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

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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?

12. 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

13. Clarifications & Site Visits
At this stage, the officer reviews the questionnaire responses and/or document packages and issues follow-up questions, usually by
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

14. 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…

15. 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)

16. 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

17. 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)

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. Thank you DARREL PEARSON GEORGE REID
Senior Partner, Co-Head of International Trade
GEORGE REID
Associate