(416) 864 - 6200

Tax & Trade Blog

  • Home
    Home This is where you can find all the blog posts throughout the site.
  • Categories
    Categories Displays a list of categories from this blog.
  • Tags
    Tags Displays a list of tags that have been used in the blog.
  • Bloggers
    Bloggers Search for your favorite blogger from this site.
  • Archives
    Archives Contains a list of blog posts that were created previously.

Understanding Customs - Mandatory Correction Obligations

Posted by on in Customs & Trade Blog
  • Font size: Larger Smaller
  • Hits: 6832
  • Subscribe to this entry
  • Print

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.

Both Canada and the U.S. have what are called "mandatory disclosure" requirements, requiring the mandatory correction of certain customs errors, and the payment of attendant duties and interest ("Mandatory Corrections"). If complied with, Mandatory Corrections will not involve any additional penalties, and the interest factor applied will generally be lower than if the error were discovered by CBSA on audit (in Canada, the prescribed rate is applied to Mandatory Corrections, which is 6% lower than the specified rate otherwise used).

The balance of this article will compare the Mandatory Correction regime to its "voluntary disclosure" counterpart, and summarize the application of the Mandatory Correction systems in both Canada and the U.S.

Voluntary Disclosures and Mandatory Corrections

To start, what is the difference between "Mandatory Corrections", and the "voluntary disclosure" regime ("Voluntary Disclosure(s)") that one often hears about?

In order to deter persons from ignoring their compliance responsibilities under the Customs Act, the CBSA has various audit and enforcement powers at its disposal, to detect contraventions. However, as there will never be enough money or resources available for the CBSA to achieve perfect compliance through audit and enforcement activities, the CBSA (and other taxing authorities), have turned to promoting compliance through other means.

For present purposes, there are effectively two means by which the CBSA ensures customs compliance: compliance through "carrot" measures and compliance through "stick" measures.

Mandatory Correction serves as a prime example of a "stick" approach – which has no real GST or income tax "cousin" – and forces an importer (within 90 days in Canada), to make an adjustment to certain prior customs entries, where the person has "reason to believe" that an error or non-compliance has occurred, and pay any attendant duties and interest. The technical basis for Mandatory Corrections is set out in subsection 32.2(2) of the Customs Act.

Voluntary Disclosures, on the other hand, involve a "carrot" approach, where in exchange for voluntarily coming forward to report non-compliance (either after the Mandatory Correction time limit has expired, or in cases of other customs non-compliance that is not covered by Mandatory Correction), CBSA will accept the adjustment – assuming it is made "voluntarily" and otherwise in accordance with the CBSA's voluntary disclosure policies (see Memorandum D11-6-4) – and apply the prescribed rate of interest to the outstanding duties and GST (which must still be paid).

That being said, it is important to understand that Mandatory Correction and Voluntary Disclosure are two mutually exclusive ideas: if one applies, the other does not.

The balance of this article will focus on the Canadian and U.S. Mandatory Correction rules, and their effect on customs compliance.

Canada: What are the Mandatory Correction Requirements?

Technical Requirements

 In Canada, the Mandatory Correction obligation is provided for in subsection 32.2(2) of the Customs Act. This section imposes a positive obligation on importers to disclose and self-correct errors to the CBSA in respect of customs accounting declarations, where a person has "reason to believe" that their declaration is incorrect.

The provision provides as follows:

32.2 (2) Corrections to other declarations — Subject to regulations made under subsection (7), an importer or owner of goods or a person who is within a prescribed class of persons in relation to goods or is authorized under paragraph 32(6)(a) or subsection 32(7) to account for goods shall, within ninety days after the importer, owner or person has reason to believe that the declaration of origin (other than a declaration of origin referred to in subsection (1)), declaration of tariff classification or declaration of value for duty made under this Act for any of those goods is incorrect,

(a) make a correction to the declaration in the prescribed form and manner, with the prescribed information; and

(b) pay any amount owing as duties as a result of the correction to the declaration and any interest owing or that may become owing on that amount.

(emphasis added)

This means that where an importer has "reason to believe" that there is an error with respect to the origin, or value for duty or tariff classification (including diversion), there is a positive duty to correct the errors and pay any additional duties owing – all within 90 days.

 Canadian Commentary

 There are four separate comments that can be made.

 Tie in to AMPS & Revenue Generation

First, Mandatory Correction is really an "informed compliance" initiative, which follows from a similar approach taken in the U.S. (see below), and which ties into Canada's relatively new Administrative Monetary Penalty System ("AMPS") – also a U.S. styled system. Both initiatives are expected to provide an increase in overall revenues to the CBSA, as penalties imposed for customs non-compliance begin to compensate for the reduction in "duty revenues" since the full implementation of NAFTA (at least in respect of Canada – U.S. trade).

 No More Hide the Ball

Secondly, and in and in even more practical terms, the most important implication of Mandatory Correction in Canada is the elimination of the "heads down" or "hide the ball" option for many importers discovering customs non-compliance. Those strategies, often viable options for dealing with customs problems in the past (and which may still be available in other tax contexts) are (1) no longer technically available for customs infractions subject to section 32.2 (i.e., technically, the client has no option but to make the correction), and (2) a very expensive gamble if corrective action is not taken. (See Example 1 below)

Previously, where an importer discovered an error in the way in which goods were imported, the focus was more on the go-forward, since the onus was often on the CBSA to bring the prior problems to the importer's attention and to issue appropriate assessments. With the passage of time, historic problems could generally be expected to disappear, with the applicable limitations periods for levying customs assessments eventually running out, and exposure "falling off the table" with each passing day.

Example 1: Mandatory Corrections in Action
CBSA audits an importer of crude oil (duty free, but subject to GST), finding that a couple of importations in 2015 were in error, and subject to GST even though the importer believed no GST applied under section 144.01 of the Excise Tax Act. In the result, the importer pays the GST, but takes a complete GST ITC, off-setting the GST. For 2015, there are some minor interest consequences.

Prior to conclusion of the audit, the CBSA advises that the importer now has “reason to believe” that other of its importations may have been in error.

What is the importer to do?

Technically it is required to correct all entries over the prior 4 years, and pay the attendant GST (and at this point, not so nominal unrecoverable interest).

Adopting a “do nothing” strategy could lead to the imposition of AMPs penalties for non-compliance (e.g., Contraventions C082 and C352), the latter of which includes a penalty of $100 per transaction or 5% of the value for duty, whichever is greater.

Given the value of the crude oil transactions, it would be expected that each importation that is not corrected and accounted for could give rise to an AMPs penalty of $25,000, the maximum threshold for AMPs penalties pursuant to section 109 of the Customs Act.

The “heads down” / “do nothing” strategy is often – from this perspective – no longer a viable option.

Mandatory Corrections & GST Obligations

Third, any corrections that affect only the GST status of imported goods, must also be self-corrected under section 32.2 of the Customs Act.

The problem is that any GST amounts owing will be subject to the interest and penalty provisions in the Customs Act, as well as the Mandatory Correction, and generally remain unrecoverable to the importer, notwithstanding the full off-set for the GST owing that may be obtained through "input tax credit" claims.

This seemingly unusual result follows from section 214 of the Excise Tax Act, which provides that Division III GST payable on importations are paid and collected under the Customs Act and interest and penalties shall be imposed, calculated, paid and collected under the Customs Act, as if it were a customs duty levied on the goods.

Customs is currently attempting to consider its policy position here, and in respect of the application of similar interest in Voluntary Disclosure situations.

"Reason to Believe"

Finally, one of the more troubling issues in the development of Mandatory Correction has been the meaning of "reason to believe."

The CBSA has published its views in Memorandum D11-6-6 "Reason to Believe" and Self-adjustments to Declarations of Origin, Tariff Classification, and Value for Duty, which effectively requires a high objective standard (i.e., what you ought to have known as opposed to what you did know).

Gleaning through the policy, one sees that in the CBSA's view, an importer is expected to be aware of all existing legislative provisions (even the complicated valuation provisions which many customs "experts" have difficulty understanding).

Jurisprudence is clearly going to be required to help establish what "reason to believe" will constitute in Canada, and to date there does not appear to be such guidance available.

How do the United States Rules Compare?

Depending on which country the importer is operating in, they will either have to comply with Canadian or U.S. customs rules for Voluntary Disclosure and Mandatory Correction. The two regimes are similar; Canada's coming into existence after that of the U.S. (1997 in Canada, 1994 in the U.S.), and largely modeled on it, however there are some differences to note.
The U.S. equivalent to Canada's section 32.2 Customs Act is section 484 of the Tariff Act of 1930, which added the requirement of "reasonable care" and the obligation to self-adjust as law with the implementation of the North American Free Trade Agreement. The final limitation period in the U.S. for errors and omissions from the past is 5 years (which compares to usually a 4 year period in Canada). While in Canada penalties are usually eliminated, in the U.S., penalties may only be reduced if Mandatory Correction or Voluntary Disclosure is made. However, with a valid Voluntary Disclosure for negligence or gross negligence, the "penalty" typically constitutes back duties plus interest necessary to make U.S. Customs and Border Protection ("CBP") "whole." Also, in the U.S., a Voluntary Disclosure is an admitted violation, which goes on your record, whereas Canada offers a clean slate.

The date in the U.S. for Mandatory Correction is not fixed at 90 days, rather it is "within a reasonable time" after discovering the error. In the U.S., the Voluntary Disclosure and Mandatory Correction also are not mutually exclusive. Mandatory Correction is routinely undertaken prior to the liquidation of an entry (typically within 314 days of entry) and a Voluntary Disclosure can be done at any time, allowing the importer to weigh the advantages of each. The U.S. importer can make a Voluntary Disclosure provided it does "before, or without knowledge of" a formal Customs investigation of that violation, which is considered to be written notice of an investigation. Therefore, in the U.S., the criteria are reasonably well established as to when an importer has actual or imputed knowledge of the error or omission, rather than the more elusive Canadian concept of "ought to have known." And, even in the face of a formal investigation, an importer can still submit a Voluntary Disclosure with the hopes that it will aid in mitigating penalties. Importantly, a U.S. importer should first consider whether the error is "material" in order to even trigger the obligation. Since the U.S. does not have GST, that of course does not come into play, as it can in Canada.


Whatever the practical effect of Mandatory Correction, it is also clear that it has put a renewed premium on customs compliance, and will be forcing importers to continually monitor whether they are in compliance with their customs' obligations. Where non-compliance is detected, they will be required to take the positive steps necessary to rectify the non-compliance, on both a go-forward and a go-backward basis.

If you need assistance with Mandatory Corrections or Voluntary Disclosures contact us!

Want a PDF Copy of this Blog?

Last modified on


  • No comments made yet. Be the first to submit a comment

Leave your comment

Guest Wednesday, 19 June 2024

Toronto Office

10 Lower Spadina Avenue, Suite 200, Toronto, Ontario, M5V 2Z2 Canada
Phone: (416) 864-6200| Fax: (416) 864-6201

Client Login

To access the Millar Kreklewetz LLP secure client file transfer system, please log in.