CBSA Proposes "Last Sale" Rule for Customs Valuation

May 30, 2023

Written By Jessica Horwitz, Darrel Pearson, Sabrina A. Bandali, George Reid and Ethan Gordon

The Canada Border Services Agency (CBSA) is proposing to fundamentally change Canadian customs valuation rules in draft amendments to the Valuation for Duty Regulations, (SOR/86-792) (VFD Regulations) published on May 27, 2023. The stated purpose of the draft amendments targets the valuation of goods by non-resident importers (NRIs) by valuing goods based on the "last sale" in a series of transactions resulting in the importation of goods into Canada, but as drafted, the amendments will also affect Canadian resident importers.

The draft amendments, if adopted in their current form, will cause an increase in declared values for duty and consequently amounts of customs duties and GST payable when goods are imported into Canada. If the importer—resident or non-resident—has agreed, prior to importation, to sell the goods to a customer in Canada, the importer must use its selling price rather than its purchase price as the basis for the value for duty. The amendments will also affect the costs of wholesalers, retailers, and e-commerce sellers.

A consultation period for the public and stakeholders to comment on the proposed amendments ends on July 26, 2023. The consultation notice and draft amendments are available here.

In Canada, most imported goods are valued for customs purposes using the transaction value method, which is based on the price paid or payable in the "sale for export" of the goods to a "purchaser in Canada". "Sale for export" is not defined in the Customs Act or VFD Regulations, but the Supreme Court of Canada in Mattel (2001 SCC 36) interpreted it to mean the sale by which title to the goods passes to the importer. The phrase "to a purchaser in Canada" is a Canada-specific requirement that is not present in the transaction value language contained in Article 1 of the WTO Customs Valuation Agreement or of treaty implementing language of any other WTO member. "Purchaser in Canada" is currently defined in the VFD Regulations as: (a) a resident, an entity the management and control of which is in Canada; (b) a non-resident with a permanent establishment, which is a fixed place of business through which the person carries on business, or (c) a person who is neither (a) nor (b) and who imports the goods for their own consumption in Canada, or for sale if the person has not entered into an "agreement to sell" the goods to a Canadian resident before the purchase of the goods (i.e., importation of inventory on speculation of future sales).

The Regulations Amending the Valuation for Duty Regulations, published for comment on May 27, 2023, will fundamentally change these concepts. The proposed amendments overturn the rule from Mattel that identifies the relevant "sale for export" based on timing of title transfer, and repeal entirely the current definition of "purchaser in Canada". The effect will be that neither title transfer nor the residence/permanent establishment of the purchaser will be factors in establishing the correct value for duty. Instead, the amendments would cause valuation to be based on the "last sale" price in what is effectively the transaction (defined as any of agreements, understandings or arrangements—i.e., not necessarily a sale or an agreement to sell) that causes the importation in Canada. These changes will have a significant financial impact on a wide variety of businesses, particularly multinationals that import into Canada through a Canadian subsidiary or that sell imported goods using a Canadian branch or dependent agent.

The key proposed provisions are as follows:

2.01 (1) For the purposes of subsection 45(1) of the Act, sold for export to Canada means, in respect of goods, to be subject to an agreement, understanding or any other type of arrangement—regardless of its form—to be transferred, in exchange for payment, for the purpose of being exported to Canada, regardless of whether the transfer of ownership of the goods is completed before or after the goods are imported.

(2) If the goods are subject to two or more agreements, understandings or other types of arrangement described in subsection (1), the applicable agreement, understanding or arrangement for the purposes of that subsection is the one respecting the last transfer of the goods in the supply chain among the transfers under those agreements, understandings or arrangements, regardless of the order in which the agreements, understandings or arrangements were entered into.

2.1 For the purposes of subsection 45(1) of the Act, purchaser in Canada means, in respect of goods that are the subject of an agreement, understanding or any other type of arrangement referred to in section 2.01, the person who, under that agreement, understanding or arrangement, purchases or will purchase the goods, regardless of whether the person is the importer of the goods or when the person makes payments in respect of the goods.

The stated policy goal of the amendments is to establish a "level playing field" by eliminating what the CBSA characterizes as an unfair advantage to intermediary NRIs. According to the CBSA, some NRIs are able to declare a lower value for duty than Canadian importers by valuing imported goods based on their acquisition cost even though their Canadian resident customers/end users pay a higher price for the same goods. As drafted, however, the proposed amendments are not specific to NRIs, and will impact any importers that resell goods commercially to customers in Canada—including resident businesses—where the subsequent resale is agreed to prior to importation. The CBSA argues that the proposed amendments align with the WTO Customs Valuation Agreement and the practice of trading partners such as the EU and other WTO members, although not the United States which maintains a "first sale" valuation rule in certain circumstances.

The timeline for implementation of these amendments has not been identified by the government, but the entry into force is to be coordinated with the upcoming entry into force of other Customs Act amendments in the Budget Implementation Act, 2021, No. 1 (S.C. 2021, c. 23), which specify, among other changes, that the term "sold for export to Canada" will be defined by regulation.

All businesses that import goods into Canada, and particularly those that import goods for resale to other customers in Canada, should review the proposed amendments with experienced Canadian customs counsel to assess the potential impact on their dutiable values. Interested stakeholders are encouraged to provide submissions in response to the CBSA's consultation before July 26, 2023.

The Bennett Jones' International Trade & Investment group has industry-leading expertise in Canadian customs valuation matters. Please contact Darrel Pearson, Sabrina A. Bandali, George Reid or Jessica Horwitz to discuss how these proposed measures could impact your business.

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