International trade opens the door to a much wider variety of goods and services than people could get locally. Every country has goods and services that it can produce more easily, and by exporting these products to other countries, they can reduce manufacturing expenses and increase profits. Free trade agreements can reduce the barriers that prevent other countries from importing and exporting goods and services, but they do not necessarily eliminate all barriers. Canadian tariffs, or import duties, still apply to most goods and services that are imported. How do these tariffs impact Canadian importers and exporters? At Jeremy Scott Law, our experienced tax lawyers may be able to assist you in understanding when tariffs apply to you, whether you are eligible for tax credits, and whether sales tax applies to your imported or exported goods. Call (902) 403-7201 to schedule a consultation and learn more about how tariffs affect you.
What Are Canadian Tariffs?
Like most countries, Canada imposes fees on services and goods imported into Canada by Canada’s customs authority. These fees are called tariffs or import duties. Canadian tariffs are based on the World Customs Organization’s Harmonized Commodity Description and Coding System. Canada does have preferential tariffs for products coming from countries with whom Canada has a free trade agreement.
How Do Canadian Tariffs Affect Exports?
When Canadian goods are exported out of Canada, the exporter does not pay Canadian tariffs. However, the importer receiving those Canadian goods may pay tariffs in their country. However, this does not mean that tariffs do not affect Canadian exporters. If the goods or services the exporter is producing require imported goods or services to produce, the exporter will pay tariffs on the imported items. This increases the price of the finished product, and if that product is being exported, the tariffs in the other country will also increase the price of the finished product.
Most goods imported into Canada are subject to import duties. Additionally, for a limited number of goods, import licenses are required. Import licenses, combined with import duties, can also add to product cost. Import licenses generally apply only to poultry, eggs, dairy, some steel and aluminum products, and some textile and clothing items.
An Example of How High Tariffs Can Harm Trade
The Government of Canada offers an example of how high tariffs can do harm to trade between countries. On March 1, 2018, the United States announced their intention to start charging Canada a 25% tariff on steel imports and a 10% tariff on aluminum imports beginning June 1, 2018. Canada responded on May 31 by imposing their own retaliatory tariffs of the same amount on the same products beginning July 1, 2018.
In the two years prior to the implementation of these tariffs, Canada’s exports of steel and aluminum were on an upward trend. In the months between the announcement of the impending tariffs and their implementation, this growth increased by 22.6% for steel and 12.5% for aluminum. After the implementation of the tariffs, exports of steel fell by nearly 40% and aluminum fell by more than half. Canada’s imports of steel and aluminum from the United States were also on an upward trend in the two years prior to the tariffs, and also saw increased growth before the implementation of their own tariffs with a significant decrease after implementation. Both countries also saw these numbers rebound significantly immediately after the tariffs were lifted the following year.
How Did the Comprehensive and Progressive Agreement for Trans-Pacific Partnership Impact Canadian Tariffs?
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a trade agreement that Canada was one of the first six countries to ratify in December 2018. The CPTPP is a mega regional trade agreement involving eleven countries in the Asia-Pacific region. The agreement is significant not for what it may have done for Canada, but because it forms a regional trading bloc that makes up 13.5% of global gross domestic product (GDP) and 15% of global trade.
The CPTPP increased Canada’s trade with new CPTPP markets overall. The agreement also provides preferential tariff access to almost all goods, but only products with a positive (non-zero) most-favoured nation (MFN) tariff rate benefit from this. Already MFN duty-free goods do not benefit further. Both imports and exports saw an increase after the CPTPP was signed, though at this time, there is no clear indication that said growth was solely or specifically due to the CPTPP.
Do You Pay Sales Tax on Tariffs?
For most goods, Canada does require the importer to pay Goods and Services Tax (GST) or the federal portion of Harmonized Sales Tax (HST) on imported goods. Typically, this is collected at the time of importation. The Government of Canada requires the GST or federal portion of HST to be calculated based on the Canadian dollar value of the item, including duty and excise taxes. Importers who meet the requirements to claim input tax credits (ITC) may be eligible to claim an ITC for the sales tax they paid on imported goods.
While most goods imported into Canada are subject to GST or HST, there are two potential exceptions. These are non-taxable imports and GST/HST relief programs. Jeremy Scott Law may be able to assist with determining eligibility and applying for these programs.
Non-taxable Imports
Canada specifies some items as being non-taxable imports, which means that though they may still be subject to Canadian tariffs, they are not subject to GST or HST. Certain zero-rated goods that are specifically taxed at 0% in Canada are part of that list of non-taxable imports. An example of zero-rated goods would be prescription drugs.
Other items that are included on the list of non-taxable imports are tourist literature imported by specified organizations or the government for free public distribution, goods imported by or donated to a charity or public institution, warranty replacement parts and property supplied by non-residents at no charge other than shipping and handling, or most goods valued at $20 or less sent by mail or courier to an individual at a Canadian address.
GST/HST Relief Programs
The Government of Canada offers two GST/HST relief programs. One is the Export Distribution Centre Program (EDCP), which permits export-oriented businesses that are eligible to receive a certificate that allows them to import certain goods without paying the GST/HST. These businesses do not produce or manufacture goods and only add limited value to goods during their processing or distribution activities.
The second is the Exporters of Processing Services Program. This program offers GST/HST relief to eligible businesses who will export certain goods they acquired in or had imported to Canada. The relief is limited to goods imported solely to have services performed on them and those services must be provided by a GST/HST registrant to a non-resident.
How Can a Canadian Tax Lawyer Assist You?
Understanding Canadian tariffs, GST/HST taxes, and when each of these things must be paid can be complex, particularly for new or small business owners. A skilled Canadian tax lawyer can assist you in understanding how tariffs and sales tax apply to your business, apply for GST/HST relief, fill out and file tax forms, or communicate with the government during audits or if there are questions regarding your taxes. Call Jeremy Scott Law at (902) 403-7201 to schedule a consultation and learn more about imports, exports, and tariffs in Canada.