Preparing for and Surviving a Canadian Audit ICPA Spring Conference Preparing for and Surviving a Canadian Audit March 14, 2018 Presented by: Darrel Pearson

Preparing for and Surviving a Canadian Audit Pre-verification Verification initiation Questionnaire Responses Clarifications & Site Visits Interim Report Final Report Corrections Appeals

What is a Verification? Canada operates a customs self-assessment regime Importers are required to: Classify imported goods according to the Harmonized System Identify the origin of the goods, including whether the goods originate for preferential tariff treatment under a free trade agreement Identify and apply the correct methodology to value the goods Pay duties and taxes based on the above A verification (or audit) is how the CBSA checks that an importer has complied with its obligations and has correctly declared the classification, origin and value for duty of goods

Origin of Audits CBSA issues verification priorities at the beginning of each year, but these priorities are only a guide The CBSA may initiate a verification in respect of any importer, good or trade program (origin, classification and value) at any time A refund request can trigger an audit

Pre-Verification: Communications Before initiating a verification, CBSA officers may contact importers (by phone or letter) to confirm: The contact person for the verification and address of the importer The goods that will be subject to an origin or tariff classification verification The fiscal period of the importer to select the an appropriate verification period - especially for value for duty verifications

Pre-Verification: Tips Take advantage of pre-verification communications as they indicate the goods and/or trade program that will be verified: Identity the internal resources needed to respond to the audit (compliance, tax, finance, legal, etc.) Review entries and flag issues that may arise in the verification Is all supporting documentation readily available? Are there any gaps? Contact your broker and/or customs service provider to let them know a verification is coming

Pre-Verification: Tips If errors are found during a pre-verification review or during verification, explore whether a voluntary disclosure (VD) application is appropriate If accepted by the CBSA, a VD results in the waiver of penalties and punitive interest rates normally assessed on corrections made after 90 days that the importer had reason to believe its declarations were incorrect NOTE: The CBSA will not grant a VD for errors discovered after the CBSA has initiated a verification for the same trade program

Verification Initiation The initiation letter specifies the trade program of the verification and information to be verified by the CBSA: Classification: Document packages for sampled entries, including information to permit the officer to classify the goods Origin: NAFTA questionnaire issued to the NAFTA exporter regarding goods imported during a particular time frame (as known as the verification period) Value: Valuation questionnaire regarding imports of goods during the verification period

Verification Initiation The initiation letter also sets the deadline for a response and identifies the CBSA officer conducting the verification Best practice is to contact the officer and confirm receipt of the verification letter Determine whether an extension is necessary to file the questionnaire response

Questionnaire Responses: Origin and Value CBSA uses template questionnaires for origin and valuation audits Careful responses to these questionnaires is critical: Officers rely on these responses to conclude whether the importer correctly declared the origin or value of imported goods Vague or incomplete responses can result in an extended back and forth with the officer to clarify misunderstandings

Questionnaire Responses: Discovery of Errors When responding to the audit letter, the importer or exporter may discover errors in entry declarations or certificates of origin What to do?

Questionnaire Responses: Discovery of Errors The importer may file corrections at any time during a verification However, corrections should only be filed if errors relate to a different trade program than the verification (i.e. discovery of a classification error in preparation for a valuation audit) As noted – a VD may be possible for a different errors in a trade program than the audit Notify the CBSA of any corrections filed to avoid misunderstandings If the errors relate to the trade program that is the subject of the verification, wait for the verification to run its course

Clarifications & Site Visits At this stage, the officer reviews the questionnaire responses and/or document packages and issues follow-up questions, usually by email Keep a log of all communications with the officer, including additional questions and document requests This is the soft middle of a verification – there are no deadlines – it can go on for years

Clarifications & Site Visits Lengthy audits are caused by a number of factors: Incomplete or vague responses resulting in additional requests for information and documents Importer missing deadlines to provide information requested by the CBSA Complexity of legal issues Others…

Clarifications & Site Visits Although less common, the CBSA may also arrange a site visit to verify the information collected during the verification Importers who maintain their books and records outside of Canada are on the hook for CBSA travel and accommodation during an onsite verification In theses cases, the obligation to pay is set out in the Agreement to Maintain Records Outside of Canada between the importer and the CBSA Site visits are an excellent opportunity to convince an officer that importer’s declarations are correct (or how the declarations should be corrected)

Interim Report The interim report is the preview of the CBSA’s verification conclusions if the CBSA is of the view that the exporter made errors No problems in the audit = no interim report Note: CBSA policy is that an interim report does not trigger the importer’s duty to correct entries In customs speak: the interim report does not give the importer reason to believe that a declaration of classification, origin or value is incorrect

Interim Report: Timeline and Content Importers/exporters are given 30 days to respond to the Interim Report The 30 day period may be extended by the CBSA The importer/exporter can provide additional facts to support their declarations (or view as to who their declarations should be corrected)

Interim Report: Challenges The Interim Report is often when the importer realizes it is facing serious liability unless it can convince the CBSA otherwise Engaging legal counsel/ professional advisors at this stage can make a response to the Interim Report more challenging The advisor is new to file and must get up to speed quickly The Interim Report often only contains the CBSA’s conclusions, with little or no analysis - it is difficult for the advisor to understand the Interim Report without discussing the matter with the CBSA officer

Final Report The final report sets out the CBSA’s audit conclusions for the verification period regarding the importer’s compliance with the audited trade program As the CBSA reviews individual transactions in the verification, it may issue a re-determination for those, specific transactions in a Detailed Adjustment Statement (“DAS”) The Final Report also directs the importer to correct entries in accordance with the conclusions of the final report

Final Report – Reason to Believe The importer has 90 days from the date of the final report to correct the errors for the reassessment period In customs speak: The date of the final report triggers the importer’s reason to believe its declarations during the verification period were incorrect

Final Report – Reassessment Period The CBSA has the power to require the importer to correct importations made within four years of the date of accounting to correct errors identified in a final report (Reassessment period) The CBSA can select a shorter reassessment period if it chooses Generally, the reassessment period selected by the CBSA is the verification period and forward up to the date of the final report Depending on the nature of the errors and the importer’s conduct, the CBSA may shorten or lengthen the reassessment period

Final Report – AMPS The Final Report may also include an assessment of administrative monetary penalties or AMPS AMPS can be assessed for any contravention of the Customs Act, including misclassifying goods, undervaluation, or erroneous claims of origin, or failing to provide “sufficient information” to support a declarations Payment of AMPs is due within 30 days of the assessment

Corrections 90 days is not a long period of time – do not wait for the last moment to prepare corrections required by a Final Report Following a final report, the most important step is identifying the entries during the reassessment period that must be corrected: Tariff classification: The Final Report decision on tariff classification applies to imported goods that are the “same or similar” to the goods subject to the verification Valuation: The Final Report decision on valuation applies to all imported goods that suffer for the same valuations errors as the transactions in the Final Report

Corrections – Change in Practices An emerging issue in CBSA verifications relates to reason to believe and changes to the importer’s practices after the verification period A Final Report gives the importer reason to believe it made erroneous declarations during the verification period, which is usually a calendar year or the importer’s fiscal year The importer is therefore required to correct its past importations under the Customs Act The issue is how reason to believe flowing from a Final Report operates following the verification period and into the future

Corrections – Change in Practices For valuation and origin, reason to believe will continue after the verification period if there are no changes to commercial structure of the importations If the importer changes the structure of the transactions/sources from new suppliers after the verification period such that the conclusions in the Final Report are no applicable, it should seek a ruling and file refund claims Otherwise there is a risk that the CBSA may seek to apply the conclusions in the Final Report to the changed transactions, which may not be appropriate

Corrections: Tips Be aware of potential administrative obstacles to filing corrections Payments must be made in Canadian funds – for non-residents this can be problematic Large numbers of entries may be corrected by a blanket B2 spreadsheet, but the importer must first obtain authorization from the CBSA – this is a recent policy change

Appeals Note that an importer cannot appeal the Final Report itself DASes issued with the Final Report is issued must be appealed within 90 days of the DAS/Final Report AMPS issued with the Final Report must be appealed within 90s days Corrections filed on the basis of reason to believe cannot be appealed until the CBSA issues a “confirmation” DAS - once the “confirmation” DAS is filed, the importer has 90 days to appeal

Preparing and Surviving an Canadian Audit Audits can be overwhelming – a maelstrom that pulls people off their day to day responsibilities – and instructive on the need for internal audits Be aware of your risk profile: CBSA audits frequently target consumer goods subject to duties (apparel, footwear, cosmetics, accessories) and related party transactions Consider structuring transactions in a matter that is both compliant and minimizes duties paid, supported by proper documentation

Preparing and Surviving an Canadian Audit Engage Canadian Customs Lawyers to: Properly document international transactions Benefit from attorney-client privilege in the context of an audit Provide legal analysis supporting compliance decisions Protect substantive and procedural rights

Thank you DARREL PEARSON GEORGE REID Senior Partner, Co-Head of International Trade pearsond@bennettjones.com 416.777.4811 GEORGE REID Associate reidg@bennettjones.com 416.777.7458