The Internet enables foreign companies to market and sell to Canadian consumers without setting up in Canada. A common question of foreign sellers with opportunities to sell to Canadians is “Should I sell into Canada as a non-resident importer?” Before answering this question, we must go back to the basics.
What is an importer?
The term “importer” is generally understood to mean “the person who brings goods into Canada or causes an importation of goods into Canada or causes goods to be brought into Canada”. Importers are often distributors and customers. However, a non-resident seller can be an importer if they deliver goods to Canadian customers. The can cause a good to be imported into Canada by selling a good at a single and certain “all-in” “duty paid” price.
What is a Non-Resident Importer?
A non-resident importer (also referred to as a “NRI”) is a person located outside Canada (and who usually does not have a place of residence in Canada) who ships or exports goods to Canada and who acts as an importer of record of those goods into Canada. When a person acts as an importer of record, they are responsible for customs clearance and other border-related matters (such as, paying all applicable duties and taxes, having all relevant import documentation (including import permits and certifications if required) for the good, are responsible for payment of handling fees, inspection and storage fees, etc.).
Benefits (Pros) of being a Non-Resident Importer?
Most foreign persons who ask about selling to Canadians as a non-resident importer think primarily about the money they will make by expanding into the Canadian market. The perceived benefits that are often discussed with persons wishing to be non-resident importers include:
- Not Having Any Physical Presence in Canada: Most non-resident importers want first and foremost to have access to the Canadian market without having to operate out of a physical location in Canada. Part of the reason lies in the expense of Canadian real estate. The other perceived benefit is that Canadian income taxes may be avoided if there is no “permanent establishment” in Canada.
- Being Able To Sell At “All-In” Prices: The Canadian customer receives the goods delivered duty paid (DDP) to his/her doorstep for a single agreed-upon price. This makes the customer happy as there are no big surprise costs. The price on the web-site or invoice is the amount that is paid. Foreign sellers have control over their costs and know their costs in advance. However, this becomes a disadvantage to many who guess the shipping, CBSA, GST and other costs and under-estimate those costs. Errors can negatively affect profit margins.
- Seamless Process for the Canadian Customer: The Canadian customer gets the goods delivered to his/her doorstep. That was easy.
- Customer Service – Can Track Shipments: Canadian customers will be happier when they can talk to a human about tracking the shipment. The seller is responsible for shipping and can track any shipment as part of the service.
Negatives (Cons) of being a Non-Resident Importer?
If a foreign person is a non-resident importer, they must comply with Canadian customs, import and border laws. The non-resident importer is responsible for communicating accurate information to the Canada Border Services Agency (“CBSA”) and will be subject to assessment, administrative monetary penalties (AMPs), penalties, fines and other charges if they do not take the time to ensure all information is correct, accurate and complete. The following are just a few of the many areas of risks to be considered.
- Getting in the Canadian System: A non-resident importer must obtain a Business Number from the Canada Revenue Agency (“CRA”) prior to importing goods into Canada. A Business Number is a 9 digit number that identifies a person for various revenue related matters in Canada (like a social insurance number for businesses). A non-resident importer must obtain an Importer Number (which is also known as an “RM” number). This RM number must be used on the customs clearance documentation.
- Goods and Services Tax (“GST”)/ Harmonized Sales Tax (“HST”): When a non-resident importer applies for the Business Number and RM number, the CRA will ask if they wish to obtain a goods and services tax/harmonized sales tax (“GST/HST”) number. GST is a federally imposed sales tax that is applicable regardless of the province in which a person is selling goods. GST (at a rate of 5%) is payable to the CBSA at the border prior to customs clearance in respect of taxable supplies. As a general rule, a non-resident importer must be registered for GST purposes to get back and GST paid to the CBSA relating to import transactions. There are exceptions to this rule that are fact specific. When a non-resident person registers for GST/HST purposes (in order to get the border GST back), they must collect the appropriate amount of tax from customers and meet documentary requirements. Invoices must contain certain prescribed information.
- Collection of Canadian Sales Taxes: In Canada, GST is charged in every province and territory. HST is charged only in Prince Edward Island, Newfoundland/Labrador, Nova Scotia, New Brunswick, Quebec and Ontario. The rate of HST differs from province to province. Provincial sales taxes (“PST”) are charged in Manitoba, Saskatchewan and British Columbia. Non-resident importers deliver goods in Canada and are responsible for collecting and remitting sales taxes. This means the non-resident importer must register federally to collect the GST/HST and register in any PST province in which they will sell goods. Collecting the right amount of GST/HST and PST is a challenge for non-resident importers and domestic businesses alike. Registered persons must keep up on sales tax laws changes in order to ensure compliance. For example, two provinces increased the HST rate as at July 1, 2016 and another is raising the HST rate on October 1, 2016. When one registers as a non-resident importer, the foreign person usually has to post security for sales taxes because collection of assessed amounts is more difficult when a person does not have property in Canada. Also, when a foreign person registers for a Canadian tax number, they usually must complete a “Books and Records ” form in which the person (1) indicates where the books and records will be kept and (2) agrees to pay the expenses of the Canadian tax authorities visit to conduct an audit.
- Filing Sales Tax Returns: Persons who register for sales tax purposes must collect all applicable sales taxes from customers and remit the sales tax to the correct governmental authority. All tax returns must be filed on time and late filing penalties are applicable when filed late. Amounts collected as or on account of GST/HST and PST are generally considered trust funds held for Her Majesty.
- Income Tax: If a foreign person gets into the Canadian tax system for sales tax purposes, the Canadian tax authorities usually ask if they require an income tax number. Canadian tax authorities may look at all books and records and are not obligated to accept a subset of records relating only to sales to Canada. This means that the Canadian tax authorities have a right to look at anything they wish (they just cannot go outside Canadian tax law and treaties when imposing assessments).
- Customs duties: Under Canadian customs laws, the importer of record is responsible to the CBSA and may be assessed for errors in customs documentation. The CBSA does not assess exporters for providing incorrect information – the relationship is between the importer of record and the CBSA.
- Tariff classification: The importer of record must ensure that the tariff item number communicated on the customs clearance documentation is correct. When importing into Canada, the Canadian tariff classification must be used, which may differ from a foreign HS classification. While tariff classification is harmonized, the last 7-10 digits are all local trade data numbers. Also, the CBSA may have issued policy statements and advance ruling letters that interpret the HS Code differently than another country’s customs authorities. When importing into Canada, the Customs Tariff (Canada) applies and Canadian case law and policies need to be considered. If a tariff classification is incorrect, the importer of record may be re-assessed additional duties and taxes and may have to pay AMPs penalties.
- Certificate of Origin: The importer of record must have a properly completed certificate of origin at the time of importation. If the certificate of origin is not available or is incorrect, the CBSA may issue a re-assessment against the non-resident importer.
- Valuation: Non-resident importers face valuation issues because their invoice price is not usually considered to be reliable. A non-resident importer is usually the exporter of the goods. As a result, the non-resident importer can write any number it wishes on an invoice. The price of the invoice may not reflect what an arm’s length customer would pay. As a result, more complex valuation rules usually apply.
- Import Permits: Canada requires that some goods (e.g., cheese, poultry, eggs, dairy, meats, other foods, small arms, chemicals, carbon steel products, apparel and textiles, roses, etc.) have prior approval by way of an import permit. Failure to obtain an import permit may result in over-access customs duties rates, fines and imprisonment.
- Marking Rules: Non-resident importers must ensure that imported goods meet Canada’s marking rules.
- Labeling: Non-resident importers must ensure that imported goods meet Canada’s labeling rules, including Canada’s language labeling laws.
- Maintenance of Books and Records: A non-resident importer must maintain books and records relating to all Canadian sales for a prescribed number of years. Depending on the tax or the border issue, the length of time may exceed 6 years. Failure to maintain proper books and records may result in fines and penalties (and more audits).
- Agency Agreement With Customs Broker: Most non-resident importers sign agency agreements with a customs broker. The brokers usually use a standard form agreement. The non-resident importer is responsible even if the broker makes mistakes and does not follow the instructions of the non-resident importer.
There are many other rules that may be applicable depending upon the goods. Please seek out specific advice before importing goods into Canada as a non-resident importer.
There are other options to being a non-resident importer. A foreign entity may deliver goods outside Canada and have their customer be the importer of record. All paperwork must be very clear that goods are delivered outside Canada.
A foreign entity may look for a Canadian distributor for its goods who will be responsible for all things Canadian and will be paid a commission for taking on Canadian compliance and market risk. Generally, the relationship is structured so that the foreign seller delivers all goods to the distributor outside Canada and the distributor acts as the importer of record.
A foreign entity may locate a fulfillment company that operates in Canada who will be responsible for all things Canadian and will be paid a commission for taking on Canadian compliance and market risk. Generally, the relationship is structured so that the foreign seller delivers all goods to the distributor outside Canada and the distributor acts as the importer of record.
Many foreign entities decide to incorporate a Canadian subsidiary to isolate the Canadian risk in a Canadian company. The single most important benefit is that the Canadian tax authorities will deal with the Canadian subsidiary and not the foreign person if the arrangements are structured properly. This is a good option where the sales in Canada are anticipated to exceed a threshold amount on an annual basis.
Please contact a Canadian lawyer for specific structuring advice.