When a NAFTA refund claim isn’t a refund

Written by Paul J. Diamond GTM Governance, Canada

The Canada Border Services Agency (CBSA) and the Canadian International Trade Tribunal (CITT) have been at odds dating back to December 2012 when the CITT issued its decision in a case, allowing importers to apply provisions of the North American Free Trade Agreement after the one year statutory time limit had passed. This complex issue has come up again in recent CITT decisions and is still before the courts with no immediate resolution in sight. With some background and recommendations, importers can protect themselves from this disagreement between the two federal agencies.

The Canadian International Trade Tribunal is a quasi-judicial federal institution that, among other responsibilities, provides rulings on appeals of customs-related matters. It’s the federal department that provides a subsequent level of appeal after the CBSA, and its decisions establish a legal precedent. The next levels of appeal beyond the CITT are the Federal Court of Appeals and the Supreme Court of Canada, respectively.

Under section 74 of the Customs Act, importers can, in certain circumstances, claim a refund of duty within four years of accounting for those goods. However, under section 74(1)(c.1) any refund claims under the North American Free Trade Agreement must be made within one year of the date that the goods were accounted for with CBSA. On the other hand, section 32.2 of the Customs Act delineates the obligation of an importer to make any corrections (revenue neutral or revenue owing to the Crown) within 90 days of discovering the error. This legal obligation lasts up to four years after the goods were accounted for with CBSA.

In the event of an audit or review of an importer’s records, CBSA can make a re-determination on the value, tariff classification or origin of the imported goods within four years of the date of accounting. This can provide a dilemma for importers in the case where goods were imported and accounted for duty-free without the benefit of NAFTA and then, re-assessed by CBSA under an alternate HS classification in the Customs Tariff which attracts duty. If this re-assessment by CBSA occurs after the one-year statutory time limit for claiming NAFTA tariff treatment, the importer can be left with duty and interest payments on goods that were likely entered into their supply chain under a previous fiscal period with no ability to recover the amounts.

After a compliance verification audit in which the CBSA made a re-determination of the classification of goods imported by Frito-Lay Canada, the importer submitted entry adjustments under section 32 of the Customs Act for the purpose of correcting the HS classification as directed by the CBSA. In addition to the classification corrections, Frito-Lay Canada also changed the tariff treatment to reflect the duty free NAFTA tariff treatment under the premise that the entry adjustments were not refunds but rather revenue neutral adjustments. The CBSA initially rejected the entry adjustments and subsequently accepted the classification correction but not the application of the NAFTA Tariff Treatment, which resulted in duty plus interest owing to the Crown.

After exhausting their avenues of appeal to the CBSA, Frito-Lay Canada took their case to the CITT who in turn granted their appeal. While this should have been the end of the story, the CBSA disregarded the legal precedent established by the CITT ruling and disallowed all similar claims. In a series of three decisions, with the first decision being the Bri-Chem decision, the Canadian International Trade Tribunal affirmed their earlier decision in the Frito-Lay Canada ruling and characterized the actions taken by the CBSA as an “abuse of judicial process”.

The CBSA is appealing the Bri-Chem and other related CITT decisions to the Federal court of Appeals with an outcome expected by early 2017. If the CBSA’s appeal is unsuccessful, an appeal to the Supreme Court of Canada is expected. In the meantime, any importers who find themselves in a similar position have been instructed to submit their claims, which will be held in abeyance until this issue reaches its final resolution. Due to the complexity of this issue, consulting a customs expert is the best approach to ensure compliance and minimization of duty payment.

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