Tax & Trade Blog
DIRECT SELLING INDUSTRY: Canada Customs Audits Coming!
Canada is often viewed as a natural extension of the American direct selling ecosystem: it has a common dominant language, similar culture, convenient land border, and a market of over 38 million people!
While there are many similarities, there are still unique legal and regulatory features that direct selling businesses operating in Canada must be aware of and adapt to — all of which can be easily avoided with the right planning, structuring or advice. This includes the appropriate “Canadianization” of plan documents and overall business strategies.
In the third of a 5-part series, we review one of the major risk areas facing the Canadian direct selling industry:
Understanding CBSA Verifications
No matter what kind of products Direct Sellers promote (nutritionals, foods, jewelry, knives, kitchenware), Canadian direct selling companies have been facing more and more commercial import audits AC (after-COVID) – perhaps as a result of CBSA’s post-COVID push to extract tax revenue from cross-border business.
These include CBSA verifications focused on the value of the imported goods, the proper tariff classification of the goods (especially nutritional products and starter kits) and the origin of goods being imported to Canada (including qualification for zero-duty status under the United States-Mexico-Canada Agreement (“USMCA”), which replaced the former NAFTA in mid-2020).
What are the Chances of My Company Being Selected for Audit
The most common question we receive from clients interested in our customs and trade services is, “What are my chances of getting audited?”
There is no real telling with that, although CSBA does put out annual verification priorities. In our experience, however, the risk of a CBSA audit is often exacerbated by problems in a company’s logistics department, with technical staff not fully realizing that Canada is not the 51st state – and treating shipments to Canada like other “domestic” shipments (e.g., if we can truck it, it must be domestic!).
To the contrary, Canada has its own particular customs formalities which are over-and-above requirements for state-to-state shipments.
Freight Forwarder “Misuse” Another Problem
Another common recent risk issue appears to involve the use of couriers and freight-forwarders to move goods into Canada, with some recent cases illuminating the potential issues. One example can be seen in the recent Landmark Trade Services case where CBSA had a difficult time determining who the importer was (as between the Canadian customer, the freight-forwarder-like entity, and the US customer). CBSA tried to make Landmark (the freight-forwarder) liable for additional duties on an incorrectly imported product but lost in court. CBSA then appears to have begun targeting the US vendors of those types of freight-forwarding services, and assessing them directly for the same additional duties, on the basis that they were the "owners" of the goods at the time of import. These are live issues and not easily defended if the wrong structures were implemented in the first place.
The bottom line is that while it is not at all clear when a direct selling companies importing to Canada will be selected for Customs Verification, what is clear is that when one’s ticket gets pulled by CBSA, bad things usually happen!
Notices of impending audit need to be dealt with, like “NOW”, and cannot be bottom-drawered. Fortunately, dealing with CBSA on an expeditious and proper basis may often help avoid larger assessments and penalties later.
Do you require assistance in this area? If so, please click here.