Tax & Trade Blog
CITT Rebukes CBSA for Denying Revenue Neutral Corrections: The Bri-Chem Case
The liberalization of Canada’s trade policies over the years has now lead to a situation where goods may often be capable of being imported to Canada on a duty free basis under Canada’s most favoured nation (MFN) tariff, without needing the benefits of Canada’s various preferential trade agreements (PTAs) like the NAFTA.
A problem arises, however, when after importing such goods on the basis of the MFN tariff, an importer discovers, or is assessed, on the basis that the original tariff classification was incorrect. The problem specifically arises where, more than one year has passed from the original date of accounting, and the new “correct” tariff classification is duty-positive under MFN.
In Canada Border Services Agency’s (CBSA) historic view of these situations, an importer is obliged to correct the tariff classification and treatment under s. 32.2(2) of the Customs Act, and pay the required MFN duties owing (with no application of the relevant PTA). CBSA has historically denied application of PTA benefits in these situations on the basis that PTA refunds are usually limited to one year from accounting: see for example section 74(3)(b)(ii) of the Customs Act.
CBSA’s historic practice has been overturned by the Canadian International Trade Tribunal (CITT) in the recent decision in Bri-Chem Supply Ltd. v. CBSA ((October 2, 2015) AP-2014-017 (CITT)).
On the facts of Bri-Chem, the importer imported NAFTA qualifying goods from the US, using the MFN tariff, which was also duty-free for those goods. The importer later discovered that the goods were imported under the wrong tariff classification and made the required corresponding corrections pursuant to section 32.2 of the Customs Act. Since the proper tariff classification attracted a positive duty rate (while the NAFTA rate was duty-free), the importer also corrected to NAFTA treatment. CBSA refused to apply NAFTA treatment and required the importer to pay duties at the MFN rate. The importer appealed to the CITT.
At the CITT, the CBSA’s position was that the CITT lacked jurisdiction to hear the matter on the basis that there was no re-determination of tariff treatment pursuant to subsection 59(1) of the Customs Act and, therefore, no basis upon which to request a further re-determination under subsection 60(1). In what would become a common theme in the decision, the CITT rejected CBSA’s argument on the basis that the Federal Court of Appeal previously “definitively rejected” CBSA’s reasoning in C.B. Powell Ltd. (2010 FCA 61).
On the substantive issue, the CITT noted that the CBSA’s position was “disjunctive”; “defies the very purpose of [PTAs]”; was “discordant”; and “ignores the day-to-day commercial reality of importers”. It held that CBSA’s contention that MFN tariff treatment is “not an incorrect tariff treatment” “is at best narrow-minded; at, worst… entirely misleading if not underhanded.” The CITT characterized CBSA’s position as seeking to “artificially devise a way to catch the taxpayer into paying duties on goods that were rightfully duty-free.” The CITT further rejected CBSA’s argument that section 74(3)(b)(ii) is triggered (thus resulting in non-application of NAFTA treatment), characterizing the position as “tantamount to taxation in the absence of legislation.”
Further, the CITT noted that the importer’s correction of tariff classification and treatment “constituted precisely the type of “revenue-Neutral” correction… that was upheld” by the CITT in Frito-Lay ((21 December 2012), AP-2010-002 (CITT)). In Frito-Lay, “Cheetos” were imported from the US under the improper tariff classification of the cardboard that they were contained in and with MFN treatment; however, they ought to have been imported under the tariff classification applicable to the actual Cheetos snack and with NAFTA treatment. Similar to the facts in Bri-Chem, the cardboard was duty-free with MFN or NAFTA treatment, while the proper tariff classification was NAFTA duty-free but attracted MFN positive duties. The importer submitted corrections to both the tariff classification and treatment; however, CBSA refused to apply NAFTA treatment and charged duties at the MFN rate. The CITT noted that the foregoing constituted “straightforward corrections to everyday mistakes” and that “CBSA should have simply acknowledged these corrections for what they were.” More specifically, the CITT held that section 32.2(2) of the Customs Act required the importer to file corrections for incorrect tariff classifications and treatment. As the importations were duty-free under both the initial and corrected tariff classification and treatment, the corrections were “revenue neutral”, thereby avoiding application of section 32.2(5) of the Customs Act, which states that a correction that would result in a claim for a refund of duties is neither allowed nor required. Accordingly, the CITT allowed Frito-Lay’s appeal.
The CITT then took the extraordinary step of admonishing CBSA for creating and applying a deliberate policy designed to disregard Frito-Lay, describing CBSA’s actions as “unprecedented” and “perhaps contemptible”. The CITT chided CBSA for re-litigating the very same issues of law decided by the CITT in Frito-Lay, ultimately holding that it constituted an abuse of process. The CITT noted that the abuse of process was “particularly troublesome, as it was deliberate and involved an elaborate design” and the intent and mindset behind CBSA’s policy appeared to have been to disregard a previous CITT decision, culminating in nothing short of a conscious re-trial of a matter.
The CITT noted that CBSA’s actions took place in a context where the CITT has no power to indemnify importers at all for “needlessly incurred costs” yet the Customs Act requires an importer to pay duties owing (or otherwise post satisfactory security) as a condition precedent for commencing an appeal in the first place.
In our view, Bri-Chem was rightly decided by the CITT, based on its previous decision in Frito-Lay, the wording of the Customs Act and Canadian trade policy. The CBSA’s policy regarding this issue lacks foundation in Canada’s international trade policy with respect to PTAs, which is to grant duty-free importations to Canada for certain specified goods. CBSA’s policy essentially purported to impose duties on goods contrary to NAFTA, based on fiscally inconsequential clerical errors, and is difficult to reconcile.
The CITT’s decision here also highlights the incongruity of the customs appeal process in Canada. Notwithstanding CITT’s harsh view of CBSA’s actions, the CITT had no powers to award costs or otherwise sanction the CBSA for its inappropriate actions. Perhaps more problematically, CBSA can theoretically continue its policy of rejecting such corrections, without any negative consequence other than the use of its own resources used to litigate these matters time and time again. On the other hand, importers continue to have to pay all duties up front, before commencing an appeal and have to continue to incur their own legal expenses. Government action to amend the law is required to afford the CITT real powers to police its own Court.
Substantively, it is hoped that CBSA will amend its policy with respect to these corrections situations to comply with the Frito-Lay and Bri-Chem decisions. Many years ago, it was a policy of CBSA’s Appeals Division to accept a properly completed NAFTA certificate, dated presently, for a blanket period covering the original time of accounting, to resolve situations similar to these – a common sense approach to accept the substance of the situation over the form (procedural irregularities) of the situation. One wonders what happened in the interim. Hopefully the decision in Bri-Chem has gotten this situation back on track.