade Tribunal (“CITT”) chastising the Canada Border Service Agency (“CBSA”) for misunderstanding and potentially misapplying the customs appeal processes.

Based on recent inquiries, it appears that the Canada Border Services Agency (the “CBSA”) is currently focusing on verifying whether importers are using the correct tariff classifications when reporting importations of various spices and seasoning products.

Importers of spices and seasoning products – and their foreign producers – should take any inquiries from CBSA seriously!

Recently we’ve noticed an uptick in the number of Canada Border Services Agency (“CBSA”) audits regarding the tariff classification of gloves (see our prior blog).  With its mid-year update, the CBSA has officially upgraded this focus to a Trade Compliance Verification Priority!

This marks the third time gloves have been a “verification priority” having previously been in the spotlight in 2017 and 2019.  The results from the first two rounds revealed that 82% of the 49 companies targeted were non-compliant, resulting in reclassification duties and penalties totalling over $2.6 million.

In Charoen Pokphand Foods Canada Inc. v. President of Canada  Border Services Agency, the Federal Court of Appeal (the “FCA”) affirmed a decision from the Canadian International Trade Tribunal (the “CITT”) upholding the Canada Border Service Agency’s (the “CBSA”) classification of frozen wonton soup under the tariff item “stuffed pasta”, and not under the tariff item for “soups and broths”. 

Given Chief Justice Wagner’s recent comments about people forming critical opinions without reading the underlying courts’ judgement, let’s take a look at this seemingly paradoxical decision.

The Canada Border Services Agency (“CBSA”) resets its “audit priority areas” twice per year. Essentially, the CBSA designates certain products as priority areas for customs verifications (i.e., “audits”) based on the program areas that the CBSA believes pose a significant risk for import non-compliance in terms of tariff classification, valuation, and/or origin of goods.

The CBSA has now released its January 2024 Trade Compliance Verification priorities, setting the stage for the next six (6) months. While there are no new audit priorities in this round, the CBSA has announced its intention to engage in new rounds of verifications on a number of historic issues, and updated its statistics on existing verifications. As is often the case, most of the focus is on tariff classification!

There seems to have been an uptick in Canada Border Services Agency audits concerning the tariff classification of gloves, carrying costly consequences to potential importers not based on what their product is, but how it is used by their customers!

This is a function of the wonderful world of tariff classification, some of the complexities of which we tackled in a previous blog, here.  

The chief issue is whether imported gloves will be used “with protective suits in a noxious atmosphere” or whether they will be used in other circumstances/places which CBSA does not consider a “noxious atmosphere” (e.g. nail salons, restaurants, etc.). 

Canada Border Services Agency (“CBSA”) resets its “audit priority areas” twice per year – designating certain tariff classification codes as priority areas for customs verifications.

Priorities are based on CBSA’s work in certain industries or on CBSA’s view of “significant risk” importations from a tariff classification, valuation, and origin compliance perspective.

With the January 2024 audit priorities around the corner, it is a good time to review the outcomes from the July 2023 update.

Tariff Classification Priorities

Georgian Bay Leisure Distributors Ltd., 2022 CanLII 139059 (CA CITT) (“Georgian Bay”) is a CITT case highlighting the complexities of tariff classification when importing goods to Canada.!

Background

When importing commercial goods to Canada, there are three things any importer needs to address from a customs compliance perspective:

Imported goods are identified using Canada’s tariff classification system. Tariff classification is important for two reasons: (1) the duty rate depends on the tariff classification; and (2) tariff classification determines eligibility for preferential duty rates under Canada’s various preferential trade agreements (generally speaking, “Free Trade Agreements” or “FTAs” for short).

Importers can sometimes find themselves in the unfortunate position of facing an enormous increase in duties, or disqualification from preferential FTAs, due to a tariff classification dispute with the Canada Border Services Agency (“CBSA”). As seen in the decision in Canada v. Best Buy Canada Ltd., 2021 FCA 161, classification is not always obvious!

While there is no specific definition of what constitutes a Foreign Trade Zone (“FTZ”), this terms generally refers to a specific location within a country that is officially designated as eligible for tariff and tax exemptions with respect to the purchase or importation of raw materials, components, or finished goods. These materials and goods can generally be stored, processed or assembled in the FTZ for re-export without having to pay any domestic taxes or duties. If these materials or goods are distributed into the domestic market, duties and taxes will apply, but will generally be deferred until the time of entry into the domestic market.  

Over the past few years, the Canadian government has tried to position Canada as a desirable destination for foreign investment. To this end, tariffs have been eliminated on essentially all manufacturing inputs, including machinery, equipment, and other inputs used in the industrial manufacturing sector.

According to the Canadian government, this initiative has made Canada the first country in the G-20 to offer a tariff-free zone for industrial manufacturers. Furthermore, since this a nationwide initiative, the federal government has promoted this tariff elimination as essentially making Canada one large FTZ for firms importing manufacturing inputs.

With all of the concerns that businesses engaged in the import/export of products in the United States and Canada face (increased global competition, currency fluctuations and product quality), one of the least considered but most important involves the often confusing world of customs compliance.

While it is inevitable that errors or omissions may occur in customs compliance, errors can be expensive. To avoid customs assessments, and attendant interest and penalties (not to mention potential prosecution), constant vigilance of one's customs obligations is required.

On September 21, 2017 the Canadian-European Union "Comprehensive Economic and Trade Agreement" or "CETA" came into force.

Some businesses may erroneously believe that this means they can ship anything they want beween Canada and the EU without paying any duties. While the reality is a little more complicated, CETA still represents a tremendous achievement for Canada, and provides Canadians with greater access to the massive EU marketplace of 500 million people!

Read the Statement by the Canadian Minister of International Trade here.

The Customs Act requires corrections of errors in import declarations – such as a tariff classification, country of origin, or value for duty.  Each correction requires the filing of a form B2 adjustment request, which can be an onerous task when multiple corrections are required. The CBSA has an administrative practice that streamlines the procedure for authorized importers by allowing them to file a single blanket adjustment request - a single form with an attached spreadsheet - to process multiple corrections with one form.  However, the CITT decision in Worldpac Canada (AP-2014-021) shows that administrative practice does not have the force of law and a taxpayer’s reliance thereon involves risk. 

In AG v. Bri-Chem Supply Ltd. et al. (2016 FCA 257), the Federal Court of Appeal (FCA) reproached the Canadian Border Services Agency (“CBSA”) for administrative practices that amounted to an abuse of process.