Canada-U.S. Blog

Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

Play in Again Sam – CBSA Updates Royalties and License Fees Memoranum

Posted in Cross-border trade, Customs Law

On January 14, 2014, the Canada Border Services Agency (CBSA) issued a revised version of D-Memo D-13-4-9 “Royalties and License Fees”.  The revisions do not involve extensive changes to the CBSA’s existing policies.  The revised version of the D-Memo includes only minor amendments of a housekeeping nature.

This presents an opportunity for importers of goods into Canada (and especially subsidiaries of foreign parents or multinational entities) to review whether they are properly adding royalties and license fees to the price paid or payable in the proper circumstances and at the appropriate time as required by the Customs Act (Canada) and CBSA policies.  Take a moment to review D-Memorandum D-13-4-9 (it is not very long).  Pay particular attention to Appendix A, which contains 6 somewhat helpful examples.

Also review Appendix 6, which is the CBSA’s view of 3 court cases:

1. Polygram (AP-89-151 and AP-89-165 (CITT));

2. Reebok (AP-92-224 (CITT) and A-642-97 (Federal Court of Appeal); and

3. Mattel Canada (2001 SCC 36 (Supreme Court of Canada).

While there may be (are) additional legal interpretation of these cases, the CBSA’s Appendix B summaries of the jurisprudence provides useful guidance about how the CBSA sees the decisions.  They are communicating how they plan to apply the decisions.

If your activities are not consistent with the CBSA’s stated policies, it may be time for a discussion about risk mitigation and potentially a voluntary disclosure.

Know the Rules: Canada Border Services Agency Releases Revised NEXUS Membership Guide

Posted in NEXUS

On January 13, 2014, the Canada Border Services Agency (CBSA) released a revised NEXUS Membership Guide (BSF5095).  NEXUS card holders should review the rules of the NEXUS program in order to avoid problems at the Canadian border.  The rules are strictly enforced.  If you break any rule, even a small little rule, you will have your NEXUS card confiscated for 7 years and may never be allowed back in the NEXUS program.  As a result, it is important to review this document carefully in order to understand what the CBSA expects of you when you cross the border.

The CBSA enforces the NEXUS rules under a ZERO TOLERANCE policy.  Any infraction, no matter how small, shifts a trusted traveler into the untrustworthy category.  If you have commercial goods and you use the NEXUS lane, you are out of the program. If you forget to report any item (even a $1 chocolate bar), you are out of the program. If you get a new passport or driver’s license and do not update your information, you may be out of the program.  If you move residences and do not update your address, you may be out of the program. If you fail to answer any question accurately, you are out of the program.

There is no pardon process.  There is no leniency for carelessness or lack of knowledge.

Also, remember that your NEXUS pass expires automatically after 5 years.  Check the date of issue on the back of the card and renew your NEXUS card before it expires.  If you use the NEXUS lane with an expired card, you have broken a rule and may not be renewed for another 5 years.  You may be out of the program.

What Kind Of Wake Up Call Would You Like?

Posted in Aerospace & Defence, Border Security, Controlled Goods Program, Corporate Counsel, Customs Law, Export Controls & Economic Sanctions, FCPA/Anti-Corruption

Do you know if your customs compliance program is effective?  Do you know if your export controls and economic sanctions internal controls are working properly? Do you have any internal controls to detect payments of bribes to foreign public officials or the recording of such improper payments in your books and records?

If the answer is “No” – What kind of wake up call would you like?  Do you prefer loud alarm bells?  Do you prefer a bucket of ice cold water?  Do you prefer a shock?

If you do nothing, you may experience a wake up call that is not welcomed and unexpected.  The auditors may arrive and find serious mistakes.  A CBSA officer may arrive to conduct a verification only to find unverifiable transactions.  A disgruntled employee may download information from your computer systems and provide a neatly wrapped package to the justice officials, who will arrive with a search warrant.  There are so many scenarios of a wake up call into a nightmare.

There is only one way to prevent the nightmare scenarios and unanticipated wake up calls – that is, to implement strong and verifiable internal controls.  Senior management cannot be sure that the employees know the rules unless there is a policy manual (compliance program) that sets out the rules clearly.  Senior management cannot know that the employees know what the rules require them to do unless there is a training program.  Senior management cannot know that the employees are following the rules without internal checks and balances.  A mini internal audit is a great way to determine if there are gaps in the compliance program.  There needs to be someone who makes compliance a priority.

What is an Ascertained Forefeiture?

Posted in Customs Law

Normally, if an importer fails to declare goods or undervalues the goods, the Canada Border Services Agency (CBSA) may seize goods as forefeit and/or ascertain an amount as a penalty to get the goods back.  An ascertained forfeiture occurs when the goods cannot actually be seized (because the good cannot be located or seizing the good is impracticable). It is a civil proceeding (as opposed to a criminal proceeding) that is set out in section 124 of the Custom Act (Canada).

What normally occurs is the CBSA sends a Notice of Ascertained Forfeiture by registered mail or hand deliver it to your door.  The Notice of Ascertained Forfeiture will indicate the amount of money that is payable by the Recipient of the Notice. Usually the amount in the Notice of Ascertained Forfeiture is high enough that the recipient will take notice.

If the person against whom the ascertained forfeiture is made wishes to file an appeal, they may request the Minister make a redetermination within 30 days of receiving the Notice of Ascertained Forfeiture.  The person is required to provide all the relevant information (to overturn or reduce the amount of the ascertained forfeiture) in the request for a redetermination.

In my experience, the CBSA has issued notices of ascertained forfeiture in cases where they believe a person has been smuggling goods into Canada.  The belief may be based on information provided by USCBP or another foreign government or an informant (or a former/disgruntled business associate/spouse).  For example, the CBSA has issued Notices of Ascertained Forfeiture in respect of tobacco, vehicles and other alleged undeclared goods that are transported at non-border points.  The belief that undeclared goods have been imported into Canada may also be based on the x-ray of a box containing the receipts for an expensive watch/piece of jewelry.

Since an ascertained forfeiture is an extraordinary action taken pursuant to a statutory provision, all the preconditions set out in the law must be satisfied.  The CBSA cannot issue a Notice of Ascertained Forfeiture because it is more convenient. If the goods are subsequently seized, the ascertained forfeiture should be cancelled.  If you receive a Notice of Ascertained Forfeiture, consider contacting a lawyer because a criminal smuggling charge may also be in your future.

The Panic Call: How Many Corruption of Foreign Public Official Act Files Start

Posted in FCPA/Anti-Corruption

Based on my experience, most Corruption of Foreign Public Officials Act (Canada’s version of the Foreign Corrupt Practices Act) start with an after hours telephone call.  You can usually sense the panic through the telephone line. The caller has learned that the company (which has international activities) is under investigation for bribing a foreign public official.  He/she does not know much about the facts and even less about the law. He/she does not know what to do, what to say, or where to start.  All he/she does know is that the situation is serious.

This is the type of call that requires active listening and intense questioning.  The potential client has a lot of questions about how could this have happened and what should be done.  The lawyer must ask the tough questions in order to assess the situation AND assess whether to take on the file.  The questions about how and next steps give important information about the twists and turns the file may take (these files always have ups & downs, twists & turns).  Most importantly, this first discussion informs on whether the potential client wants he lawyer to help them manage the crisis (from a legal perspective) or agree with them that they should be able to sweep this little thing under the rug and carry on business as usual (hint: the later group are often problematic clients).

In anti-bribery cases, the newly hired lawyer has to catch up to the investigators very quickly.  The newly hired lawyer must be able to devote time to learn quickly, investigate quickly, and act quickly.  The newly hired lawyer must ask the hard question – the questions that the client does not want you to ask them.  The newly hired lawyer has to preserve the evidence – whatever that may be. The newly hired lawyer must look into the emails, texts and correspondence of employees (who have potentially engaged in wrongdoing and do not wish for you to discover their actions). The newly hired lawyer has to be prepared to investigate the person who placed the first panic call and signed he retainer letter.

Both persons on that call have adrenalin levels that are higher than normal.  Both must say, “It is go time”.

Controlled Goods Program To Undergo Changes in 2014 – Consultations Underway

Posted in Border Security, Canada's Federal Government, Controlled Goods Program, Corporate Counsel, Cross-border trade, Export Controls & Economic Sanctions, Government Procurement

in November 2013, Canada’s Public Works and Government Services Canada (PWGSC) announced consultations concerning the implementation user fees in connection with the Controlled Goods Program (CGP). The Controlled Goods Program is administered by the Controlled Goods Directorate of PWGSC (CGD). The CGD is responsible for administering Canada’s domestic industrial security program relating to the possession and/or examination of controlled goods with Canada’s borders and the transfer (including disposal or disclosing of contents) of any controlled good to another person within Canada. The to-be-proposed user fees will be imposed starting January 1, 2015.

PWGSC  is consulting with current and potential CGP registrants.  Specifically, PWGSC would like to obtain input from:

  • Canadian aerospace businesses and associations
  • Canadian defence businesses and associations
  • Canadian security businesses and associations
  • Canadian space/satellite businesses and associations
  • Museums that exhibit controlled goods
  • Universities and other educational institutions
  • Professional associations
  • Other service providers involved with controlled goods (e.g., translators)
  • Consultants working with controlled goods.

PWGSC has released a Consultation Paper “Consultations on the introduction of a new user fee for Controlled Goods Program registrants“.  The purpose of the user fees to to shift some of the burden of operating the CGP from the Canadian taxpayer to the stakeholders/users of the CGP. Phase 1 of the consultations will occur in January 2014 – but is closed to industry associations and their representatives who are members of its Industry Engagement Committee.  Phase 2 will take place in February 2014.  In Phase 2, PWGSC will post the User Fee Proposal and bBusinesses and individuals may submit a complaint in order to register a concern.

PWGSC has also released a Consultation Paper “Consultations for Amendments to the Schedule to the Defence Production Act“.  PWGSC is also reviewing the Controlled Goods List contained in a Schedule to the Defence Production Act.  The Controlled Goods List is Canada’s domestic controlled goods list (which is different than Canada’s Export Control List, but similar because one is based on the other).   In particular, the term “controlled goods” is defined in section 35 of the Defence Production Act as those goods listed in Group 2 (with minor exceptions), item 5504 in Group 5, and Group 6 of the Schedule to the Export Control List made under section 3 of the Export and Import Permits Act.

The CGP will undergo significant changes in 2014.

Canada to Update Export Controls List to Remove Unnecessary Restrictions

Posted in Canada's Federal Government, Export Controls & Economic Sanctions, Government Procurement

On October 23, 2013, Lee Berthiaume reported in the Ottawa citizens that the Canadian “Government to remove export controls on hundreds of goods“. According to Mr. Berthiaume, the government of Canada is reviewing the Export Control List with the goal to removing hundreds Canadian-made military items.  The objective of this exercise is to assist Canadian manufacturers of such military goods and remove red tape to the export of some of these types of goods.

This process is not complete and there is not defined timeline in the public domain.  However, this is a governmental review worth watching closely.  It is another example of the current government taking steps to improve export opportunities for Canadian exporters.  It is another example of the current government taking steps to reduce red tape to build Canadian jobs.  It is also an example of the current government listening to a manufacturing sector.

It is important to note that the United States has been undertaking a similar exercise over the past few years. As a result, the Canadian government is being smart.  There is no reason for Canada’s manufacturers of defence related goods to face greater restrictions than their U.S. counterparts. There is no reason for there to be a significant divergence between Canada’s and the U.S.’s list of export controlled goods. As a result, this is an exercise that has as a component the harmonization of North American export controls rules.

For this reason, U.S. manufacturers (especially those with Canadian subsidiaries or distribution arms/arrangements) should take notice of the Canadian exercise and possible make submissions to the government of Canada.  Some of the decisions made by the government of Canada may affect inbound goods in addition to exported goods.

The ABCs of Canadian Border/Customs Laws

Posted in Border Security, Cross-border trade, Customs Law, Export Controls & Economic Sanctions, GST/HST, Harmonization, NEXUS, Tax, Trade Agreeements

As 2014 begins, we want importers in to Canada to succeed in their cross-border trade activities.  Here is an alphabetical guide to some the relevant Canadian customs/border issues.

A =  Ascertained Forfeitures – The Canada Border Services Agency (CBSA) will issue an assessment based on best information available if they do not have the item.  For example, if you go on a cruise and do not declare the watch/jewelry purchased, the CBSA will guess at the value and issue a notice of ascertained forfeiture.

B = Border – The border is the perimeter that is Canada.  Canada shares its border with the United States.  You must report to the CBSA if you cross the border into Canada (even if you are traveling by hot air balloon or swimming).

C = Canada Border Services Agency – The CBSA enforces Canada’s border laws.  They are the people you meet at border crossings.  The CBSA are law enforcement and not the greeters at Walmart.

D = Duties and Taxes – If you import goods into Canada, you may have to pay duties and taxes to the Receiver General of Canada.

E = Exports – The CBSA may detain and seize exports too.

F = Food – Many food items cannot be imported into Canada without a permit.  Travelers who attempt to import food items may face a $800 penalty.

G = Goods and Services Tax (GST) – The CBSA collects GST on the value for duty of goods imported into Canada, regardless of whether the importer is an individual or business.  GST is collected prior to customs clearance.

H = Harmonized Sales Tax (HST) – The CBSA collects HST on the value for duty of goods imported into Canada by individuals. The PVAT component of the HST is not collected from businesses who must pay the GST at the border prior to customs clearance.

I = Importer of Record – The importer of record is responsible for any duties and taxes.  The importer of record receives the detailed adjustment statements.  If a certificate of origin is incorrect, the importer of record is assessed the duty that should have been paid and penalties/interest.

J = Judicial Review – If you disagree with certain discretionary decisions of the CBSA, you may file an application for judicial review with the Federal Court of Canada – Trial Division.

K = Kits – Determining the H.S. code for a kit may be tricky.  There are many tariff classification issues that arise with respect to parts, accessories and kits.

L = Limitation Periods – Importers need to be aware of limitation periods for filing requests for redetermination, appeals, adjusting entries, voluntary disclosures, refunds, relief, etc.

M = Monetary Instruments – Importers of monetary instruments in excess of $10,000 must report to the CBSA.  There are an increasing number of cases where travelers and importers do not make the reports of monetary instruments because it takes time at the border to complete the forms. It is better to complete the forms that have the monetary instrument seized.

N = Non-resident importers – Importers into Canada who are not “purchasers in Canada” and reside outside Canada are non-resident importers.  This group should expect to see amendments to Canada’s customs laws soon.

O = Origin – A determination of the origin of a good imported into Canada is necessary to receive preferential tariff rates under Canada’s free trade agreements.

P = Penalties – The CBSA imposes penalties when an importer makes an error.  If the importer makes a valid voluntary disclosure, the penalties may be waived.  Canada imposes Administrative Monetary Penalties (AMPs).  An individual who fails to declare a good may have to pay a penalty of 50% of the value of the good – which can add up.

Q = Quicker – The border wait times can be long.  Having a NEXUS pass may permit a quicker border crossing if the traveler completes the forms in advance and makes a complete declaration.

R = Relief – Canada has a number of duty relief programs, such as duty drawback, duty deferral, and bonded warehouses.

S = Subsequent Proceeds – Subsequent proceeds must be added to the price paid or payable for valuation purposes.  If the amount is determined after the importation, an adjusting entry must be filed and additional duties and taxes must be paid.  If the adjustment is downward, the importer cannot claim a refund under Canadian law.

T = Tariff Classification = Goods imported into Canada must be classified by H.S. tariff codes.  If the importer uses the wrong H.S. Code for the good, additional duties and taxes may be payable (and AMPs penalties).  Most cases relate to tariff classification issues.

U = Undervaluation = If an importer under-values a good imported into Canada, the importer will receive a detailed adjustment statement and have to pay additional duties and taxes and AMPS penalties.  If a Canadian citizen or resident undervalues the goods brought back to Canada, the goods will be seized and penalties will be imposed.

V = Valuation = An importer must pay duties and taxes on the value for duty of the goods imported into Canada.  There are valuation rules in the Customs Act.

W = Wood – If an importer imports goods on wood pallets, a fumigation certificate must be provided or the goods will not enter Canada.

X = X -rated – Importations of x-rated materials may be prohibited under Canada’s laws.  Keep it clean folks.

Y = Yellow – Importers should exercise caution when importing goods into Canada.

Z = Zebra – Canada’s customs rules are not always black and white.

The CBSA Is Looking Out For Canadians Returning From Cruises Who May Have Shipped Undeclared Goods

Posted in Criminal Law, Customs Law, NEXUS

Canadians taking Caribbean cruises should know that the CBSA has seen it all before.  It is not uncommon for a Canadian or resident of Canada to be wrongly informed at a duty-free store on board the cruise ship or by a salesperson at a shop in a Caribbean port that they can save the Canadian duties and taxes by shipping the receipts/warranty information for expensive items (such as watches, jewelry) home while wearing the goods when crossing the border.  Travelers are wrongly advised to not declare the goods and that CBSA border officers will not issue an assessment because the receipt is not in the luggage.

This is a big mistake (and possibly a criminal offense) and should not be done.  The CBSA knows the names of the duty free stores who often provide the envelop in which the receipt/warranty documentation is mailed.  The CBSA knows the names of the cruise ship lines who offer free envelopes in the room.  The CBSA knows the locations of the ports to which the cruise ships return (from which envelops are mailed).  The CBSA has x-ray machines to look for invoices in very light boxes or envelopes.

If the value of the undeclared goods exceeds $10,000, the CBSA may charge you criminally with smuggling.  If this happens, you will have a permanent criminal record if convicted, which may limit future ability to travel (persons with criminal records may be inadmissible for entry into foreign countries).

The CBSA may show up at your home seeking more information about the item and asking you to come clean. Since the information provided may be used to lay criminal charges, it is important to exercise caution.  If the CBSA does not receive the good or the receipt, the CBSA may issue a Notice of Ascertained Forfeiture and guess at the value in order to impose a penalty (often 50% of the value of the undeclared good).  It is possible that the CBSA opened the mail and already has a copy of the receipt.  There are rules relating to the opening of mail (which will be the subject of a future post). It is important to know that you may be fined a civil penalty and charged criminally (the two are not mutually exclusive).

If you are a NEXUS participant, the CBSA officer will make a recommendation to the NEXUS Program to revoke NEXUS privileges.  You will have to wait 7 years to reapply for admission into the NEXUS program.  Based on our experience, this type of infraction is serious and you will not be treated as a trusted traveler in the future (meaning the future application will be denied).

In short, it is bad to lie. When caught, you will find that the penalties far exceed the duties and taxes you attempted to save. Yes – the cruise vacation was expensive. Yes – the expensive goods were expensive.  However, your reputation is priceless.

Families That Travel Together May Have Their NEXUS Passes Cancelled Together

Posted in NEXUS

The Canada Border Services Agency (CBSA) has designed the E311 form (Declaration Card) so that families of 1-4 individuals can complete a single declaration card. Canadian citizens and residents must complete a Declaration Card when returning to Canada by air.  At land border crossings, the CBSA prefers each NEXUS traveler complete a Traveller Declaration Card prior to arrival at the border. The Traveller Declaration Card is completed by each family member in the car separately (all must by NEXUS participants).  Persons who are not NEXUS participants make a verbal declaration to the CBSA in the primary booth.

In 2013, we saw a number of entire families lose their NEXUS cards due to an error by a single family member.  Sometimes, just the father (usually the person who completes the E311 form or the first person listed in the form) was the only person to have his NEXUS card cancelled despite the fact a spouse or child made the errors.  When this occurs, the most frequent traveler in the family is the most severely punished by the CBSA for mistakes of persons traveling in their family posse.

This happens because the first person listed on the E311 form is usually the person the CBSA lists in the seizing documentation.  In other words, the CBSA does not identify the person who actually made the mistakes even though the secondary CBSA officers have asked for and received everyone’s information.  Since the infraction is documented as having been committed by the first person, this is the person whose name is sent to the NEXUS Program and whose NEXUS privileges are cancelled.

When the person appeals the penalty (requests a redetermination is the correct terminology), the CBSA sends the primary and secondary officers’ Narrative Reports. Usually these Narrative Reports show that the appellant did not commit any infraction.  Usually, the Narrative Reports refer to the person who made the errors or are unclear as to who made the errors (this happens when the CBSA officers complete Narrative Reports at a later date).

For example, a family of 3 went to New York City for a family week-end.  Each family member was away more than 48 hours and each was entitled to claim a $800 exemption.  However, the mother and the daughter each spent more than $800 because it was New York City.  The mother completed the E311 form, but put the father’s name first in the E311 form.  Each individual signed in respect of their portion of the declaration.    The problem was that the mother and daughter made an under-declaration ($800 each).  The father had no idea of their receipts and had no way of knowing the precise totals for others listed on the form were incorrect.  He knew his declaration was correct.

In this case, we successfully appealed the fine (actually called a request for redetermination) against the father and his NEXUS privileges were reinstated.  In this case, the Narrative Reports were helpful in showing that the mother was clearly identified in the Narrative Reports and admitted to the error.

Stories like this one played out on numerous occasions in 2013.  One reason for the misidentification of the offender is the CBSA’s multi-person forms. Another reason is that the head of the household is usually the father and he usually pays the fine. Another reason is that the CBSA officers make mistakes too.  Unfortunately, when a CBSA officer makes a mistake, it can take months to correct the mistake and honest business persons must use the long line ups at security and customs until the mistake is corrected.  Also, the traveler is more likely to be sent to secondary inspection for a more thorough review when returning to Canada because the computers will inform the primary officer that the person has a recent/past infraction (or if the person uses the new automated kiosk – will print a form for the exist screener).