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customs duties

Canada Customs Duty and Taxes and Classification of Goods – Canada Customs Duty

Customs Duty is basically a tax or tariff on foreign goods being imported. The amount of duty on a particular commodity is based on the H.S. Code and the Tariff Treament applicable.

The H.S. Code is set under the Harmonized Description and Coding System as developed and agreed upon by the World Customs Organization. Almost all countries of the trading world belong to the WCO and the first 6 digits of the code are universal. The remaining 4 digits of a total of 10 digits that make up the HS Code can be unique from country to country. These codes, duty rates and tariff treatments available are listed in the Customs Tariff linked here for Canada.

The Customs Tariff identifies commodities by sections, 21 in all. Each of these sections is divided by chapters. Chapters are numbered 1-99 and have a heading based on type of goods or material/composition. i.e Section I is titled “Live Animals; Animal Products” and within Section I are chapters 1-5, chapter 1 being titled “Live Animals”, chapter 2 “Meat and edible meat offal”, and so on…

The key to classifying your goods correctly is to follow the “General Rules for Interpretation of the Harmonized System“. There are 6 universal agreed upon rules and 3 Canadian additions. You can read about the GRI linked here for more detail.
The most important rule in my opinion and one that many people get wrong is Rule number 1. That is …”classification shall be determined according to the terms of the headings and any relative section or chapter notes and, provided such heading or notes do not otherwise require, according to the following provisions…(goes on to rule 2).

The basic meaning of this rule is that you must classify according to the headings if one exists…the most accurate being the correct choice. So for example, if you purchased a hand made wool carpet while on vacation and had it shipped back to Canada and wanted to figure out how much duty would be owing on the item, you would not classify it as wool, or wool fabric. It would also be incorrect to try and classify it as just as wool carpet. A quick look of the headings under Chapter 57 for Carpets and Other Textile floor coverings would result in seeing that the chapter distingushes between “machine knotted” and “other” carpets when it comes to those made of wool. Thus, the correct description of which a heading exists is “carpets, or wool or fine animal hair, other” and the corresponding HS code would be 5701.10.90.00 with a duty rate (for the Most Favoured Nation Tariff 02) of 13%. Now, if the purchased carpet was manufactured in country that qualified for a Tariff Treatment like GPT (general preferntial tariff 09) i.e. Pakistan and you had either a certificate of origin or statement from the exporter in the prescribed format, then the duty rate is usually lower. So make sure to check to see if your goods qualify for a lower rate. It is suprising how many seasoned importers and brokers make this basic mistake.

Classifying correctly is key to paying the correct amount of duty and to avoid administrative monetary penalties (AMPS) or worse, seizure action of your goods and even criminal charges if the value for duty evaded surpass specific thresholds. In the event that you cannot find a classification that fits, you should request an Advanced Ruling. Here is the link on how to make such a request and here is a link for advanced rulings that have already been made. Check there before you request one.

The second key part to assessing duties and taxes is to understand Tariff Treatments (TT). The roughly 200 countries that are members of the WCO are assigned different TT by Canada. Canada also has trade agreements in place with specific countries that qualify for a lower rate of duty to no duty at all. I.e. with US and Mexico, Canada has NAFTA (North American Free Trade Agreement) which has eliminated duty on goods imported within the 3 countries. Canada also has free trade agreements with Israel, Costa Rica, Peru, Chile, Panama, Jordan, and European Free trade association (Iceland, Lichtenstein, Norway, and Switzerland). Just because there is a free trade agreement does not mean that all duties are eliminated. Some agreements cover only specific commodities and can be phased in over a period of time. A list of our free trade agreements and the details and what they cover is linked here.

Goods from countries with no free trade agreements with Canada but are a member of the World Trade Organization, by default, qualify for Tariff Treatment 02 or the Most Favoured Nation tariff (MFN). However, some goods from these countries can qualify for other Tariff Treatments which carry a lower rate of duty than MFN. For example TT 09 – GPT or General Preferential Tariff, can on certain commodities reduce the duty by a few percent or completely to zero. It varies from commodity to commodity. Linked here is page from the CBSA website with guides and forms for Tariff Treatments and Free Trade Agreements. And linked here is the list of countries and the applicable tariff treatments.

*Please note that goods that have import restrictions to Canada usually do not qualify for reduced duty rates under any TT and usually default to MFN and often require permits and have high duty or excise taxes associated. i.e Steel products, dairy, textiles, meat, etc.
*Also please note the requirements of the forementioned link for how origin of goods are determined and the required certificate of origin or statement from the exporter used as supporting proof to use a TT with a lower duty rate of the goods qualify.

So once you’ve figure out what HS classification code is correct, the origin of the goods and then what tariff treatment or free trade agreement applies you should usually use the ad valorum method of declaring the value to Customs…which is the final purchase price/cost not including freight/shipping charges (only from the where the goods left the foreign country and arrived in Canada). I.e.  Wool Hand knotted Carpets from Pakistan so TT 02 would have 13% duty associated but you have a certificate of origin from Pakistan so the goods qualify for TT 09 at lower duty rate of 10%. A savings of 3%! Which can add up if you are a commercial importer…but even if this a one time import, 3% can make a difference as Sales taxes are calculated based on what you purchased the goods for plus duty. So if the carpet was $1000, then duty would be $100 under TT 09 GPT and sales tax (GST/HST) is assessed on $1100.

If this is a personal importation than PST could also apply depending on province of residence. In Ontario and B.C. where the HST has come into force, the cost would be Duty and HST. If the import is a commercial import than only duty and GST would apply.

The only other tax that may an importer may incurr is Excise duty or tax. This is usually associated with Alcohol and tobacco. Check out this link here for the excise rates. Also, on importations of vehicle there is a $100 tax if your car has airconditioning and a green levy tax if its a gas guzzler…check out my previous post on importing vehicles for the details.

I hope this post helps clarify the duties and taxes on imported good to Canada. If you have any questions please post, tweet or email me.

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