Canada-U.S. Blog Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

Ask Questions Before You Market Access into Canada?

Posted in AMPs, Canada's Federal Government, Corporate Counsel, Cross-border trade, Customs Law, GST/HST, origin, Sales Taxes, tariff classification, valuation

Many U.S. and foreign companies that sell goods on Internet-based retail platforms (both in-house platforms and Amazon-type platforms) should ask more questions as they access Canada’s consumer market.  Often, the first question asked by the foreign company is how to access the Canadian market (as they see dollar signs).  After they foreign company figures out how to access the Canadian market, the sales begin.  Before you know it, they volume of sales to Canada have increased substantially.  We have seen foreign companies go from zero to millions of dollar of sales to Canada in just one year.

Often these foreign companies did not ask any questions about compliance with Canadian laws before taking steps to access the Canadian consumer market.  They must play catch-up after making sales.  The greater number of sales, the more work is required to become compliant.

Often the foreign company is the importer of record on the customs documentation into Canada, rather than selling to Canadian consumers FOB outside Canada and requiring the Canadian consumer to be the importer of record (because they want the Canadian consumer to see a seamless transaction).  The importer of record is the person who is identified as the importer on the import documentation (e.g., the B3 Customs Coding Form) or by the customs broker in the CADEX submission and who pays customs duties and taxes at the Canadian border.

What we often see is that the foreign company is told by their customs broker that they must obtain a Canadian import number.  An import number is a 9 digit business number with an “RP” extension.  After a few importations, the foreign company sees the goods and services tax (“GST”) (5% when selling to a Canadian business or consigning goods to sell via Amazon Canada) or GST/harmonized sales tax (“HST”) (when selling to Canadian consumers in HST provinces) or GST and provincial sales tax (“PST”) (when selling to Canadian consumers in provinces that have not harmonized) on their invoices from the customs broker and ask if they can get the money back/refunded.  The customs broker recommends that the foreign company obtain an GST/HST number to claim input tax credits and recover all GST/HST paid to the Canada Border Services Agency (“CBSA”) through the customs broker. Foreign companies register for GST/HST purposes to increase recoverable costs (and allow them to keep prices competitive in Canada).

The decisions to be the importer of record, obtain an import number and obtain a GST/HST number are often made without any consideration of the legal ramifications.  The sales continue and all is great — until the CBSA conducts a customs verification or the Canada Revenue Agency (“CRA”) conducts a GST/HST audit.  Then the past mistakes become expensive lessons.

Ask the right questions before you start to access the Canadian market.  If you hae not asked the right questions, there is no time but the present to conduct a diagnostic and correct mistakes you are making.

Some of the top mistakes are:

  1. The foreign company thinks the customs broker is responsible for everything and does not realize that they can be audited and will be liable under Canadian law (not the customs broker) for any compliance errors;
  2. The foreign company does not make sure it has all the documentation related to the import transactions (they do not download the B3 Canada Customs Coding Forms) and are, therefore, not able to respond to requests for information from the CBSA (which can result in very significant administrative monetary penalties (“AMPs”), such as $25,000 per transaction);
  3. The incorrect origin of goods is reported to the CBSA on the import documentation (which results in an assessment of customs duties, additional GST/HST, interest and AMPs penalties by the CBSA);
  4. A certificate of origin is not prepared by the foreign company for goods manufactured by that company is in a country with a free trade agreement with Canada or is not obtained from manufacturers to justify the claim of preferential treatment;
  5. The incorrect value is reported to the CBSA on the import documentation (which results in an assessment of customs duties, additional GST/HST, interest and AMPs penalties by the CBSA). For example, the cost of goods is used as the value rather than a variation on the selling price to the Canadian consumer;
  6. The foreign company does not file B2 Canada Customs – Adjustment Request forms to pay additional customs duties and GST/HST on royalties, assists, subsequent proceeds, commissions and other amounts that increase the amount paid or payable for the goods;
  7. The incorrect tariff classification number is used on import documentation (which results in an assessment of customs duties, additional GST/HST, interest and AMPs penalties by the CBSA);
  8. The incorrect currency is reported on import paperwork or recorded in books and records (the foreign company is not familiar with Canadian dollars or typically transact business in United States dollars);
  9. GST/HST is collected on invoices to Canadian customers (issued by the foreign company) and is never remitted to the CRA because the foreign company thinks that they are recovering what is paid at the border (which is a very serious mistake because a person who collects GST/HST is considered to be an agent of the Government of Canada and is is serious to keep Canada’s money – there is no limitation period for amounts that are technically collected and not remitted to Canada and gross negligence penalties may be imposed);
  10. GST/HST/PST is collected by Amazon (and advertised as being imposed) and the foreign company does not obtain reports from Amazon to report all taxes that are collected in the name of the foreign company (which is considered just as serious as 4 above);
  11. Canadian sales taxes (GST, HST and PST) is not charged on invoices from the foreign company to the Canadian consumer where the foreign company is the import of record and delivers the goods in Canada (if delivery takes place outside Canada, Canadian sales taxes are not applicable);
  12. Canadian sales taxes are imposed at the incorrect rate (the same rate is not applicable in each province); and
  13. No questions are asked whether the goods are subject to Canadian antidumping duties and countervailing duties (could result in significant assessments).

There are many other Canadian laws to consider.  We have only highlighted some of the most common errors.

For more information or to schedule a diagnostic of your activities in Canada (by reviewing sample transactions from start to finish), please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  We have many other customs articles and GST/HST articles on the LexSage website.