On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “Trump Tax Act”). The Trump Tax Act materially changes U.S. corporate tax laws and incentivizes U.S. companies with overseas operations to either return home to the United States and/or repatriate money home to the United States.
As companies are attempting to figure out how the Trump Tax Act affects them, I am going to throw another curveball. Have you thought about the Canadian customs duties consequences? If you have a related party transaction and the U.S. company sells goods to a Canadian subsidiary (or imports the goods via a Canadian branch or office) for resale in the Canadian market, the payment (repatriation) of additional monies (compensation) in response to the Trump Tax Act from the Canadian subsidiary to the U.S. parent could be considered to be “subsequent proceeds” for Canadian customs purposes. Similarly, a non-resident U.S. importer may import goods into Canada for resale. The Canada Border Services Agency (“CBSA”) may want to receive additional customs duties on any subsequent proceeds that arise in connection with Trump Tax Act tax planning or response.
Canada imposes customs duties on the value for duty of goods as determined by one of six valuation methods. Pursuant to paragraph 48(5)(v) of the Customs Act, the value of any part of proceeds of any subsequent resale, disposal or use of the goods by the purchaser that accrues to the vendor (directly or indirectly) must be added to the price paid or payable and form part of the transaction value of the goods (the term “subsequent proceeds” simplifies this provision). If post importation an amount of additional compensation is accrued, the importer must file a B2 Adjustment Request and allocate the additional compensation on a transaction-by-transaction, H.S. Code-by-H.S. Code basis. It might not matter that the payments are for Trump Tax Act planning purposes, the CBSA may see an opportunity to receive additional customs duties and the payment may fall within the subsequent proceeds rules. If the goods are subject to customs duties and there is no NAFTA relief (either because there is no NAFTA or the goods are not considered to be originating under NAFTA), then additional customs duties and GST/HST will be payable. In other words, Canada gets a portion of the repatriated funds.
The CBSA takes the position that subsequent proceeds includes any type of payment made by the importer to the exporter (or a third party for the benefit of the exporter) after importation of the goods into Canada. Since the Trump Tax Act repatriation will be a payment, the CBSA may want to look at it more closely and ask whether there is any connection to the imported goods. If the repatriated funds are profits on the sale of those goods in Canada, they may satisfy the legal conditions to be subsequent proceeds.
So, in answer to the question “What do Canadian customs duties and the Trump Tax Act have in common”? Both governments receive revenues.
For more information about Canada’s rules for subsequent proceeds, you may wish to review D13-4-13 “Post-importation Payments of Fees “Subsequent Proceeds”. If you would like to discuss how to reduce the likelihood that the CBSA will view a payment as subsequent proceeds, please call Cyndee Todgham Cherniak at 416-307-4168 or email firstname.lastname@example.org.