De Minimus Thresholds Under USMCA

Trade Update • July 11, 2019

Frequently highlighted by many as a positive outcome from renegotiation of the North American Free Trade Agreement, the new trade deal between the Canada, Mexico and the United States raised the so-called de minimus thresholds under which low-value parcels can be imported duty/tax free, usually with a simplified customs process.

What is de minimus?

De minimis is a Latin term that means a negligible amount. Canada’s current de minimus level is C$20 — a figure that has not changed since 1985 and is now one of the lowest in the world. By comparison, in France the figure for this type of exemption is €150 and in the UK it is £135. The U.S. raised its de minimus rate to US$800 from US$200 in 2016.

Changes in the USMCA

Under the new USMCA, Canada has agreed to increase its de minimus threshold for express courier shipments to C$150 for duties and C$40 for taxes. This exemption applies to shipments coming from almost anywhere in the world, not just the U.S. or Mexico.

Accordingly, when the new trade deal is ratified, an express shipment valued at C$149 will be able to enter Canada duty free but would be subject to the sales tax of the applicable province where the import is destined (in this example, approximately $17 to $22 in taxes, depending on the province). A package valued at CDN$39 would be exempt from both duty and sales tax.

In the USMCA, Mexico agreed to a US$50 de minimus tax-free threshold, and a US$117 level for tariff-free and simplified customs processing (the previous level had been 645 pesos or roughly US$34).

For its part, the United States agreed to a $100 threshold in the USMCA, but there are no plans to repeal the current level of $800 already established by U.S. law, so the much higher figure will continue to apply to purchases from Mexico and Canada, as well as the rest of the world.

Benefits to Importers

Advocates of the move to raise thresholds not only tout the obvious plus of making e-commerce purchases from U.S. retailers more affordable, but point to the savings government will experience from not collecting duties on small value shipments.

In this regard, they cite a 2016 C.D. Howe report found that the federal government spends four times more on enforcing duties than it takes in from them. The report (commissioned by eBay it should be noted) argued that raising the duty-free threshold would benefit consumers, businesses and the government.

Not Everybody’s Happy

Some Canadian business groups argue that raising the de minimus threshold gives an unfair tax advantage to foreign online retailers over Canadian businesses which have to charge sales of value-added taxes for small items while foreign sellers will be exempted.

Lobby groups such as the Retail Council of Canada fear that the change could result in a massive increase in cross-border orders with negative consequences for Canadian retailers that will have detrimental ramifications throughout the economy including job losses and decreased investment.

When Does It Take Effect?

Changes to the de minimus thresholds are entirely dependant on the USMCA being ratified by all three countries. While the trade agreement is not viewed as facing any serious difficulty being approved by either Canada or Mexico, its passage by Congress in the United States remains far from certain.

In accordance with “fast-track” legislation, the implementing legislation for the USMCA is considered a revenue bill and therefore House Democrats have control of the agenda for moving the bill forward. Presently, however, there are a number of divisions within the party over the trade deal with many lawmakers pushing to strengthen its enforcement, labour, and environmental commitments.

The USMCA ratification must happen this year in the U.S. or wait until after 2020 with an impending election season, which would move implementation into early 2021.

Need More Information?

If you have any questions or concerns about how this change, don’t hesitate to contact us – our trade experts are here to help.