Importers Beware: Canada Border Services Agency Retroactive Trade Compliance Verifications

Most clients are unaware that customs compliance audits take place after goods have been imported into Canada and, of course, after they have cleared customs. In fact, compliance verifications usually happen well after the goods have been sold and delivered to market.

By: Didier Culat and Jean-Marc Clément of Clément Law Office

Why Is This Important to Know?

Because the retroactive duty assessments that are usually associated with these audits catch most importers by surprise and come as a total shock. Given that these assessments typically cover a 4-year import period, the amounts owed can be astronomical, even fatal to the business.

There are usually no early warning signals that a business can potentially face a large duty liability and any such liability generally goes unreported in their financial statements. Why? Because it is not something that controllers and CFOs have on their radar. Neither is it on the radar of their external auditors and thus falls out of scope of year-end tax audits.

That being said, twice a year the Canada Border Services Agency (CBSA) publishes a document entitled Trade Compliance Verifications, in which audit targets are divulged periodically. Some might think that by disclosing ahead of time the audit areas where CBSA will focus its attention is a very kind gesture. But this excitement will be short-lived: Once selected for audit the importer will quickly realize that the subject matter of the audit frequently contains a trap. CBSA is very selective when identifying audit targets: they usually pick areas where the legislative provisions are not so clear and constitute fertile grounds for disputes.

In the latest iteration of their Trade Compliance Verification targets, CBSA lists these areas as priority for them:

• Apparel and clothing accessories (customs valuation and tariff classification)
• Batteries (tariff classification)
• Dairy products (permits and quotas)
• Footwear (customs valuation and tariff classification)
• Furniture (tariff classification
• Machinery parts and components (tariff classification)
• Pasta (quotas)

There are more of course, the full document can be viewed here.

But remember, not all audit focus areas are mentioned in the document: for instance, importers of steel and aluminum products are routinely selected to determine whether their imports are subject to antidumping and countervailing duties. In the affirmative, CBSA will send assessment of tariffs that can frequently exceed 100% of the shipment value.

It might come as a surprise that CBSA actually does very little “verification” before an assessment is sent to the importer: it is usually conducted from a distance (i.e. desk-audits), the importer rarely has the opportunity to meet with the verification officer and present their case, few questions are asked and the responses provided are rarely discussed. CBSA’s position is that the importer has the onus of demonstrating compliance: failing that a presumption on non-compliance will be noted in the verification report and the importer will be told to take its grievances to the next level at the recourse directorate. From experience, importers don’t usually handle CBSA verifications very well: aside from the customary telephone call to the customs broker, little more is done to manage the customs audit process and protect the interest of the business.

The Bottom Line?

Importers are generally ill-prepared to face CBSA’s post-import compliance controls we have just discussed. It is only when an external customs and international trade specialist is tasked with performing a trade compliance readiness analysis that the business finds out where they stand. And the outcome of that analysis is not always bad news: trade compliance readiness mandates sometime reveal overpayments that can result in potentially meaningful refunds.