Throughout January and February 2023, Baker McKenzie’s Canadian international trade team will be publishing articles on Canadian trade compliance issues to watch in the year ahead.
This article is focused on customs updates and customs matters that we expect to develop over the course of 2023.
The Canada Border Services Agency (the “CBSA“) announced anticipated annual updates to the Customs Tariff and its trade verification priorities. It has also announce the implementation date for CARM Release 2 and typical administrative and statutory trade remedy proceedings. In addition to these developments, it is possible that in 2023, Canada may implement its proposed amendments to the Valuation for Duty Regulations, continue to scrutinize the apparel industry, and apply enhanced scrutiny of imports and exports to determine whether goods were manufactured by forced or child labour or are at high risk for sanctions circumvention.
This article addresses the following:
- Annual updates to the Customs Tariff
- Annual updates to the CBSA’s trade verification priorities
- Implementation of CARM Phase 2 in October 2023
- Use of trade defence instruments in 2023
- Proposed changes to Valuation for Duty Regulations
- Enforcement of Canada’s prohibition on importing goods manufactured with child or forced labour
January 2023 Customs Tariff
The CBSA announced the January 1, 2023 Customs Tariff in December 2022. The new tariff includes minor description changes in chapters 19, 20, 21, 23, and 73 and scheduled rate reductions within individual free trade agreements. The PDF version of the tariff indicates the changes using a change bar in the left margin of the PDF.
Importers should review the changes to the tariff to determine whether their imports remained properly classified. Importers holding tariff classification advance rulings from the CBSA with respect to goods classified in the above noted chapters should ensure that the rulings remain valid. The Customs Tariff will continue to be updated throughout 2023. Importers should ensure they are always reviewing the most recent version of the tariff.
2023 Customs Trade Verification Priorities
The CBSA has announced its audit (referred to as trade compliance verification) priorities for 2023. The priorities provide notice to Canadian importers of the products within the CBSA’s compliance crosshairs. New verification targets may be added throughout 2023.
The CBSA’s 2023 trade verifications are as follows:
Tariff Classification
- Spent fowl – Harmonized System Number(s): Headings 02.07, 16.01 and 16.02
- LED lamps – Harmonized System Number(s): Heading 85.39
- Furniture for non-domestic purposes – Harmonized System Number(s): Headings 94.01 and 94.03
- Batteries – Harmonized System Number(s): Heading 85.06
- Footwear ($30 or more per pair) – Harmonized System Number(s): Heading 64.03
- Parts of lamps – Harmonized System Number(s): Heading 94.05
- Cell phone cases – Harmonized System Number(s): Headings 39.26, 42.02 and 85.17
- Pickled vegetables -Harmonized System Number(s): Heading 20.01
- Gloves – Harmonized System Number(s): Headings 39.26 and 42.03
- Bags -Harmonized System Number(s): Heading 42.02
- Other mountings and fittings, suitable for furniture -Harmonized System Number(s): Heading 83.02
- Air heaters and hot air distributors- Harmonized System Number(s): Heading 73.22
- Flashlights and miners’ safety lamps – Harmonized System Number(s): Heading 85.13
- Parts of machines and mechanical appliances – Harmonized System Number(s): Heading 84.79
- Bicycle Parts – Harmonized System Number(s): Heading 87.14
- Parts for Use with Machinery of Chapter 84 – Harmonized System Number(s): Heading 84.31
- Indicator Panels and Light-Emitting Diodes (LED) – Harmonized System Number(s): Heading 85.31 and 84.41
- Safety Headgear (Round 5) –Harmonized System Number(s): Subheading 6506.10
- Disposable and Protective Gloves (Round 5) – Harmonized System Number(s): Subheadings 3926.20 and 4015.19
Valuation
- Apparel – Harmonized System Number(s): Chapters 61 and 62, with an emphasis on assists
Additionally, the CBSA has reminded importers that “Most Favoured Nation” designation that would typically apply to goods originating from Russia or Belarus has been eliminated. It appears that the CBSA may engage in enhanced scrutiny to verify the origin of goods that may originate in Russia or Belarus. Goods with Russian or Belarussian origin are now subject to a 35% duty under the General Tariff. Importers should be alive to the possibility of fraudulent origin declarations as a method of circumventing the high duties associated with the General Tariff.
As noted above, the apparel industry remains a valuation trade verification priority target in 2023. In August 2022, two important customs valuation cases[1] were determined by the Canadian International Trade Tribunal (the “CITT”), with opposite results. Both cases arose from CBSA trade compliance verifications of the value for duty of apparel imported into Canada. Going forward, importers should consider their compliance with Canadian customs law in light of these developments coupled with the pending amendments to the Valuation for Duty Regulations (outlined below).
If a CBSA audit uncovers compliance deficiencies, the CBSA has authority to re-determine the origin, tariff classification, value for duty or marking of an imported good at any time within four years of the time of accounting and release of imported goods. A re-determination results in the CBSA issuing a Detailed Adjustment Statement for unpaid duties, taxes, and interest. The CBSA also has authority to issue administrative monetary penalties by way of a Notice of Penalty Assessment. The CBSA’s Master Penalty Document provides further information on the CBSA’s tiered penalty structure where the amount owing by an importer correlates to whether an offence is reoccurring.
Phase 2 of Customs Accounting & Revenue Management Initiative Expected in October 2023
The CBSA’s Accounting and Revenue Management (CARM) project is being implemented in a multi-stage process. The program aims to modernize Canada’s customs accounting processes by moving away from manual processing, paper-based documentation, antiquated payment systems, and aging technology. The implementation of CARM will also align Canadian customs processes with its obligations under the USMCA and the World Trade Organization’s 2017 Trade Facilitation Agreement.
Release 1 was launched on May 25, 2021. Release 1 made available the new CARM client portal, a self-service tool, to importers, brokers, and trade consultants. Importers can now create and manage their accounts on the CARM client portal, which can be used to:
- classify goods and estimate duties and taxes;
- make secure credit card or pre-authorized debit payments online;
- delegate portal access to employees and third parties; and
- submit rulings requests and track their progress.
Importers should review the CBSA’s onboarding documents (available here) and commence the CARM portal registration process if they have yet to do so. Importers will need the following information to register for the portal: business number, program account identifier, legal name of the business, business address as registered with the Canada Revenue Agency, recent Form B3 transactions, Statement of Account balances, and the recent transaction payment amounts.
The CBSA announced Release 2 of CARM implementation in November 2022, with a proposed implementation date of October 2023. Release 2 will follow the implementation of proposed amendments to the Customs Act and Customs Tariff to: (i) support electronic communication between the CBSA and importers by removing certain in-person and paper-based communication requirements; (ii) update financial security requirements; and (iii) implement simplified billing cycles.
Release 2 will result in significant changes to the day-to-day customs clearance process, and corrections and adjustment processes. Release 2 will expand the functionalities of the CARM Client Portal to allow importers to:
- register for a business number and enrol in CBSA programs;
- obtain statements of account in real time;
- utilize harmonized billing cycles;
- utilize new offsetting options;
- submit an electronic commercial accounting declaration (CAD), which will replace the current custom coding (B3) and adjustment request (B2) forms; and
- submit appeals and track their progress.
A key change is that B3/B2 Forms will be replaced by an electronic CAD. On the CARM portal, importers will be able to create new declarations, view a list of submitted declarations, or create new temporary importations. Certain fields will prepopulate on the forms to expedite CAD filing. Importers will also be permitted to make interest-free changes to their electronic CADs during the “correction phase” – up until a payment due date. After a payment due date – the “adjustment phase”, an importer can make electronic changes to their CAD, but interest may accrue. The adjustment process, which currently takes 3 to 6 months may take only “minutes” using the CARM portal, which will allow importers to upload documents directly to the portal and communicate with CBSA officers.
Release 2 requires importers to obtain their own financial security to participate in the Release Prior to Payment (RPP) program. Importers will no longer be permitted to rely on a customs broker’s financial security. Importers will either need to post “cash security” (a one-time deposit held by the CBSA as a guarantee), a “customs bond” (provided by an approved financial security provider), or a “legacy security form” (additional forms of security may be available).
The CBSA began to release information on Release 2 at the end of November. CARM support materials, including recordings of CBSA-prepared webinars are available here.
Canada’s Trade Defence Instruments
We expect that the AD/CVD landscape will remain busy in 2023 with a number of either ongoing expiry reviews, or those scheduled to commence in 2023. The first expiry review was initiated by the CITT its earlier finding from May 2018 in NQ-2017-004 on Copper Pipe Fittings originating in or exported from Vietnam.
Anti-dumping and countervailing duty measures are in place for a period of five years, at which point the CITT and the CBSA are required by law to conduct an expiry review. The CITT investigates whether there is a likelihood of resumed or continued dumping or subsidizing (CITT) and the CBSA investigates whether a rescission of a finding would result in the continuation or resumption of dumping and/or subsidizing of the subject goods (CBSA). If the CBSA finds that such a likelihood exists, the second stage of the inquiry is triggered and the CITT will consider if continued or resumed dumping or subsidizing is likely to result in injury.
The measures in force scheduled to expire in 2023 are as follows:
- Line Pipe II (Expiry: January 3, 2023) – Notice given October 31, 2022
- Stainless Steel Sinks (Expiry: February 7, 2023) – Notice given November 28, 2022
- Copper Pipe Fittings II (Expiry: May 24, 2023) – Notice given January 16, 2023
- Liquid Dielectric Transformers (Expiry: May 30, 2023) – Tentative Notice on February 16, 2023
- Piling Pipe (Expiry: July 3, 2023) – Tentative Notice on March 23
- Wheat Pasta (Expiry: July 25, 2023)
- Steel Plate III (Expiry: August 8, 2023)
- Carbon Steel Welded Pipe II (Date: October 14, 2023)
- Seamless Casing (Expiry: November 27, 2023)
- Sucker Rods (Expiry: December 13, 2023)
- Cold-rolled Steel (Expiry: December 20, 2023)
In addition to the above expiry reviews scheduled to commence in 2023, the CBSA has initiated an anti-dumping and countervailing duty re-investigation on Corrosion Resistant Steel Sheet originating in or exported from Turkey or Vietnam. Re-investigations update normal values, export prices and amounts of subsidy, and may be initiated at any time. Interested parties (exporters, importers, domestic producers, unions, and foreign governments) can make representations to the CBSA to demonstrate a need for updated values, e.g. changing domestic selling prices; changing production and/or selling costs; changes to distribution channels, changes in market conditions; or changes in amounts of subsidy.
The CBSA has not yet initiated an investigation in 2023. The CBSA may self-initiate an investigation or initiate an investigation based on a complaint filed by a domestic industry. Although self-initiation is rare, it is not unprecedented. The CBSA self-initiated an investigation into concrete reinforcing bar from Oman and Russia in December 2020. While imported industrial and steel products are commonly targeted by Canadian AD/CVD investigations, consumer goods like upholstered furniture, plywood, and mattresses have recently been the subject of investigations.
With respect to AD/CVD enforcement policies, the CBSA recently announced revisions to the Special Import Measures Act Handbook (the “Handbook”), which are effective immediately. The Handbook is used by CBSA staff in administering Canada’s AD/CVD laws under the SIMA and its regulations and reflects the Trade and Anti-dumping Programs Directorate’s current policies and procedures. To obtain a copy of the Handbook, make a request by e-mail to: SIMA_Disclosure_and_Registry_Unit@cbsa-asfc.gc.ca.
Proposed Changes to Value for Duty Regulations
In June 2021, the CBSA held a consultation on proposed regulatory amendments to the Valuation for Duty Regulations (“Regulations”). The consultations followed a spring 2021 amendment to section 45(1) of the Customs Act, that is not yet in force, which introduces the term “sold for export to Canada”, which will later be defined by regulation. There has been no further information provided by the CBSA on the consultation. The potential amendments, if passed into law by Parliament will amend key legislative valuation provisions. In 2023, it is possible that the CBSA may publish a high-level summary of the public response to the consultation, or may publish draft regulations.
The proposed amendments target key terms of the Regulations, which may significantly alter how importers determine the value for duty of goods imported into Canada and how cross-border businesses arrange their Canadian operations and global supply chains. Namely, the amendments target the relevant transaction that constitutes a “sale for export” (the basis for determining duties and taxes owing under the Customs Act) and seek to clarify the definitions of “purchaser in Canada”, “resident” and “permanent establishment”.
The CBSA proposes that “sale” be construed broadly to include any type of transaction or arrangement that causes goods to be exported to Canada. The CBSA also proposes to circumscribe how a business may qualify as a “permanent establishment” under the Customs Act, limiting the ability of a non-resident importer to qualify by either importing goods for their own use or on speculation. The consultation followed a March 2021 decision by the Canadian International Trade Tribunal (CITT) where it held that a U.S. parent was carrying on business in Canada by way of a “dependent corporate entity”. The Customs Act and its regulations (as drafted at the time) did not preclude a non-resident importer from structuring a permanent establishment using a separate, dependent corporate entity.
Importers should anticipate further information on the proposed amendments and should begin to consider how the proposed amendments (as described in the consultation) may require restructuring of Canadian operations to avoid increases in the amount of duties and taxes owing on their imports into Canada.
CBSA Enforcement of Prohibition on Importing Goods Manufactured by Forced and Child Labour
In the coming weeks, we will provide an overview of Canada’s proposed Modern Slavery Act, Bill S-211, and the CBSA’s enforcement activities targeting goods produced with forced or child labour. Briefly, the first line of defence against the importation of goods manufactured with forced or child labour is at Canada’s border, where the CBSA has authority to verify the tariff classification of imported goods and re-determine that classification under the Customs Act.
Pursuant to the Customs Tariff, goods manufactured with child or forced labour are prohibited from importation into Canada and must be classified under tariff item 9897.00.00. CBSA policy provides that the re-determination scheme is the legislative tool in practice to enforce a ban on the importation of forced labour goods. To date, the CBSA is only reported to have detained, and then later released, one shipment of goods suspected to be manufactured with forced labour. Considering that the Customs Tariff was amended to reflect Canada’s obligations under the USMCA, it is possible that the U.S., which has detained tens of thousands of shipments on the suspicion of forced labour to date, may begin to apply pressure on Canada to ramp up its enforcement efforts of 9897.00.00.
[1] In August 2022, the CITT issued decisions in G-III Apparel Canada ULC v. President of the Canada Border Services Agency (AP-2020-028) dated August 22, 2022 and GBC Spyder Canada Holdings ULC v. President of the Canada Border Services Agency (AP-2019-033) dated August 2, 2022. In G-III, the CITT found that the relevant sale for export was between the Canadian affiliate and foreign apparel suppliers by way of a US affiliate buying agent. The CITT rejected the CBSA’s arguments that the relevant sale for export was between the US affiliate and the Canadian affiliate and the transaction value method was successfully applied to the impugned imports. In Spyder, the CITT held that the transaction value method did not apply to the impugned imports because there was no sale for export from the US parent to the Canadian affiliate, or between the US parent and Canadian retailers. The Canadian affiliate was not a “Purchaser in Canada” and the CITT applied a subsidiary valuation method.
