Trade Talk Blog W
hen it comes to importing goods into Canada, understanding customs valuation is essential for ensuring compliance with Canadian law. An accurate assessment of the value of imported items and proper duty preparation helps companies avoid significant financial penalties or even legal issues. However, many importers may not be familiar with how exactly customs valuation in Canada works.
We understand just how daunting it is for importers to understand how custom duties are calculated. That’s why in this post we’ll provide essential information about Canadian customs valuation and its components that every importer must know. We’ll delve into a comprehensive explanation of what customs valuation in Canada entails and how you can use it to ensure smooth importations that meet all applicable regulations.
The Customs Act
The Customs Act in Canada mandates that all imports be assigned a value for duty. This value for duty is the basis for calculating duty and taxes applicable to imported goods. The Customs Act’s valuation provisions are aimed at ensuring that imported goods are valued correctly and that importers pay the appropriate duties and taxes. The Act provides several methods for calculating the value of duty, such as transaction value and deductive value. Each of these methods has a specific calculation that importers must follow to determine the correct value for duty.
For instance, the calculation for the transaction value method involves the price paid or payable for the goods, adjusted for specific elements like transportation, insurance, and royalties. In contrast, the calculation for the deductive value method involves deducting a predetermined percentage from the selling price in the same country of export.
Duty declaration for imported goods
In Canada, irrespective of the origin and nature of imported goods, a value for duty must be declared by the importer in compliance with the Customs Act. The customs value, also known as value for duty, must be established based on the principles outlined in the World Trade Organization’s Valuation Agreement or the Customs Valuation Code.
The objective of this code is to guarantee that the value of all goods entering the country is determined using a consistent, impartial, and practical system that adheres to commercial reality. This ensures that the valuation of goods does not become a deterrent to international trade. Moreover, it prohibits the use of arbitrary or fictitious customs values, creating a fair, uniform, and neutral system for both importers and exporters. Consequently, the customs value for imported goods in Canada is a crucial element, subject to verification and assessment by the Canadian Border Services Agency (CBSA), to ensure the accuracy of the declared value for duty.
To comply with Canadian customs regulations, you must maintain thorough records to support your value for duty declaration. If documentation is requested, it is your responsibility to provide it for review, as outlined in Memorandum D17-1-21, Maintenance of Records and Books in Canada by Importers.
Under Section 152(3)(d) of the Customs Act, the burden of proof regarding compliance with the Act falls upon the party involved in the proceeding, rather than the Crown. Proper documentation may include commercial invoices, agreements, cost allocation schedules, proof of payment, or any other information that supports your value for duty declaration and calculations. More information about importer responsibilities and record-keeping can be found in Memorandum D13-2-1, Responsibility of Importers and/or Authorized Agents with Respect to Valuation.
When declaring the value of duty on imported goods to Canada, it is crucial to report the amount in Canadian currency. In the case of foreign currency, the value must be multiplied by the exchange rate that was in effect on the day the goods began their direct and uninterrupted journey to Canada. Refer to Memorandum D13-2-3, Exchange Rate for Calculation of Value for Duty Under the Customs Act for more details.
Finding the suitable valuation method for your imported goods
There are six valuation methods used when importing goods into Canada. The methods are applied in hierarchical order, with the exception of computed and deductive which may be applied in reverse order upon request of the importer.
- Transaction value
The primary method of valuation for imported goods sold for export to Canada is the transaction value method. This method is focused on the price paid or payable for the imported items. While applying this method, specific adjustments are taken into account for assessment.
- Transaction value of identical goods
This method entails determining the value for duty based on the duty applied to identical goods imported into Canada during the same time frame, where the transaction value was used to establish the value for duty.
Both the transaction value of identical goods method and the transaction value of similar goods method (explained in the next section) are similar in application. However, the two differ in the definitions of “identical” and “similar”. The identical goods method takes precedence over the similar goods method, and only if the transaction value method is not applicable.
The Customs Act’s subsection 45(1) defines “identical goods” as those that are the same in all respects, produced by or on behalf of the same person, and in the same country as the merchandise being appraised. Adjustments can be made to the customs value of the other identical goods to allow for trade level, quantity, and transportation cost differences with the goods being valued. The adjusted customs value of the identical goods is a suitable value for duty for the goods you’re importing.
To determine the value for duty of goods you’re importing under the transaction value of identical goods method, you base it on the value for duty of other identical goods that were imported to Canada at the same or substantially similar time and accounted for under the transaction value method. The Customs Act’s Section 49 outlines the specifics of this method.
- Transaction value of similar goods
In situations where transaction and identical goods methods are unavailable, it is necessary to rely on a predetermined value for duty calculation. The value pertains to related goods that fulfill specific criteria, including similarity in function, production origin, and commercial interchangeability. To qualify for this assessment, the value of goods should closely resemble that of the related goods.
- Deductive value
The deductive value method determines the value for duty based on the importer’s typical selling price per unit to Canadian customers at the first level of trade following importation. From this price, you can subtract commissions, profit, general expenses, transportation costs, Canadian duties and taxes, and costs for assembly, packaging, or further processing of goods in Canada. If not already factored into the deduction for profit and general expenses, costs incurred in Canada for warehousing, distribution, and delivery can also be deducted. To learn more about this method, consult with your regional CBSA Client Services office or refer to memoranda D13-7-1 and D13-7-3.
- Computed value
To determine the value of imported goods, the computed value method takes into account the production cost of the goods, as well as a normal profit margin and general expenses that would be incurred by a firm based in the exporting country when selling similar products to Canadian customers. Additionally, any assets that are not included in the producer’s costs are also factored in.
The use of this method relies on having in-depth knowledge of the production costs of the imported goods. Due to the sensitive nature of this information, it is generally only utilized by importers who have a relationship with the manufacturer of the goods. For further details on how to use the computed value method, please refer to Memorandum D13-8-1, Computed Value Method (Customs Act, Section 52).
When the value of your imported goods cannot be determined using the transaction value method or any of the four subsequent methods, the residual method of valuation must be used. Unlike the other methods, the residual method does not specify any exact requirements for determining the value for duty. Instead, you should reconsider the requirements of the first five methods in sequence and apply the method that requires the least amount of adjustment based on information available in Canada. The value for duty determined by the residual method must be fair and reasonable and reflect commercial reality. Memorandum D13-9-1, Residual Basis of Appraisal Method (Customs Act, Section 53), contains examples of how the residual method can be applied.
In the event that you want to use the computed method before the deductive method, you will need to address the regional CBSA Client Services Office in writing.
Value for Duty codes is an integral part of the customs clearance process for imported goods that enter Canada. The code is comprised of two digits, each of which has a specific meaning. The first digit signifies the relationship between the vendor and the purchaser―whether they are related or as per the definition under subsection 45(3) of the Act.
The second digit denotes the valuation method employed to determine the value for duty payable on imported goods. It is important to choose the correct Value for Duty code for each transaction line in Form B3-3 to ensure that the customs duty and taxes payable are correctly calculated. Importers should refer to Memorandum D17-1-10 for detailed guidance on the coding of customs accounting documents. By accurately and consistently applying the Value for Duty codes, you can avoid costly mistakes and delays in the customs clearance process.
Understanding customs valuation is important for anyone involved in the importing of goods. By taking the time to consider all avenues and ensure that your imported goods are classified correctly, you can ensure that you comply with the necessary rules and regulations. It is also essential to be aware of the Customs Act. By utilizing the correct customs value declaration, you can limit how much duty must be paid when moving goods through customs. With careful research and the use of best practices, selecting the right valuation method can make your import process more efficient!
How GHY Can Help You
At GHY, we are committed to helping you import your goods seamlessly, and our experienced team of customs brokers and concierges are ready to handle all your import needs. Book a meeting with one of our Trade Experts, we can help you understand the Customs Act and find the customs valuation method that suits your case―saving you time and money in the long run.
We also provide full-service solutions for managing, tracking, and filing all required paperwork associated with international trade. This ensures that all processes are handled efficiently and accurately so that your shipments arrive on time and comply with applicable regulations.