Transfer pricing has been a favorite Canada Border Services Agency (CBSA) enforcement target for some time now. Payments made by importers because of income tax transfer pricing requirements can trigger obligations and liabilities under Canadian customs laws. This arises, for example, when CBSA seeks to assess duties and taxes on upward transfer pricing adjustments and even on the payment of management and administration fees to related parties, claiming that these amounts should be properly accounted for as part of the value for duty of imported goods.

This week, CBSA released Customs Notice 15-001, “Treatment of Downward Price Adjustments in Value for Duty Calculations” (Notice) which, under certain specific circumstances, provides a pathway for importers to the claim a refund of customs duties on goods that have been imported and had their purchase price paid or payable (PPP) subsequently reduced. The new policy in the Notice, however, also makes it clear that in certain circumstances, importers of duty free items are now required to submit to CBSA adjustments reflecting downward price reductions occurring after importation.

CBSA’s Historical Treatment of Downward Price Adjustments

Up until now, the CBSA has generally refused to accept adjustments to value for duty of imported goods that resulted in decreases in PPP where the downward adjustment was made after the importation. In so doing, CBSA relied on paragraph 48(5)(c) of the Customs Act which requires that rebates or other decreases in PPP effected after the goods are imported be disregarded.

This approach created a perverse situation as transfer pricing adjustments that resulted in a higher PPP required an adjustment and increased the duties paid while transfer pricing adjustments that resulted in a lower PPP were ineligible for duty refunds. This inequity has long been an issue for related party importers; particularly considering that many of these reductions in PPP were the result of contractual mechanisms executed and in force prior to the goods being imported. It also appeared inconsistent with the approach taken by customs authorities in the United States.

More recently, CBSA also found its approach at odds with decisions of the Canadian International Trade Tribunal (CITT). As support for the change in policy, the Notice cites the CITT decision in Hudson’s Bay Company v. President of the Canada Border Services Agency,1 concerning the treatment of post-importation price reductions.

The Hudson’s Bay Company had been granted two discounts by its supplier. As the discounts were recorded after importation, the CBSA had denied the reduction in PPP when calculating the value of the imported goods. The CITT held that while the discounts were only applied post-importation, they were contracted for prior to importation and therefore not prohibited by paragraph 48(5)(c). Hudson’s Bay was not a transfer pricing case, but in making its decision, the CITT relied on its reasons in Jockey Canada Company v. President of the Canada Border Services Agency,2 an earlier case that explicitly endorsed the practice of allowing upward and downward adjustments to the value for duty of imported goods to reflect adjustments made for income tax transfer pricing proposes.

CBSA Adopts a New Methodology

CBSA issued the Notice on January 19, 2015 – it can be accessed at Under CBSA’s new policy, a reduction in PPP post importation can result in a refund under certain circumstances. In order to qualify for a reduction in duties payable, or a refund for duties paid, the agreement that triggered the reduction in the PPP must be entered into before the importation of the products and the agreement must be in writing. Importers will be eligible for a duty refund should the PPP on dutiable imported goods be reduced after importation in accordance with this prior written agreement. An importer with a qualifying reduction in PPP may file an adjustment and seek a refund of duties paid under paragraph 74(1)(e) of the Customs Act. Any such application must be made within four years after the goods were accounted for under the Act.

New Obligations

While the Notice provides great benefits to qualifying importers, it also presents a new set of obligations. If there is a reduction in the PPP post importation for a qualifying importer, the CBSA will take that reduction in PPP to be “reason to believe” under s. 32.2 of the Customs Act necessitating the importer to file a correction within 90 days. This new burden exists in situations where the net adjustment to value for duty results in duties payable to CBSA or is revenue neutral.

This is a new obligation for importers of goods goods subject to duty-free treatment. Under the old policy, it was not unusual for such importers to simply ignore downward adjustments to the PPP, as those were considered to be reductions in price that were to be disregarded under the paragraph 48(5)(c) of the Customs Act. However, with this change in policy, failure to file an adjustment in line with the changes to the PPP could create the potential for the imposition of Administrative Monetary Penalties.

The CBSA explicitly considers when “reason to believe” occurs in the context of a transfer price agreement between a vendor and a related purchaser. According to the new policy, CBSA takes the view that under a transfer pricing agreement, an importer has “reason to believe” that the PPP is incorrect “when the net total of upward and downward transfer price adjustments occurring in a fiscal period is identified.”

Next Steps

For importers, the next step is to get in front of the new obligations to take advantage of any refund opportunities as well as to address any potential exposure for failure to make adjustments for price reductions on non-dutiable imports. All importers should consider if they have an agreement that meets the criteria set out in the Notice, and if so, if they have any PPP adjustments across the year. This is particularly true of importers engaged in transfer pricing or who import goods on a duty free basis where the contracts for those goods contain provisions for price reductions.

Significant uncertainties with the Notice remain, including exactly what kinds of agreements to reduce the price of imported goods could trigger the obligation to file an adjustment and at what point CBSA considers the net total of upward and downward price adjustments to be “identified” and therefore triggering the obligation to file an adjustment. It is expected that at least some of the uncertainties will be addressed as CBSA updates its Departmental D-Memoranda to fully account for the changes in the Notice. The International Trade and Investment Group at McCarthy Tétrault will be monitoring the situation and providing updates as the new policy is implemented.