Agreements and Rules

All importers and exporters need to be aware of the trade agreements that affect their international transactions. If you do business in a way that violates such an agreement, you may become embroiled in legal difficulties with the Canadian government, with foreign governments or with international dispute settlement bodies. Such problems can be expensive to resolve and can lead to penalties such as heavy fines or the loss of access to foreign markets.

Canada is a member of the World Trade Organization (WTO), an international body that facilitates market access through trade agreements negotiated between member states. More than 150 countries belong to the WTO, and the agreements established under its umbrella cover goods, services, intellectual property, subsidies, countervailing measures and dispute settlement—in short, most of global trade.

WTO trade agreements are distinct from regional free trade agreements (FTAs) such as the North American Free Trade Agreement (NAFTA). These regional FTAs require deeper commitments by the countries involved, but can offer better benefits than WTO agreements, such as lower tariff rates for the participating nations. For example, the WTO most-favoured-nation tariff on potatoes entering Canada is 8 per cent, but potatoes from NAFTA partners enter duty free.

Free trade agreements (FTAs) cover many of the aspects of trade across international borders. Once Canada enters into an FTA, Parliament enacts implementing legislation so that the provisions of the FTA are adopted into Canadian law. This implementing legislation, in the form of trade rules and regulations, is what ultimately affects your import and export operations.

FTAs are intended to open up markets, reduce trade barriers and help build relationships among buyers, sellers and investors. If you misapply the provisions of an FTA, however, it can be expensive and time-consuming to extract your company from the resulting difficulties. Your best approach is to understand your rights and obligations before engaging in international trade, and to consult legal professionals about the potential compliance risks to your company.

If you’re thinking of operating in another market—for example, by setting up a manufacturing affiliate abroad—you should be aware that environmental and labour regulations are now enshrined in many FTAs. You’ll have to abide by these regulations when operating in the foreign market; if you don’t, your company may face penalties under the provisions of the FTA.

Intellectual property (IP) rights include copyrights, trademarks, patents and industrial designs. Canada is a member of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which establishes common rules and minimum standards for protecting IP rights. The WTO web site has extensive information on TRIPS.

Canada has also signed the Berne Convention for the Protection of Literary and Artistic Works, an international agreement that requires its members to recognize the copyrights of authors in other signatory countries. This means that once you protect your copyright in Canada, this protection extends to other countries, provided they’ve signed the Berne Convention.

Note that while copyright exists automatically on the creation of an original work, registering a copyright provides evidence of this ownership and, if necessary, can help establish it in court. You can register your copyright through the Canadian Intellectual Property Office (CIPO), which also provides a useful online guide for exporters.

Trademarks, patents and industrial designs, however, must be protected on a territorial basis—unlike copyright, you do not gain international protection by registering your IP with the CIPO. Instead, you have to protect these types of IP by registering them with the appropriate authorities in the countries where you are doing business.

Trademarks can also be protected internationally through the Madrid Protocol, which is administered by the World Intellectual Property Organization (WIPO). The Hague Agreement Concerning the International Deposit of Industrial Designs, also administered by the WIPO, will allow you to use a single application to register an industrial design in a number of countries simultaneously.

If your company possesses valuable IP, it is very much in your interest to comply with international IP-protection rules. If you don’t, your assets will be vulnerable to misappropriation, which could cost you heavily in lost income and missed business opportunities.

To help deal with frequent cholera outbreaks in his native India, University of California scientist Dr. Ashok Gadgil developed an effective, low-cost water treatment system using ultraviolet light. Although the objective was to provide the technology cheaply to low-income populations, Dr. Gadgil decided to patent the technology in order to keep less-effective copies out of the market.

The invention was patented using the international Patent Cooperation Treaty, which provides protection in the United States, the EU, Africa, Eurasia and many other countries. With IP protection in place, Dr. Gadgil gave an exclusive licence to a U.S. company to manufacture and distribute the product. It is now in use in more than 15 countries, including India, Mexico and the Philippines.

Canada is a signatory to the Treaty on the Non-Proliferation of Nuclear Weapons and to the Chemical Weapons Convention. To comply with these international agreements, the federal government has established trade control mechanisms through the Defence Production Act and the Controlled Goods Regulations.

Any business in Canada, if it is in a position to examine, possess or transfer any controlled goods or technology that falls under these regulations, must register with the Controlled Goods Program (CGP). CGP registration is also required before you can obtain export permits for controlled goods. It is an offense to ship such goods abroad without these permits, which are issued by the Department of Foreign Affairs, Trade and Development.

Failure to comply with the Controlled Goods Regulations can result in fines of $25,000 to $2 million and/or imprisonment for up to 10 years.

International business disputes can occur because of differences between Canadian laws and the laws of your customer’s market. In any import or export deal, consequently, you must clearly understand which country’s laws govern the transaction. This will reduce your risk of non-compliance.

The best way to specify the governing law of a transaction is through the sales contract, which should be reviewed by qualified legal counsel before it goes into effect. The contract should:

• establish the legal system under which the provisions of the contract will be interpreted;
• ensure that a suitable translation will be provided if the contract is not in English (or French, if applicable); and
• specify whether the translation or the original of the contract will prevail if a dispute arises.

In 2003, Canada, the United States and Argentina launched a WTO complaint against the European Communities (EC), alleging that the EC was unfairly blocking genetically modified organisms (GMOs) from the three countries. The complainants argued that GMO-based products should be treated the same as non-GMO products.

The EC argued that restrictions were justified because little was known about the long-term effects of GMOs. In 2006, the WTO rejected this argument and ruled in favour of the complainants. The WTO panel agreed that the EC rules were not based on scientific evidence and created a de facto ban. The EC was ordered to change the rules affecting GMO imports; as of mid-2013, however, the dispute had not yet been completely resolved.

For Canadian companies doing business internationally, some of the most important trade rules pertain to the classification and valuation of the goods they import or export. These rules are crucial because they are used to establish the value of the imported or exported products, and thus the fees, duties and other levies that must be paid when they cross international borders.

Almost all internationally traded products are classified according to the numeric codes set out in the Harmonized Commodity Description and Coding System, commonly called the Harmonized System (HS). The primary purpose of the HS is to help customs authorities and businesses determine the rate of duty for imported or exported products.

A product’s HS classification is indicated by its HS code. Basic HS codes have six digits and collectively define about 5,000 commodity groupings covering some 98 per cent of international trade. Many countries add two or more digits to reflect more detailed product descriptions, but the core HS description is always based on the six-digit code. All imported and exported goods must have HS codes before they can cross international borders.

Because HS classifications are internationally standardized, governments also use them in areas such as freight tariffs, quota administration, rules of origin definitions and trade statistics.

Assigning the HS classifications and codes to the products you import or export will help you identify the tariffs that apply to them. Getting this right is vital to reducing your risk of non-compliance.

The most important basis for the proper classification of a product is your own knowledge of the merchandise. Unfortunately, HS product descriptions often diverge drastically from the terms in everyday use—an electric toothbrush, according to the HS, falls under the classification of “electro-mechanical domestic appliances, with self-contained electric motor, other than vacuum cleaners of heading 85.08.” Determining the correct classification can thus be a long and complicated task for non-specialists, which is why many companies let their customs brokers handle it.

The Canadian Border Services Agency (CBSA) provides extensive information about the HS on its Customs Tariff page. This page has a link to current Customs Tariff data, which covers all HS classifications and their associated codes.

If you’re importing a product, you must ensure that its HS classification complies with Canadian requirements—don’t assume that the vendor-applied code is in compliance, since different countries have different interpretations of what is covered under the same HS code. Because classification can be very complex, the CBSA offers an advance ruling service that will tell you whether the HS code you intend to apply to the imported product complies with Canadian rules.

Conversely, before you export a product for the first time you should verify the HS classification of the product in your destination country with your customs broker. If you get the classification wrong, your product may be stopped at the border until you correct the problem, and you may not get the shipment to your customer on time. If there’s any uncertainty, you should obtain an advance ruling from the destination country’s customs authorities so you can assign the correct classification to the product.

For more information about obtaining advance rulings from Canada, the United States and Mexico, refer to the Advance Ruling Procedures section of the U.S. Customs and Border Protection web site.

The United States Court of International Trade ruled that an importer of certain LCD panels was liable for civil penalties because it did not exercise reasonable care with respect to classification. The company’s counsel had advised it to seek an advance ruling from U.S. Customs and Border Protection in light of a court decision classifying other types of LCD panels under the classification 9013.80.70. The company did not do this and improperly continued to classify its panels under the classification 8531, which carries a lower duty rate. This made it cheaper for the company to import the panels, but the court-ordered penalty for its non-compliance far outweighed the savings.

Valuation is the process of determining and declaring the proper value for duty (VFD) of a product. The rate of duty (which is set by the HS classification) is applied to the VFD to calculate the duty payable on the product.

Getting the VFD right is essential for accurately calculating the landed costs of your imports and the duties payable on them, and consequently for reducing your risk of attracting customs penalties. If you create a document describing how and why your company uses a particular valuation method for its imports, you can use it to support your position if authorities challenge your VFD approach. For more information, refer to the Valuation page on the Canadian Border Services Agency (CBSA) site.

Although establishing a product’s VFD is not precisely the same as determining its price for domestic taxation, the two processes are closely related. You should work with both taxation and trade compliance authorities when considering either issue.

The World Trade Organization (WTO) Customs Valuation Agreement, as described in the Customs Valuation section of the WTO web site, establishes the valuation methods for most international trade. The primary method, and the one most often used for imports into Canada, is the transaction value method. With this method, the value for duty is based upon the transaction value, which is the price actually paid for the goods, subject to additions and/or deductions such as transportation costs and customs fees. In cases where the transaction value method can’t be used, the WTO Agreement provides alternatives, such as the deductive value method and the computed value method.

There are limitations to the use of transaction value method if goods are traded between related parties, as defined by the Related Persons Memorandum (PDF) published by the Canadian Border Services Agency (CBSA) (PDF). You can, however, use this method under the conditions given in the Memorandum on Transaction Value Method for Related Persons (PDF).

The CBSA publishes several other documents that cover valuation information, including a range of interpretive memos on valuation, a Step-by-Step Guide to Importing and a Customs Valuation (Purchaser in Canada) (PDF) document. The WTO’s Handbook on the WTO Customs Valuation Agreement is another valuable guide. For US.-related information, you can consult the U.S. Customs and Border Protection Agency’s Customs Value (PDF) documentation.

You must maintain complete records to support your value-for-duty declarations and keep them available for review by the Canadian Border Services Agency for six years. The burden of proof in any question relating to compliance lies with you. Penalties for inaccurate or incomplete records can be severe and include fines, detainment of goods and denial of preferential tariff treatment.

Acceptable documentation includes invoices, agreements, cost allocation schedules, proof of payment and other data that supports your duty declarations. All values must be in Canadian currency and you must use exchange rates that were in effect when the goods began their journey to Canada. For more information, refer to record maintenance (PDF), reporting regulations in Canada, and exchange rate calculation.

Rules of origin help determine whether an exporting country has “preferential access” to the markets of another nation. If it does have such access, its goods (or some of them) attract lower duties in the destination market than the same goods from a third country. This is a competitive advantage for the exporting country.

If you want to take full advantage of a preferential-access situation, you’ll need a good understanding of how rules of origin work. Depending on how they apply to your goods, your exports to a particular market may attract import duties that range from zero to several hundred per cent. The level of duty will obviously affect the cost of your goods in the foreign market, and thus your ability to compete within it.

There are many sources of information about rules of origin. Some of the major ones are:

• Canadian Society of Customs Brokers
• The Origin Institute
• World Customs Organization Rules of Origin Handbook (PDF)
• Rules of Origin in Canada’s Free Trade Agreements
• NAFTA Certificate of Origin (PDF)
• NAFTA Rules of Origin Memorandum (PDF)
• NAFTA Verification of Origin Questionnaire (PDF)
• NAFTA Rules of Origin Regulations

Rules of origin are set out in specialized trade agreements known as preferential trade agreements (PTAs) that countries establish among themselves for trading purposes. Each PTA has its own rules of origin and, at present, there are nearly 400 such agreements in effect around the world. NAFTA, for example, is not only a free trade agreement; it also functions as a PTA covering Canada, the United States and Mexico.

Most global trade uses the most-favoured-nation (MFN) tariff rates negotiated by members of the WTO. However, a country may be able to obtain better-than-MFN rates for its exports if it negotiates a PTA with another nation. Since Canada has a PTA with Colombia, for example, you can benefit from lower Colombian tariff rates provided you can prove, under the PTA’s rules of origin, that your final product originates within the geographical territory covered by the Canada–Colombia PTA.

Determining the origin of a product can be complicated and time-consuming. To remain competitive, however, you need to understand not only the general concepts associated with rules of origin, but also how these rules are implemented in the PTAs that apply to the markets where you operate.

The Canada Tariff Finder is a free online tool that lets Canadian exporters check the tariffs applicable to a specific good in a given foreign market, with a focus on countries with which Canada has a free trade agreement.

The origin of a product, as determined by the rules of origin of a preferential trade agreement, helps determine the product’s eligibility for preferential tariffs, as follows:

• If the product and its inputs are wholly produced or obtained within the geographic territory covered by the agreement, the product is considered to originate there and will be eligible for reduced or tariff-free treatment under the PTA.
• If any of the inputs come from outside this territory, however, they must be “substantially transformed” before the finished product can qualify as an “originating product” and receive the reduced tariff. If there is no such transformation, the product is “non-originating” and the full tariff must be paid on it.

There are three basic ways of establishing a substantial transformation so that the finished goods qualify as originating products and thus receive tariff benefits under a preferential trade agreement (PTA):

• Tariff shift: Inputs imported from outside the PTA’s territory and used to make a finished product must undergo a “tariff shift” if the product is to qualify as originating within the territory. This shift is indicated by a change in the HS classifications of the product’s foreign inputs, so that the finished product has a different HS heading or subheading from the foreign inputs.
  Suppose, for example, you manufacture decorated porcelain tableware (HS classification 69.11) and export it to the United States. You make the tableware using three inputs from outside NAFTA territory: kaolin clay (HS 25.07), pigments (HS 32.07) and decorative designs (HS 49.11). In this case, your tableware is considered to originate within Canada since its HS classification of 69.11 is different from those of all three of its inputs. It is thus qualified for reduced tariffs when you sell it to U.S. customers.
• A value added criterion: A product is considered substantially transformed when its value added increases up to a specified level expressed by an ad valorem percentage. The value-added criterion can be expressed in two ways, either as a maximum allowance for non-originating materials or as a minimum requirement of domestic content. Non-originating components for a machine, for example, could be subject to a 40 per cent value-added rule—that is, if the value of these parts makes up 40 per cent or less of the machine’s total valuation, then the machine qualifies as originating.
• A manufacturing or processing criterion: Regardless of a change in its classification, a good can be considered substantially transformed if it has undergone specified manufacturing or processing operations. Steel can be hot-rolled within the PTA territory to qualify as originating, for example, or yarn can be made with cotton fibre harvested by a party to the PTA.

In almost all cases, substantial transformation must take place within the territory covered by the PTA. Transformation that takes place elsewhere may disqualify a product from achieving originating-product status.

For some goods, verifying origin can be expensive and complex. In these cases, it may be more cost-effective to opt for the WTO-provided MFN tariff rather than seek the lower rates offered by the PTA. Getting an origin declaration wrong, moreover, can lead to penalties.

The basic steps of origin verification under a preferential tariff agreement (PTA) are as follows:

1. Determine the HS classification of the product to be imported or exported.
2. Look up the product’s rule of origin under the applicable PTA and see whether the PTA allows a reduced tariff for the product. (The following steps assume that it does).
3. Assume that the PTA’s rules of origin require that all inputs from outside the PTA’s territory must undergo an HS classification change (that is, a tariff shift) before the finished product can qualify as originating within that territory. This is a common requirement during the origin verification process.
4. Using the bill of materials that itemizes the inputs for your product, identify the suppliers of these materials. Be sure to retain corresponding records, such as purchase orders, to show which inputs originated within the PTA’s territory and which did not. In addition, ensure that your inventory of the product’s inputs clearly identifies originating and non-originating materials, so as not to confuse your determinations of origin.
5. Identify the HS classification of any inputs originating outside the PTA’s territory and determine whether they underwent an applicable tariff shift. Depending on the tariff shift outcomes, your final product may qualify as an originating product.
6. If you can’t verify origin to the full extent required under the PTA, you can look for other solutions, such as obtaining an exception for very small amounts of non-originating inputs. These alternative methods are complex, however, and should be undertaken only with the help of customs professionals.

A Canadian men’s clothing manufacturer took advantage of NAFTA origin rules to secure duty-free imports of the fabrics it used for lining men’s suits. However, the company failed to realize that certain special conditions applied to these fabrics, and customs authorities denied the company’s claim that they were of NAFTA origin.

The manufacturer managed to have the decision reversed, but it was a close call. Had the customs authorities prevailed, the company would have been forced to pay millions of dollars in duties.

You must keep detailed records describing how you made your origin determinations, and these records must support your claims. Failure to keep proper records can lead to the cancellation of origin status for your product(s) and/or severe penalties in Canada and other jurisdictions. Record-keeping obligations for trade between Canada, USA and Mexico are set out in NAFTA Article 505.

• Build origin expertise within your company.
• Identify applicable preferential tariff agreements to determine which products may qualify for reduced tariffs.
• Measure the potential savings of the lower tariffs against the resources required to achieve the savings.
• If the savings justify it, develop financial and management support for internal origin training, as well as cooperation from suppliers.
• Assign origin verification and compliance to personnel who also manage the company’s financial obligations. This is intended to avoid cost-cutting measures that could create origin risks and liabilities.
• Limit the number of people who are authorized to sign or certify origin verifications.
• Perform regular origin verifications within the company, using external specialists if necessary.

Canadian exporters and importers must comply with a multitude of regulations and standards related to the use of their products, both within Canada and in their foreign markets. If compliance is mandatory, as it very often is, the product cannot be sold within the target market unless it meets specific criteria.

If your product is subject to a mandatory regulation or standard in an export market, you’ll need to have it tested for compliance by an agency accredited by the standards regulator in that country. The major testing agencies in Canada are CSA Group and Underwriters Laboratories, which provide compliance certifications that are recognized by many foreign standards bodies.

To help exporters understand and keep up with the standards that apply to their particular market and product, the WTO requires all member governments to set up an Enquiry Point to distribute regulatory and standards information. In Canada, this Enquiry Point is the responsibility of the Standards Council of Canada (SCC).

The SCC also provides Canadian businesses with its Export Alert! Notification Service, which identifies product requirements in global markets. Once you’ve registered, the service will automatically email you information about regulatory changes in your target market as they apply to your sector. Similarly, the SCC’s Standards Alert! will keep you up-to-date on changes in specific types of standards.

If you sell agri-food products, you’ll need to comply with a special class of international standards governing your goods. These standards are defined by the WTO’s Agreement on Sanitary and Phytosanitary Measures. You’ll find detailed information on agri-food issues in the section “Agri-food Exports and Imports.”

Technical barriers to trade (TBTs) are common. Many of these barriers, such as technical standards or licensing regulations, are intended to provide necessary safeguards against the importation of dangerous or substandard goods. However, TBTs can also impede international trade by being so stringent that foreign goods find it difficult to comply with them, and are thus put at a disadvantage in the local market.

While a government can impose any rules it wants to protect the health of its people, plants, animals and environment, one accepted principle is that these rules must apply to both foreign and domestic producers. A second requirement is that the rules should be based on scientific evidence and reasonable risk assessments. Together, these two principles are intended to prevent governments from misusing TBTs to favour their domestic businesses over foreign ones.

All trade agreements have chapters devoted to TBTs that set out the mandatory technical standards for imported products and the labelling and packaging regulations with which they must comply. The objective is to uphold national standards of consumer safety and product quality without creating unnecessary impediments to trade.

The Italian-made Kinder Surprise is a chocolate egg with a prize hidden inside. Millions are sold around the world, but the product is barred from the United States because it fails to meet U.S. regulations related to products for children under three years old, in that the plastic capsule containing the prize poses a choking hazard. Under this technical barrier to trade, moving Kinder Surprises across the U.S. border carries a potential fine of $2500 per egg.

All countries restrict or otherwise control the import of certain goods. Weapons, pharmaceuticals, explosives, endangered species and tobacco are a few examples. Some goods are prohibited by some countries and cannot be imported or exported at all. The customs service in your target market will usually have lists of the goods that fall into this category. Even if your products don’t seem to belong to a controlled class, it’s still a good idea to verify this with your buyer and/or local authorities.

Health products, if they are to be sold for consumption in Canada, must meet all the requirements of the Food and Drugs Act. However, if they are manufactured solely for export and won’t be sold here, they don’t need to carry Canadian-approved product labelling. For more information, refer to Health Canada’s Import and Export Policy for Health Products.

Some products—including military and nuclear technology, firearms, certain softwood lumber products and goods of U.S. origin—are deemed to be controlled or restricted goods under the Export and Import Permits Act. Such goods require import or export permits before they can be sent out of Canada or brought into the country.

The Canadian government agency responsible for administering and enforcing regulations of this type is the Trade Controls and Technical Barriers Bureau. The bureau’s web site provides a variety of resources, including lists of controlled and restricted goods.

The Canadian Border Services Agency’s web site has a guidebook where you’ll find more detail about issues such as controlled exports and reporting requirements. Refer to Step-by-Step Guide to Exporting Commercial Goods from Canada and to the Prohibited importations section of the site. For more information, you can consult Foreign Affairs, Trade and Development Canada’s Export Controls Handbook.

Product labelling requirements vary from country to country. In general, and depending on the type of product, they will require some or all of the following information:

• the name of the manufacturer;
• the country of origin;
• the product’s weight or volume;
• a description of the contents; and
• the product’s ingredients.

Some countries, such as Belgium, Canada and Switzerland, require that labels be printed in all official languages. Other countries forbid the use of foreign languages on the label. Countries using the metric system (which is everyone except the United States) require that weights and volumes be given in metric measurements.

To help ensure your compliance with foreign labelling regulations, always ask your overseas buyers exactly how to label your goods. It’s also a good idea to request a sample label to include in your sales contract.

In 2009, the U.S. government imposed country-of-origin labelling (COOL) provisions on beef and pork products in order to display information about where the animal was born, raised and slaughtered. This requires that the products be tracked through the entire supply chain, from farm to consumer. U.S. authorities enforce COOL requirements through random retail store reviews and audits and can impose significant penalties for non-compliance, including fines of up to $1000 for each violation.

The WTO views the COOL regulations as unfair trade practices and has ordered the United States to modify them, but the changes made by U.S. authorities as of July 2013 do not, in Canada’s view, bring the United States into compliance with its WTO obligations. The dispute had not been resolved as of mid-2013.

Consumers in many countries perceive Canadian products to be of very high quality, especially in the agri-food sector. The phrases “Made in Canada” or “Product of Canada” —known officially as the “Canada brand”—can thus be a competitive advantage for an exporter when applied to the label or packaging.

However, the Competition Bureau of Canada sets tight restrictions on the use of the Canada brand, as follows:

• To qualify as a “Product of Canada,” the item must have incurred at least 98 per cent of its manufacturing costs in Canada.
• To meet the less onerous “Made in Canada” standard, 51 per cent of a product’s manufacturing costs must have been incurred in Canada, plus its last substantial transformation (for example, from tomatoes to ketchup).
• Products using the “Made in Canada” label should add qualifying language such as “Made in Canada with domestic and imported ingredients” or “Made in Canada with 60% Canadian content and 40% imported content.”

If you decide to use the Canada brand, be sure the product complies with the rules and that you have the paperwork to back up your claim. Severe penalties can be levied for fraudulent or misleading claims. For more information, refer to the Competition Bureau Guidelines on the use of the Canada brand.