On September 29, 2016, hours before Canada won the World Cup of Hockey, the Supreme Court of Canada issued its first tariff classification decision since Canada signed the International Convention on the Harmonized Commodity Description and Coding System in 1998. At the heart of the decision was the proper tariff classification for goalie gloves, known as catchers and blockers.
In hockey terms – the score in the Supreme Court of Canada case was 8-1. The majority decision reflects the views of 8 members of the Supreme Court and there was 1 single dissenting judge.
In Attorney General of Canada v. Igloo Vikski Inc., the majority of the Supreme Court of Canada held that imported hockey gloves should be classified as “gloves, mittens and mitts” under tariff item 6216.00.00 and not “other articles of plastics” under tariff item 3926.20.92. The importer, Igloo Vikski Inc. had classified the imported hockey gloves as “other articles of plastics” and lost at the Canadian International Trade Tribunal (“CITT”) (see Igloo Vikski Inc. v The President of the Canada Border Services Agency, AP-2009-046). The importer successfully appealed the CITT decision to the Federal Court of Appeal (See Igloo Vikski v. President of Canada Border Services Agency). The Attorney General successfully appealed to the Supreme Court of Canada. It is important to note that there is a dissenting opinion, which means that customs lawyers are correct when they say that “tariff classification is complicated”.
Canadians would be interested in the case because we love all things hockey. However, not many people will be interested to know why the Supreme Court of Canada decided that hockey gloves worn by goalies are “gloves, mittens or mitts” rather than “other articles of plastics”. That being said, the Supreme Court of Canada decision is very important to Canadian importers because it deals with the fundamentals of customs tariff classification of composite goods – an exercise many Canadian importers must undertake.
The primary issue in the appeal was the manner in which the General Rules for Interpretation of the Harmonized System in the Customs Tariff ought to be applied when classifying goods for customs purposes. Importantly for customs lawyers, the Supreme Court of Canada majority decision and the dissent differed in the basic fundamentals of the application of the General Rules for Interpretation of the Harmonized System. As a result, there is new certainty and perpetuated confusion.
The majority of the Supreme Court of Canada determined that the General Rules for Interpretation of the Harmonized System create a hierarchical system of interpretive rules rather than a cascading system of interpretive rules. The Majority explains their thinking as follows:
“A “cascade” tends to suggest that the analysis progresses in a single, sequential direction — for example, first, to Rule 1, then (where Rule 1 fails to resolve the matter) to Rule 2, without returning to Rule 1. While the General Rules are hierarchical in the sense that any classification exercise must begin with Rule 1 (since Explanatory Note (V) to Rule 1 describes its classification methodology as “paramount”), Rule 1 … does not lose all relevance where Rule 2 is applied. Nor is it an error to consider whether a good meets the description of a heading — that is, to apply Rule 1 — when Rule 2 is also applied. Indeed, Rule 2 would have no purpose were it not applied in conjunction with Rule 1, since its function is to guide the application of Rule 1 when the good in question is incomplete or a composite of different materials. Where Rule 2 applies, it applies together with Rule 1 to identify the heading(s) under which an incomplete or composite good can be prima facie classified. The terms of the heading(s) and any relevant Section or Chapter Notes are thereby applied to the incomplete or composite good as if it were a complete or uniform good, and it is classified as such.”
The above explanation follows an analysis of how the General Rules for Interpretation of the Harmonized System should be applied when classifying goods for customs duties purposes. The majority of the Supreme Court of Canada set out its analysis of the Harmonized System and General Rules as follows:
- The Harmonized System was developed by the World Customs Organization to foster stability and predictability in classification practices internationally, it is used as a standard tariff classification system by all parties to the Convention.
- The Harmonized System proceeds, within sections of the Schedule, from general to specific classifications via chapters, headings, subheadings and tariff items.
- The Schedule to the Customs Tariff incorporates the General Rules for the Interpretation of the Harmonized System (the “General Rules”).
- The General Rules are comprised of six rules governing the classification of goods under the Harmonized System.
- While it is the case that the General Rules are to be applied in a set order, it is more helpful to understand that order as a function of a hierarchy rather than a cascade.
- The tariff classification exercise begins with Rule 1 of the General Rules, which directs that the tariff classification of goods must initially be determined with reference only to the Headings within a Chapter, as well as any applicable Section or Chapter Notes.
- Tariff classification may be determinable on an application of Rule 1 of the General Rules alone. It is only where Rule 1 does not conclusively determine the classification of the good that the other General Rules become relevant to the classification process.
- Rule 1 of the General Rules and Rule 2 of the General Rules may be conjunctive in nature of application.
- Rule 1 of the General Rules and Rule 2 of the General Rules are not mutually exclusive tariff classification rules.
- Where the goods are unfinished or where they are comprised of a mix of materials or substances (and where no heading specifically describes the unfinished or composite good as such), Rule 2 of the General Rules is applied in conjunction with Rule 1 to determine the prima facie classification of unfinished and composite goods.
- Rule 2 of the General Rules is a deeming provision. Rule 2 of the General Rules deems that certain references in headings include unfinished goods or goods composed of different materials.
- Rule 2(a) of the General Rules deems unfinished goods to be finished goods, and directs that they be classified using Rule 1 of the General Rules as if they were goods in a complete or finished state. In other words, “Where Rule 2 applies, it informs the content of the headings by which Rule 1 directs that the appropriate classification be determined.”
- Explanatory Notes (III) and (V) to Rule 1 of the General Rules reiterate that Rule 1 of the General Rules requires that the headings and Section or Chapter Notes are the first consideration in determining classification. Explanatory Notes (III) and (V) further explain that Rule 2(a) of the General Rules requires that incomplete goods are classified based on the headings and Section or Chapter Notes as if they were completed goods (assuming they are not classifiable under Rule 1 as falling within a heading that specifically describes unfinished goods).
- Rule 2(b) of the General Rules applies where a good consists of a mixture of more than one substance, and states that a reference to goods of a given material or substance in a heading shall be taken to include goods consisting wholly or partly of such material or substance. Rule 2(b) of the General Rules applies in conjunction with Rule 1 of the General Rules to determine the heading(s) under which the composite good is prima facie classifiable.
- Rule 2(b) of the General Rules deems the reference in a heading to a material or substance to be a reference to a combination of that material or substance with other materials or substances. This is, however, subject to the caveat in Explanatory Note (XII) that Rule 2(b) does not extend (“widen”) a heading so as to cover goods which cannot be regarded as answering the description in the heading. Therefore, a mixed or composite good is “described” by that heading unless the addition of the other material or substance would deprive the good of the character of goods of the kind described in the heading. In other words, “[w]hile Rule 2(b) deems a reference in a heading to a material to include a mixture of that material with other substances, the Section, Chapter Notes, and Explanatory Notes still apply when classifying that good as if it were made exclusively of the material referenced by the heading”.
- Applied conjunctively, Rules 1 and 2 of the General Rules determine the heading(s) under which an unfinished or (as here) a composite good is prima facie classifiable. If, having applied Rules 1 and 2, the good is prima facie classifiable under only one heading, then the inquiry ends and the good is classified under that heading. If, however, the good is prima facie classifiable under more than one heading — either because it is described by more than one heading under Rule 1 or because it is prima facie classifiable under more than one heading by applying Rules 1 and 2 together — then Rule 3 applies, by operation of Rule 2(b), to resolve the classification dispute.
- Rule 3(a) of the General Rules states that, where by application of Rule 2(b) of the General Rules or for any other reason, goods are prima facie classifiable under two or more headings, then the heading with the most specific description is to be preferred. If applying Rule 3(a) of the General Rules does not resolve the classification (because the headings are equally specific), Rule 3(b) of the General Rules provides that classification must occur according to the material or component that gives the goods their essential character. And, if that does not lead to a single classification, then Rule 3(c) of the General Rules states that the goods must be classified under the heading which occurs last in numerical order among those under consideration.
- If the application of Rules 1, 2 and 3 does not lead to the classification of a good under a single heading, Rule 4 of the General Rules provides a failsafe “likeness” rule, by which the good is classified under the heading that is appropriate to the good to which it is “most akin”.
- Rule 5 of the General Rules deals with classification of cases and packing materials.
- Rule 6 of the General Rules applies once goods are classified under a heading, and directs the application of the General Rules when classifying goods under a subheading within that heading.
The majority went on to review the CITT decision and found that it was a reasonable outcome.
The dissenting judge. Madame Justice Suzanne Côté disagreed with the hierarchical approach of the majority. Madame Justice Côté held that the CITT’s decision fell well outside the range of reasonable interpretations and was not justifiable because it contradicts the “cascading nature of the General Rules for the Interpretation of the Harmonized System (comprised in the Schedule to the Customs Tariff)”, was internally contradictory, and interpreted the World Customs Organization’s Explanatory Notes to the Harmonized Commodity Description and Coding System in a manner that is irreconcilable with their words. At no time in the dissenting opinion did Madame Justice Côté indicate that she adopted the majority’s “hierarchical approach”. Madame Justice Côté does state that “[t]he distinction between a conjunctive or hierarchical application of the General Rules as opposed to a cascading application is, in this case, irrelevant”.
Madame Justice Côté goes on to review the CITT decision and the Federal Court of Appeal decision and the dissent is primarily based upon the reasonableness of the CITT decision (or lack thereof).
The Supreme Court of Canada decision in Igloo Vikski is important for every importer of composite goods. It is important to review tariff classifications for imported goods to determine whether the new Supreme Court of Canada’s hierarchical approach affects the tariff classifications being used. If the tariff classification changes and the goods are imported under a free trade agreement preferential tariff rate, the rules of origin should be reviewed to ensure that the goods still qualify under the applicable free trade agreement rules of origin.
For more information about tariff classification in Canada, please contact Cyndee Todgham Cherniak at 416-307-4168 or email at email@example.com.