Determining the Valuation Method for Related Persons

Trade Talk Blog • November 1, 2021

hether you’re a small or large business, you will want to know the costs involved in importing goods into Canada before engaging in importing. And the first determinant of importing costs is reporting the correct value of your imported goods to the Canada Border Services Agency (CBSA). This article will help you understand the concept of related persons and its impact on determining the valuation method that best applies to your business.

We previously covered the basics of importing into Canada, which introduced the three pillars of importing: Tariff Classification, Origin, and Valuation. An essential component of importing, Valuation has many factors that affect the value for duty or the amount you should be reporting to CBSA. One of them is your relation to your vendor.

As an importer to Canada, are you related to your vendor?

This is one of the very first questions you will need to ask. The answer will help determine the best valuation method for your business and may affect your imported goods’ price because CBSA views related party transactions to influence the price of the goods. In simple terms, think of buying a sofa from your uncle’s furniture shop, where he offers you a family discount.

What is a related person?

According to subsection 45(3) of the Customs Act, and as outlined in CBSA’s Memorandum D13-3-2, 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.

How to identify a related person for valuation purposes

In determining whether a relationship exists or not, it is important to identify the parties involved in the transaction of the goods sold for export to Canada. You will want to identify two parties:

1. the purchaser in Canada (or importer), and
2. the vendor (or exporter).

In this case, the term importer is not to be confused with the Importer of Record for customs purposes, and the exporter is the party selling the goods and not just shipping them.

Identifying a relationship between the parties involved is not always obvious. Companies may have totally different names, ownership, shareholders, directors, board members, or officers. Ownership and shareholder information may not be public knowledge. And directors holding positions over both Canadian and foreign operations may not always be identifiable.

You can find more information about related parties in D-Memorandum D13-3-2: Related Persons.

Which valuation method can related persons use?

The primary valuation method for imported goods is the transaction value method, as stipulated in CBSA’s D-Memorandum D13-4-5: Transaction Value Method for Related Parties. However, to be able to use this valuation method, you will need to meet the following criteria:

• There is a sale for export to Canada
• The price paid or payable can be determined
• There is a purchaser in Canada

Even if you meet the criteria to use the transaction value method, you can not use this method where a relationship exists between yourself (the purchaser) and the vendor that has influenced the price paid or payable. Paragraph 48(1)(d) of the Customs Act provides two options for establishing the acceptability of the transaction value method:

• By examining the circumstances surrounding the sale to determine whether the relationship influenced the price; or

• By the importer demonstrating that the price closely approximates a “test value”.

Having said that, what proof will CBSA accept? You must prove that the relationship between you (the importer or vendor) and the other party (the exporter or purchaser) had no effect on the selling price of the goods. Supported by source documentation and factual evidence, you will need to demonstrate how the price was established, that the price is not significantly different from the price that would have been charged to an unrelated purchaser, and that the price covers all costs including profit to the vendor.

However, Canadian legislation does not provide details about the information needed to establish that the price paid or payable was not influenced by the relationship between related parties.

Alternate valuation methods for related persons

If the relationship has influenced the price paid or payable, then one of the following valuation methods must be used:

• Value of Identical Goods Method;
• Transaction Value of Similar Goods Method;
• Deductive Value Method;
• Computed Value Method; and
• Residual Value Method.