Successful exporting to Canada: What businesses need to know

Exporting to Canada offer businesses a great opportunity to tap into new markets and expand their customs base. But there are rules to be respected, argues Peter Mitchell

Most companies who export goods to Canada transfer title and possession in their home country or in international waters and let their Canadian customer handle customs clearance. The customer acts as the "importer of record", arranging for release by the CBSA (the customs authority) and paying any duties and taxes owing.

Canadian Free Trade Agreements

Most of Canada's trade is with countries that are partners in free trade agreements, principally the United States, Mexico, the United Kingdom, Japan, South Korea, Israel, Singapore, Australia, New Zealand and the 27 countries of the European Union. Where goods being exported from those countries are dutiable under Canada's general MFN tariff schedule, the exporter's principal contribution is to ascertain whether the goods meet the Rules of Origin under the free trade agreement. If they do, the goods may usually be imported duty-free or, in certain cases, at a reduced rate.

The producer of goods within a free trade area has most of the knowledge required to support the certification of origin that allows the importer to claim preferential tariff treatment. The producer, or the exporter if that is someone other than the producer, may generally prepare and sign this certification. However, the exporter will often have to rely on information or certification provided by the producer. In some agreements, notably the USMCA, the importer may also sign the certification. However, the importer may do this only with full knowledge, much of which must come from the producer.

GST - Canadian VAT and Excise

Most commercial goods that enter Canada are subject to the federal goods and services tax (GST), the Canadian VAT. The current rate is 5% of the duty paid value. The major exceptions are certain basic groceries, prescription drugs and biologicals, medical and assistive devices and products of agriculture and fishing. The full list of exceptions may be found in Schedule VI and Schedule VII to the Excise Tax Act.

For most business inputs such as raw materials, capital equipment and goods acquired for resale, this GST is recoverable as an input tax credit. However, importers involved in certain businesses (for example financial services, rental of residential real estate, health care and education) may not be able to recover the tax, or may be able to recover only part of it.

Where the exporter acts as importer of record

When goods arrive in Canada, non-residents may act as an importer under substantially the same rules as residents. The essence of the system is that, shortly before a shipment arrives at the port of entry, the carrier reports it electronically to the CBSA on a "cargo control document", identifying the goods, the shipper and the consignee. When the importer receives the notification of this, the importer provides a customs declaration to the CBSA, either paying the duties and taxes or, more often, posting security and providing a final accounting and payment later. The CBSA matches the two documents and, if all is in order, it releases the goods, allowing the carrier to unload the cargo or proceed inland to its destination. The CBSA has the right to ask questions of the carrier and/or importer and to inspect the goods. The release is sometimes delayed until questions have been answered, and the goods inspected, to the CBSA's satisfaction. On occasion, the release is denied.

The importer is not a specifically identified person under the Customs Act, the way a taxpayer is under income and other tax legislation. Rather, the importer is the person who takes on the liability associated with having the goods released - known generally as the "importer of record". Anyone with a financial interest in the import transactions may generally do this. If the importer is not the owner, the owner at the point of release becomes jointly and severally liable.

GST is a challenge

Where a non-resident of Canada, typically the exporter, acts as the importer of record the most difficult issue is often ensuring that GST paid may be recovered as an input tax credit, where such credit is available. An input tax credit may only be claimed on a GST return filed by a "registrant". A registrant is required to collect tax on "supplies" (in general, sales) of goods and services made in Canada. A non-resident of Canada is required to register if it is carrying on business in Canada, or making supplies from a permanent establishment in Canada. Most non-resident importers do not reach these thresholds.

In most cases, a non-resident may register voluntarily for GST purposes. However, non-residents are generally reluctant to do this. They don't want to deal with the administration of collecting tax and filing returns, and they want to stay off the radar of the Canada Revenue Agency. Fortunately, there is another method for recovering the GST. Where the non-resident is not registered, the input tax credit may generally be claimed by the Canadian customer. However, the non-resident must provide evidence of payment to the customer - usually a copy of the customs accounting document. That document also discloses the customs valuation, which in some cases will be the non-resident's cost.

Getting help

Most non-resident importers hire a Canadian customs broker to deal with customs clearance and payment of duties and taxes. The broker will handle the customs declaration and be the initial point of contact for any questions or issues raised by the CBSA. The broker can also advise where other costs, such as excise taxes and duties or anti-dumping or countervailing duties, may be payable. For now, they may also provide to the CBSA the security that allows final accounting and payment to be deferred until after release. However, in the spring of 2022 all importers will have to begin providing their own security in the form of a bond or cash.

About the author

Peter is a Canadian customs and tax expert with many years of practical experience advising clients on how to enter and flourish in the Canadian and North American market. He is a customs and tax manager and Customs Manager Ltd is proud that he is contributing and assisting our customers and clients in supporting operations and optimisation strategies in Canada and the US. If you have any questions for Peter or which to schedule a meeting, e-mail: info@customsmanager.org