On July 4, 2024, the Canada Border Services Agency (CBSA) announced its compliance priorities for commercial imports and it updated its 2024 trade verification priorities. In the coming months, the CBSA will closely scrutinize the application of customs procedures and programs and the declared tariff classification, value, and origin of certain goods. An analysis of the July 2024 compliance and trade verification priorities is outlined below.
Compliance Priorities
Tariff rate quota and classification of supply managed goods
The CBSA plans to conduct verifications on the classification of frozen desserts containing 5% of dairy products. Dairy products are supply-managed in Canada and are subject to import controls. Importing misclassified goods containing dairy products without a quota allocation and an import permit, may result in an “over-access commitment” tariff classification, which is subject to high duties (e.g. up to 300%). If frozen desserts containing dairy are misclassified, importers may be at risk of the CBSA redetermining the tariff classification of imported goods and issuing a Detailed Adjustment Statement to collect further duties and interest on the goods at issue.
For example, “sherbet” is defined by the Food and Drugs Regulations to contain less than 5% milk solids and is classified under tariff item 2105.00.10, as frozen food, other than ice cream or ice milk, made from a milk product. If an importer classifies frozen dessert products as “sherbet”, but the products contain more than 5% of milk solids, the CBSA may redetermine the frozen dessert products as “ice cream novelties” and “other ice cream” products, which are classified under 2105.00.92 and attract an over access commitment duty rate of 277%, but not less than 1.16/kg.
Tariff classification of gloves
The CBSA is conducting third-round verifications on gloves classified under headings 39.26 and 42.03 to determine whether importers are properly classifying gloves. With respect to Chapter 39, these goods include apparel products and disposable gloves. In response to the COVID-19 pandemic, the CBSA issued a remission order which provided relief from duties on PPE goods classified under heading 39.26, amongst others. The remission order was repealed as of May 7, 2022, and accordingly importers were permitted to claim relief within two years of the date of importation of eligible goods, so until May 6, 2024 for goods imported on May 6, 2022.
The CBSA is likely targeting gloves to confirm that goods claiming relief under the remission order were properly classified under Chapter 39 or are properly classified going forward given the amount of gloves imported over the past four years, which happens to be the lookback period for re-determinations. With respect to Chapter 42 goods, these goods are largely apparel products with duties ranging from 0% to 15.5%. Goods misclassified under Chapter 42 leave importers at risk for duty and tax liability should goods be re-classified under a different tariff item with a higher duty rate.
GST excise duties and taxes
The CBSA seeks to verify compliance with GST exemption codes, ensuring that importers are not underpaying taxes by relying on exemption codes for ineligible goods. The CBSA collects GST (Canada’s 5% VAT) on imported goods and remits these amounts to the Canada Revenue Agency. Importers are obligated to record GST rates or the applicable exemption code in Field No. 29 of a Canada Customs Form B3 (soon to be the “Commercial Accounting Document” under the new CARM Portal). The applicable GST exemption codes are listed in CBSA policy for certain goods as prescribed under the Excise Tax Act.
The CBSA is also conducting verifications of vaping products, which are subject to both excise duties and taxes. Increases to the existing excise tax on vaping products, announced in the 2024 Federal Budget, took effect on July 1, 2024. Scrutiny of GST exemption codes and excise taxes may result in duty and tax liability for importers.
Import origin verifications
The CBSA has proposed origin-related verifications in relation to goods relying on preferential tariff treatment under the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) and the Canada-United Kingdom Trade Continuity Agreement. Importers relying on preferential tariff treatments available under Canada’s FTAs must ensure that the goods at issue meet the rules of origin under the applicable FTA. Importers of commercial goods are also required to furnish certificates of origin to the CBSA to support an origin declaration. Importers who fail to properly assess the origin of imported goods, or do not have the requisite supporting documentation, risk the CBSA withdrawing preferential tariff treatment and re-determining duties and taxes owing in respect of the non-originating goods at a higher duty rate. For example, goods that are determined to be non-originating under the CETA will be subject to most-favoured nation (MFN) tariff treatment.
Duties Relief Programs
The CBSA will be conducting verifications of licensees importing supply-managed goods under the Duties Relief Program (DRP), which relieves payment of duties at the time of import for goods that will be exported either in the same condition or after being consumed, expended or used in the processing of other goods. This compliance priority, coupled with the proposed verification of tariff classification of frozen desserts, signals a renewed enforcement effort by the CBSA to prevent spillage (e.g. DRP-imported goods entering Canadian dairy, poultry, and egg markets instead of being re-exported) within Canada’s tightly controlled supply management regime. This renewed enforcement comes at a time when Canada has expanded access to the Canadian dairy, poultry and egg markets through concessions to member states in FTAs (e.g. the USMCA and the CPTPP).
Most-Favoured-Nation (MFN) tariff treatment withdrawn from Russia and Belarus
In March 2022, Canada repealed MFN tariff treatment for Russian and Belarusian origin goods. Accordingly, importers are now required to account for Russian or Belarusian origin goods under the General Tariff (GT), which applies a 35% duty rate. The CBSA has proposed to verify importer compliance with the application of the GT in respect of imports of iron or steel products, fertilizer, petroleum, non-ferrous metals, and tires. Failing to properly determine the origin of imported goods, especially when there are Russian and Belarussian origin inputs used to manufacture an imported product, may result in a redetermination of origin and corresponding duty and tax liability for the importer caused by the application of the GT, instead of MFN.
July 2024 Update to FY24 Trade Verification Priorities
The CBSA updates its trade verification priorities twice annually (in January and July), alerting importers to the goods that will be subject to trade compliance verifications, which are historically focused on classification, valuation and origin.
The CBSA’s updated July 2024 trade verification priorities are as follows:
Tariff Classification
| Gloves | Harmonized System Number(s): Headings 39.26 and 42.03 |
| Bags | Harmonized System Number(s): Heading 42.02 |
| Spent fowl | Harmonized System Number(s): Heading 02.07, 16.01 and 16.02 |
| Freezers and other freezing equipment | Harmonized System Number(s): Heading 84.18 |
| Washers and dryers | Harmonized System Number(s): Headings 84.50 and 84.51 |
| LED lamps | Harmonized System Number(s): Heading 85.39 |
| Furniture for non-domestic purposes | Harmonized System Number(s): Headings 94.01 and 94.03 |
| Bicycle parts | Harmonized System Number(s): Heading 87.14 |
| Indicator panels and light-emitting diodes (LED) | Harmonized System Number(s): Headings 85.31 and 85.41 |
| Disposable and protective gloves | Harmonized System Number(s): Subheadings 3926.20 and 4015.19 |
Valuation
| Apparel | Harmonized System Number(s): Chapters 61 and 62 |
Origin
| Bedding and drapery | Harmonized System Number(s): Headings 63.01, 63.02 and 63.03 |
Business Takeaways
The CBSA has authority to make redeterminations in cases where there is a misapplication of CBSA procedures and programs, a tariff misclassification, or an importer has declared an incorrect value or origin. Redeterminations may create duty and tax liability to the Government of Canada. Importers may also be liable for interest on duties and taxes owing at the higher (specified) rate and may be subject to administrative monetary penalties (AMPs).
Importers of the goods listed in the CBSA’s July 2024 priorities should prepare themselves for a potential trade compliance verification in Q3/Q4 2024 and should consider undertaking an internal compliance review of their import transactions. The CBSA uses several tools to monitor and identify customs compliance issues, including initiating targeted verifications and issuing compliance notices such as trade advisory notices, compliance validation letters, and directed compliance letters.
Unlike the voluntary disclosure programs in other customs jurisdictions, once the CBSA has issued a notification letter initiating a trade compliance verification, an importer can no longer avail themselves of the CBSA’s voluntary disclosure program. If non-compliance is uncovered throughout the course of a verification, an importer may be subject to AMPs and interest at the higher (specified) rate.
