In the current global business environment, increasingly many US companies are selling their goods into Canada, and using a variety of business structures to do so. However, many companies continue to struggle with their tax and customs obligations on these transactions. In particular, issues often arise with determining the proper value for duty of the goods at the border, and companies are often further confused between their Division II and Division III GST/HST obligations under Canada’s Excise Tax Act.
Value for Duty – The value for duty is the figure determined to be the value of the goods on import into Canada, and used for determining the duties and taxes that may be owing on the goods. All goods imported into Canada must have a declared value for duty, calculated in accordance with the provisions of the Customs Act.
For import purposes, a lower value for duty is typically preferred – particularly where there is a positive duty rate on the goods, as duties are non-recoverable to the company. However, depending on how the US company structures the cross-border transaction, and depending on the entity serving as the importer, there can be a significant range in the potential value for duty of any particular good being imported.
In some circumstances, the value for duty can be set as the transfer price paid between the US exporter and a related entity acting as the importer. (As a aside, the US company will often set up a related entity in Canada to act as the importer, so as to avoid the US company being viewed as “carrying on business in Canada” and potentially subject to Canadian income tax reporting and/or payment obligations.) In other circumstances, the value for duty could be as high as the retail price to the ultimate customer.
US companies selling into Canada often assume that the US rules are the same as the Canadian rules in this area – particularly because both are based on the common GATT Valuation Code. However, changes/clarifications that Canada added to these rules around the required “purchaser in Canada” have changed this, and often made the “value for duty” for Canadian import purposes much higher than the “value for duty” if the import was taking place in the US.
Division II GST/HST and Division III GST – A second issue that US businesses often confuse when selling goods into Canada involves the application of the GST/HST. In particular, companies often fail to realize that GST can apply in two different ways, on both domestic sales (Division II GST/HST) and on imported goods (Division III GST).
Division II GST/HST and Division III GST are not mutually exclusive, so in the worst case scenario, a company could end up in a double-tax situation. Therefore, when importing and selling into the Canadian marketplace, it is important for companies to arrange their business in a way that avoids this scenario.
Conclusions – Proper structuring of the Canadian import process is important, as this remains a live audit issue at the Canada Revenue Agency (CRA) with respect to GST/HST payable, and at the Canada Border Services Agency (CBSA) with respect to the appropriate value for duty. Compounding problems for importers, where an importer makes a mistake with respect to the declared value for duty, section 32.2 of the Customs Act sets out an obligation to correct the customs declaration, and to pay any amount and interest owing. This correction obligation lasts at least for four years from the importation of the goods, and sometimes longer.
While there is no similar self-correction obligation for GST/HST, the CRA does audit vigilantly in this area.
For both customs and tax purposes, the name of the game is to get it right the first time!
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