Every importer wants to know how much it is going to cost to import goods into Canada. To answer this question, the importer needs to ask questions about (1) the H.S. tariff classification of the good being imported into Canada, (2) the origin of the good being imported into Canada, (3) the applicable tariff rate of the good being imported into Canada and (4) the value of the good being imported into Canada. SMEs and SMBs want to know the cost of engaging in an import business. Multi-national companies want to know the answer to this question as they establish an international strategy involving cross-border supply chains.
When looking at the valuation of the good to be imported into Canada, one of the most important questions that needs to be asked is whether the importer is a related person to the exporter, because customs will determine which valuation rule is applicable to imported goods based on that relationship, which may in turn affect the price of the goods. The Canada Border Services Agency assumes that related parties provide “inter-company” or “family” discounts to result in the payment of less duties (which are an unrecoverable cost). In other words, it assumes the price of the goods is not a “market price,” but rather an under-stated or an “influenced” price.
In subsection 45(3) of the Customs Act, “related person” is defined as follows:
“For the purposes of sections 46 to 55 [of the Customs Act], persons are related to each other if
- they are individuals connected by blood relationship, marriage, common-law partnership or adoption within the meaning of subsection 251(6) of the Income Tax Act;
- one is an officer or director of the other;
- each such person is an officer or director of the same two corporations, associations, partnerships or other organizations;
- they are partners;
- one is the employer of the other;
- they directly or indirectly control or are controlled by the same person;
- one directly or indirectly controls or is controlled by the other;
- any other person directly or indirectly owns, holds or controls five per cent or more of the outstanding voting stock or shares of each such person; or
- one directly or indirectly owns, holds or controls five per cent or more of the outstanding voting stock or shares of the other.”
This means it is fundamentally important to review the relationship between the person identified as the importer and the person who is identified as the exporter in order to consider and determine whether the parties are related to each other. If you make a mistake (or assume the transaction value method is applicable), this is where some significant reassessments can occur (and significant legal costs too).
Where companies have different names, the customs broker may not think to ask about the relationship between the importer and the exporter. Often shareholder and ownership information of private companies is not known publicly. Even with public companies, all the officers may not be identified.
Problems often arise when a foreign company incorporates a Canadian subsidiary. The foreign company wants to maintain control over the subsidiary and the directors of the foreign company are the directors of the Canadian subsidiary. The foreign shareholders do not want to hand over control to a Canadian person they do not know very well. When this happens the foreign company and the Canadian subsidiary would be related persons for customs purposes and this affects the valuation method that may be used.
For more information about the definition of “related parties” please see D-Memorandum D13-3-2 “Related Persons” and D-Memorandum D13-4-5 “Transaction Value Method for Related Parties.”
Is there anything wrong with related party transactions?
The short answer is “No.” However, the CBSA may scrutinize transactions between related persons in order to make sure that the Government of Canada is receiving the duty revenues it deserves.
Are related parties prohibited from using transaction value?
The short answer is “No.” However, the longer answer is “maybe.” If the relationship influenced the price paid or payable for the imported goods, then the transaction value cannot be used. One of the other five valuation methods should be used:
- The Transaction Value of Identical Goods Method;
- The Transaction Value of Similar Goods Method;
- The Deductive Value Method;
- The Computed Value Method; and
- The Residual Value Method.
Valuation methods are applied in hierarchical order. What this means is that an importer must first ask whether the Transaction Value method is applicable. If the goods can be valued using the Transaction Value Method, another valuation method cannot be used. However, if the Transaction Value Method cannot be used, then the importer must determine if the Transaction Value of Identical Goods Method can be used. If the Transaction Value of Identical Goods Method can be used (because the exporter sells the same goods to another person in Canada that is not related to the exporter), then the Transaction Value of Identical Goods Method must be used. If the Transaction Value of Identical Goods Method cannot be used, then the importer must determine if the Transaction Value of Similar Goods Method can be used. If the Transaction Value of Similar Goods Method can be used (because the exporter sells similar goods (not identical in all respects) to an unrelated party in Canada), then the Transaction Value of Similar Goods Method must be used by the importer, and so on. The Residual Value Method allows the importer to use some value derived from an imperfect application of the previous methods. The approach taken must be reasonable.
Cyndee Todgham Cherniak, Lexsage Professional Corporation