On April 19, 2021, the Federal Government of Canada unveiled its first budget in two years, promising over $100 billion in new spending intended to propel Canada's economic recovery from the COVID-19 pandemic. Part of the government's recovery plan involves a number of legislative amendments that will affect international trade and domestic trade within Canada.
This blog summarizes the budget items with the most significant potential impacts on Canadian and non-resident businesses engaged in international and interprovincial trade activity.
Customs Valuation, Transfer Pricing, and Cross-border Tax Measures
Value for Duty and Tax of Imported Goods
Budget 2021 proposes changes to the valuation of imported goods for customs duty and (cross border) Goods and Services Tax (GST) assessment purposes that target non-resident importer and multinational enterprise transactions. At present, the legal meaning of "sale for export" and "purchaser in Canada" may facilitate structuring of importation transactions resulting in lower than otherwise applicable values for duty (and therefore customs duties). In recent years, customs valuation disputes between importers and the Canada Border Services Agency (CBSA) have arisen frequently in the context of importations by foreign or multinational enterprises, in particular where an importation results from a series of international sale transactions among multiple parties.
Budget 2021 proposes to amend the valuation rules in the Customs Act to "ensure that all importers value their goods using the price in the last sale for export to a purchaser in Canada." The budget materials do not provide specifics about the proposed amendments, and it is not clear whether Canada intends substantive changes to the legislation or simply to clarify existing rules. These amendments could have significant impacts on the customs duty and GST liability of Canadian businesses, many of which are affiliates of foreign companies, and of foreign companies acting as non-resident importers into Canada to facilitate inbound trade. These importers should monitor developments in this area very closely and prepare for consequences and the development of coping strategies.
Modernizing Customs Procedures and Voluntary Disclosures
Budget 2021 promises additional support and legislative updates for an ongoing customs initiative known as the CBSA Assessment and Revenue Management system (CARM) to modernize and digitize import reporting and payment processes for commercial importers. CARM has been in development for several years. Some features of the new system are scheduled to be launched to the public this spring. The Government of Canada has signalled that it will amend the Customs Act and regulations to implement this initiative, but has not provided any further details.
GST/HST Registration for Non-Resident Digital Service Providers and E-Commerce Vendors
In its 2020 Fall Economic Statement, the Government of Canada announced its intention to extend the federal GST and Harmonized Sales Tax (HST) (as applicable depending on province) to sales of digital services, regular services delivered digitally, and e-commerce sales by non-residents into the Canadian market. Budget 2021 responds to comments received through a public consultation last fall.
Non-resident suppliers of digital products and services and non-resident vendors of tangible goods sold using e-commerce, whose sales to Canadian customers are expected to exceed C$30,000 per year, will be required to register for GST/HST. The proposal also applies to non-resident distribution platform operators, and to suppliers of short-term accommodation in Canada.
Under the proposal, a "simplified" GST/HST registration and remittance framework would apply to non-resident vendors and platform operators that do not have a permanent establishment in Canada. Distribution platform operators that ship goods from fulfillment warehouses in Canada will need to register under the normal GST/HST rules and collect and remit GST/HST in respect of sales of goods made by non-registered vendors fulfilled through the platform. For short-term accommodation rentals, either the property owner or the accommodation platform operator will need to register and non-residents would be eligible for the simplified registration framework.
Budget 2021 includes additional rules to protect platform operators from liability related to false information provided by third-party suppliers using their platforms. It also clarifies certain eligible deductions for non-residents under the simplified framework for debt write-offs and provincial rebates. Zero-rated products and services do not count toward the registration monetary threshold.
The above measures are proposed to come into force on July 1, 2021. For the first 12 months after implementation, the Canada Revenue Agency (CRA) will take a "practical" discretionary enforcement approach to help businesses transition to the new rules.
Digital Services Tax Consultation
The GST/HST registration proposal described above is separate from the Government's ongoing consultations regarding the imposition of a 3% Digital Services Tax (DST) on revenue earned in the Canadian digital economy. The DST would target large businesses (with global revenue of €750 million or more and revenue associated with Canadian users of C$20 million or more) that generate revenue based on data collected from Canadian users irrespective of where the business itself is located. The proposed DST is intended to be interim in nature while negotiations on a multilateral approach to digital services taxation are ongoing, and would apply beginning on January 1, 2022. Interested stakeholders are invited to submit comments to the CRA by June 18, 2021.
Transfer Pricing Consultation—Customs Valuation Implications
The Government plans to conduct consultations on Canada's transfer pricing and mandatory disclosure rules. The Department of Finance will release a transfer pricing consultation paper "in the coming months" on which stakeholders will be invited to comment. Multinational enterprises selling goods to affiliates in Canada should monitor any changes that might impact on whether they remain able to demonstrate that prices are not influenced by the relationship for customs valuation purposes.
Trade Protection and Free Trade Agreements
Consultation to Improve Trade Remedy Access for SMEs
Consistent with its focus on supporting Canadian businesses in economic recovery, Budget 2021 announces public consultations to strengthen Canada's trade remedy system, specifically as it relates to small and medium-sized enterprises (SMEs). While some government resources are currently available to support domestic producers who wish to bring a trade remedy complaint, assistance is limited and trade remedy complaints remain a highly technical, labour-intensive, and expensive undertaking for most SMEs. The consultation will explore possible amendments to the Special Import Measures Act (SIMA) and the Canadian International Trade Tribunal Act (CITT Act), but no legislative amendments have yet been proposed.
Clarification on Procedures for Selection of CUSMA Panels
Budget 2021 proposes to further clarify the selection process for trade remedy dispute panels under the Canada-United States-Mexico Agreement Implementation Act. Annex 10-B.1 of the Canada-United States-Mexico Agreement (CUSMA) sets out procedures for the creation of these panels under this trade agreement, which was a key 'ask' by Canada in the negotiations.
Investment in Procurement Opportunities
Citing a need to increase diversity in procurement, Budget 2021 proposes $87.4 million over five years starting in 2021-22, and $18.6 million ongoing to modernize the federal procurement system and diversify the federal supplier base. This proposal includes focusing on procurement opportunities for black-owned businesses and other equity-seeking groups, as well as pursuing reciprocal procurement policies whereby goods and services are only procured from countries that grant Canadian businesses a similar level of market access. How these proposals are implemented in light of Canada's existing international procurement commitments remains to be seen.
Regulatory and Enforcement Updates
Improvements to Anti-Money Laundering and Terrorist Financing Enforcement
Budget 2021 proposes to provide $4.6 million over four years, starting in 2022-23, and $0.6 million per year thereafter, to enable the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to increase its enforcement and compliance activities in regards to money laundering and terrorist financing. The Government plans to introduce amendments to facilitate reporting by financial institutions under the Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law), although specifics of such amendments have not yet been announced.
Through the CRA, Budget 2021 also proposes to address "legislative gaps" in the Income Tax Act regarding charitable status for organizations that may be involved in terrorist financing.
New Registry of Corporations’ Beneficial Owners
In recent years, both the federal and certain provincial governments have made legislative changes to require corporations to maintain and, in some cases, make available, information about their beneficial owners. Budget 2021 includes $2.1 million of funding to Innovation, Science and Economic Development Canada to support the implementation a publicly accessible corporate beneficial ownership registry by 2025. Making beneficial ownership information publicly accessible is not only a significant development for enforcement authorities, but also for the business and the investment community, as it will, among other things, impact available due diligence information.
Trade Control Enforcement
Budget 2021 references an incentive by the Government of Canada to improve import and export controls on sensitive goods and technology, including in particular trade in firearms and exports of military goods. The budget earmarks $38.2 million in new funding over five years and $7.9 million per year thereafter for improved trade control enforcement.
Supply Chain Integrity Support for SMEs
Budget 2021 pledges that the Federal Government will work with Export Development Canada to strengthen assistance for exporters to address "human rights considerations", which may lead to amendments to the Export Development Act. Canada has introduced new measures in recent months to combat forced labour and other human rights abuses in supply chains, but the enforcement policies and procedures for these new rules have yet to be elaborated.
Addressing Internal Barriers to Trade
Previous recent budget proposals have noted a goal of reducing barriers to interprovincial trade, such as the 2019 budget which removed all federal restrictions on the interprovincial trade of liquor. Counter-intuitively, in some cases foreign exporters have better market access to certain Canadian provinces under international free trade agreements than domestic vendors in other provinces.
Budget 2021 allocates $21 million over the next three years to "accelerate the reduction of trade barriers" within Canada. This includes creating a pan-Canadian internal trade database, and pursuing internal trade objectives through discretionary federal transfers to provinces and territories.
Budget 2021 is ambitious and contains a multitude of wide-ranging policy initiatives impacting trade. It is important to note that many of these items are proposals only, may not be adopted, and could change substantially through public consultation and parliamentary scrutiny. It is nonetheless prudent for Canadian importers and exporters, and non-residents who trade with Canada, to monitor Canadian policy and legislative developments that could have an impact on their cross-border business and plan for changes as more information becomes available.