Darrel Pearson spoke at the Chartered Professional Accountants Canada's (formerly CICA) 40th Symposium on Commodity Taxation on the modern history of Canadian customs valuation law. He was part of a special panel that looked at defining moments that shaped, and are shaping, the sales tax world.
The following is a summary of his presentation:
- Canadian customs valuation is based on Canada's implementation of its international commitments, in the form of the WTO Valuation Agreement (often referred to as the Valuation Code), into domestic law. Canada has implemented the Valuation Code in several provisions of the Customs Act and Valuation for Duty Regulations.
- Countries party to a treaty may choose to deviate from its provisions by implementing different versions of the treaty. Our Courts play an important role in interpreting domestic legislation implementing treaties, and in particular the Valuation Code. The result of implementing different versions of the Valuation Code, and the interpretive role played by the Courts in Canada, is that Canada stands alone amongst its treaty partners on important questions relating to customs valuation.
- Canada stands alone on the test relating to dutiable royalty/license fees. Given Canada's dependence imported intellectual property, this is a very important deviation, for our economy, for the revenues collected by our government, and for the importer cost of access to intellectual property. As a result of this deviation, virtually no royalties are dutiable.
- Prior to 2001, the CBSA policy contemplated that virtually all royalties were dutiable, and did so notwithstanding that the Valuation Code and the Canadian Customs Act required that dutiability be predicated on the fees being paid as 'a condition of sale' for export (of the imported goods).
- In a landmark decision by the SCC, which I was fortunate to successfully plead for the Appellant, the Court rejected the CBSA position, and overturned previous CITT and Federal Court decisions that interpreted the phrase, 'condition of sale', as simply meaning that the royalty was payable as a result of 'some connection with' the imported goods. It was timely that the SCC had then recently issued a series of decisions requiring statutory interpretation be conducted through the lens of the persons to whom the statute applied. Thus, the SCC ruled that the phrase, 'condition of sale' had to be interpreted as would be understood in commercial terms, by business people regulated by the statute and regulations.
- In a commercial context, the phrase 'condition of sale' has a specific meaning commonly understood by persons conducting commerce. The SCC ruled for the Appellant, Mattel Canada, that license fees paid were not subject to duty because they had not been paid as 'condition of sale' overtly imposed by the vendor. In other words, they could not be imputed. The CBSA intuitive approach was rejected, and when I say intuitive, I mean it in the sense that the CBSA's interpretation was based on what it felt to be true even without conscious reasoning. The lens through which the Customs Act and Valuation Regulations was interpreted in Mattel and was to be interpreted in future cases, that is a commercial lens, became an important canon of Customs law, one that has given the CBSA fits over the years.
- Another example of where Canada stands alone is that its implementing law requires values for duty be appraised based on purchase prices by so called 'purchasers in Canada'. Memorable in this context is the 2004 case of Foster Grant decided by the FCA subsequent to Mattel. At issue was the interpretation of the phrase 'purchaser in Canada', and in particular what is meant by one of the defining conditions of purchasers in Canada, i.e., that it be 'carrying on business' in Canada.
- The CBSA again intuited, and the CITT approved, the notion that the purchaser in Canada cannot be 'carrying on business' as a 'real purchaser' of goods if it cannot sell those goods without the approval of its foreign parent, and does not show some control over its profits. The FCA adopted well established tax jurisprudence that a searching inquiry for 'economic realities' of a particular transaction can never supplant the Court's duty to apply an unambiguous provision of the Act. The Court established a second important canon for customs law: that it was improper to find unexpressed legislative intentions where the language is clear and unambiguous.
- Most recently this year, these canons of the commercial lens, and rejection of unexpressed legislative intentions, were reinforced by the Canadian International Trade Tribunal in a decision that has not been appealed by the CBSA, known as Delta Galil. The issue of the meaning of 'purchaser in Canada' reared its head again, this time in the context of one of its defined meanings, a non-resident permanent establishment. Again, I was fortunate to have had the opportunity to successfully plead this case for the Appellant.
- Taking into account these canons of interpretation and effecting a liberal approach to the meaning of permanent establishment, the Tribunal concluded that all that was required to be fulfilled by the non-resident importer, Delta Galil, for it to have a permanent establishment were the elements found in the Regulations: (i) a fixed place through which it (ii) carried on business in Canada. The Tribunal rejected the CBSA's intuitive approach again, examined the meaning of the phrase through a commercial lens, and refused to find unexpressed legislative intentions requiring the permanent establishment to lease its own space and have its own employees; rather, Delta Galil was found to be carrying on business by the employees and the leased premises of its (related) selling agent – the Tribunal found that the agent was dependent and fully controlled by the non-resident importer.
- The CBSA has decided to not appeal Delta Galil. Also, it has terminated several customs valuation trade verifications where the issue of permanent establishment might have been determinative. And it sits on pins and needles as at least one other appeal heard by the Tribunal relating to similar or related issues is to be decided. Instead, it seeks to transform the law by developing policies it intends to have Parliament and the Governor in Council implement by amending the Customs Act and Valuation for Duty Regulations. Faced with Canada's legal system, protected by our Courts, the CBSA is working on transforming its intuitions into law.