Canada: Proposed changes in Valuation for Duty (VFD)

Under current Canada Customs regulations, a VFD must be declared for all goods imported to Canada in accordance with the valuation provisions of the Customs Act, regardless of the circumstances of their importation. The value for duty is the base figure on which duty you may owe on your goods is calculated. Even if no duty is owed, the VFD of goods must still be established so that any applicable assessment of the goods and services tax, provincial sales tax or harmonized sales tax may be calculated.

Canada calculates import duties based primarily on the transaction value of the goods, which is typically the price paid or payable in the sale for export of goods to a purchaser in Canada. Under the current regulation, in certain scenarios, it is common practice to declare a lower VFD by using an earlier sale price (e.g., first sale) not the sale to the actual buyer in Canada. This would result in paying less customs duty. For example, this can arise when the Non-Resident Importer (NRI) sells goods to a Canadian branch or subsidiary before they are sold to the Canadian purchaser/end user.

The proposed change would establish that when an imported product is subject to multiple sales, which is very common in today’s global supply chains, the “sale for export” of that product is the “last sale”. Typically, sales prices increase at each step when multiple sales are involved, this proposal would effectively increase the VFD and result in higher duties on goods shipped into Canada. This would be of significant concern on imports of goods already subject to high duty rates.

Based on the proposed changes, this will mean that a sale that happens within Canada – for example, a sale from an importer to a distributor, or from a distributor to a retailer, or from a retailer to a consumer – could be deemed a sale for export. If the proposed rules are adopted, many businesses that import goods for resale will be required to base the VFD on their selling prices instead of their purchase prices.

The amendment is designed to ensure that, when an importer plans to resell goods to a Canadian customer before importing the goods into Canada, the VFD of the goods is based on the selling price to the Canadian customer/end user.

CBSA has stated that this change is necessary to protect Canadian importers ability to compete on a level playing field with NRIs, who are paying a lower duty based on the use of first sale on the VFD. The current regulations put Canadian importers at a disadvantage according to CBSA. The proposal notes that this current scenario also results in lost customs revenues.

The proposed amendment appears to target NRIs - businesses located outside of Canada that ship goods to customers in Canada. The NRIs use earlier sales price for the VFD, and this price is typically occurring earlier in the supply chain, including a sales price between a foreign-based manufacturer and the NRI (so the NRI can ultimately fulfill the order to the buyer in Canada).

Clearly the growth of imports in the e-commerce sector has contributed to CBSA’s concern as this has also increased the number of NRIs. Many of these NRI have minimal operations and/or investment in Canada, as well as increasingly complex cross-border sales transactions that involve companies owned, controlled by, or in partnership with foreign entities shipping goods directly to Canada from third countries.

Although the proposed regulation states it is targeting NRIs to increase their dutiable import, it does not appear to be anything in the regulation that would limit it to just NRIs. It appears that resident importers with multiple sales could also experience higher dutiable import values. So, the impact of this change is far-reaching.

CBSA also suggests that the amendments are necessary for Canada to meet its obligations under the World Trade Organization’s Customs Valuation Agreement and to Canada’s trading partners regarding the methods of calculating VFD.

The comment period is extended through July 26, 2023. Input from importers is critical to ensure that any final amendments to the regulation do not result in significant negative impacts to their business. Input received during the comment period could result in changes to the proposed language.

The proposed amendments have the potential to significantly affect businesses importing goods for resale in Canada. This can include increased duties and taxes, additional administrative burdens, and possible adjustment to a company’s business model. It would be wise for companies to review their existing structure with respect to their imports into Canada to understand the potential impact to their organization should these changes be implemented. For example, importers should review both their current and prospective duty profiles to get an idea of what the proposed change could mean to their business.

The government has not confirmed when the amendments will be implemented, but they are proposed to come into force at the same time as the yet-to-be-announced entry into force of the Customs Act amendment enacted in the Budget Implementation Act, 2021, No. 1 (S.C. 2021, c. 23). CBSA has stated the amendments would not be retroactive.