Direct sellers (also known as network sellers) enter the lucrative Canadian market, often without asking about relevant laws. Canadians sign up as independent sales contractors and start to build their sales networks before all questions are asked and answers are received. As a result, many direct sellers have not set up their computerized systems to comply with Canadian laws. Business in Canada increases exponentially, but compliance with Canadian laws is not addressed before audits commence.
Direct sellers should take steps to comply with Canadian laws before they are selected for an audit. We cannot cover all Canadian laws in this article, so here are the top 10 issues that we see on a regular basis when dealing with direct selling companies:
1. Provincial licenses: Most Canadian provinces require direct selling companies to obtain a provincial license to engage in direct selling to consumers. Find the links here: Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland/Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, Saskatchewan, Nunavut.
2. Health Canada approvals for products: Many products require Health Canada approval before they can be shipped to Canada. Depending on the product, different approvals may be required. With respect to cosmetics, manufacturers and/or importers must complete a Cosmetic Notification Form for each product before offering them for sale in Canada. With respect to natural health products, manufacturers and importers must obtain a Health Canada license for each product. If approvals have not been obtained, the Canada Border Services Agency may detain the goods at the border—and prevent future shipments by creating a lookout.
3. Safe Foods for Canadians Act: If an item shipped to Canada is considered food, restrictions in the Safe Foods for Canadians Act may apply. There are restrictions on non-resident importers importing food into Canada for sale to consumers. See Do food import businesses need an import license to import foreign food into Canada? for more information.
4. Goods and Services Tax/Harmonized Sales Tax: If sales will be made in Canada, it will be necessary to register for Canada's federal sales tax. The provinces of Ontario, New Brunswick, Nova Scotia, Newfoundland/Labrador and Prince Edward Island have harmonized their sales taxes with the federal GST. The direct seller will have to address many GST/HST issues, including: collecting the correct amount of GST/HST on invoices; filing GST/HST returns and remitting GST/HST collected from consumers; claiming input tax credits; and determining whether it is possible to become an approved network seller to use an Alternative Calculation Method relating to commissions paid to independent sales contractors.
5. Provincial sales taxes: If selling takes place in British Columbia, Saskatchewan, Manitoba or Quebec, it will be necessary to register to collect sales taxes in those provinces.
6. Decide who will be the importer of record if goods are shipped into Canada: This is an important decision. If goods are shipped direct to consumers, the consumer will be the importer of record. If the direct selling company is the importer of record, the company will have to obtain an importer number. Depending on which option is selected, there will be other issues to consider.
7. Tariff classification: When goods are shipped to Canada—even if they are shipped directly to a consumer—the correct Canadian tariff classification number must be provided to the CBSA. Based on our experience, insufficient time is spent determining the HS tariff classification number for goods shipped to Canada. Customs brokers do not always ask questions about the goods, resulting in the incorrect tariff classification being used.
8. Origin: Even if goods are shipped directly to a consumer, the correct origin of the goods must be provided to the CBSA. Just because the goods are shipped from the United States does not mean the United States is their place of origin. Often an analysis must be undertaken to determine the origin of the goods.
9. Valuation: When goods are shipped to Canada, it is necessary to report the value of each good to the CBSA. The CBSA is actively auditing direct selling businesses because errors are common when Canadian customs laws have not been reviewed prior to starting to sell into Canada. Often the manufacturer incorrectly uses the cost of the goods as the value for customs duties. The reason is that the direct seller does not want to limit sales opportunities in Canada because duties and taxes at the border add to the ultimate price paid by consumers. Providing the incorrect value to the CBSA can lead to large assessments of customs duties. The CBSA could assess the consumer as the importer of record—and this would be bad for future business. The correct valuation method will depend on how Canadian sales are structured. Valuation issues also arise with respect to replacement goods.
10. Labeling: Labels on goods sold into Canada may require both French and English on the labels.
Cyndee Todgham Cherniak is a lawyer and founder of LexSage