Report 2—Customs Duties

Audit at a GlanceReport 2—Customs Duties

What we examined (see Focus of the audit)

Individuals and businesses that import goods, such as automobiles and dairy products, into Canada are responsible for paying customs duties according to Canada’s Customs Tariff. Customs duties are a way for the federal government to obtain revenue and protect certain sectors of the Canadian economy. In the 2015–16 fiscal year, customs duties accounted for about $5.4 billion (1.8 percent) of all federal revenue.

This audit focused on whether the Department of Finance Canada, Global Affairs Canada, and the Canada Border Services Agency adequately managed customs duties according to their roles and responsibilities.

Why we did this audit

This audit is important because for customs duties to balance the different interests of market participants, government organizations must faithfully implement the customs duty system.

What we concluded

We concluded that the Canada Border Services Agency could not ensure that all customs duties owed to the government were assessed. We also concluded that Global Affairs Canada and the Canada Border Services Agency could not ensure that the tariff rate quotas were respected. The Canada Border Services Agency allowed some supply-managed goods to enter the Canadian market without the proper duties being paid.

Furthermore, we concluded that the Department of Finance Canada suitably fulfilled its responsibilities in regard to customs duties, but needed to further review the relevance of tariff items to ensure that they met government objectives. Finally, we could not conclude on whether the Department of Finance Canada considered the administrative costs when it reviewed the $20 minimum threshold for charging customs duties on postal and courier imports.

What we found

Assessing customs duties

Overall, we found that the Canada Border Services Agency was unable to accurately assess all customs duties owed to the government on goods coming into Canada. This was due in part to the Agency’s self-assessment system, which may have allowed importers to be non-compliant with import rules and regulations, and in part to the Agency’s own internal challenges relating to staffing.

Descriptions of goods on the import forms were often incomplete or incorrect, making it more difficult for the Agency to know exactly what was imported. Through its compliance verifications on specific goods, the Agency established that importers misclassified about 20 percent of those goods coming into Canada and may have ended up paying a lesser amount of duty as a result. In addition, importers could submit changes to their import form information up to four years after their goods were imported. Because the Agency did not examine or sample all shipments before release, it had to rely on the importers’ accounting information and supporting documentation, making it hard for the Agency to verify whether the requested changes were appropriate. In the 2014–15 fiscal year, the Agency paid $136 million in refunds to importers as a result of retroactive changes to import forms.

These findings matter because when the Canada Border Services Agency fails to accurately assess customs duties, the Government of Canada might lose revenue. The Agency’s verifications indicated lost revenues from misclassifications. For example, in targeted verifications conducted in the 2015–16 fiscal year, the Agency identified that the importers should have paid $42 million more, of which approximately half was due to misclassification.

  • The Canada Border Services Agency was unable to assess all customs duties owed to the government

    Recommendation. The Canada Border Services Agency should review its customs brokers licensing regime by considering features such as:

    • a licensing process that requires periodically assessing a broker’s compliance record, and
    • shared liability of licensed customs brokers and importers to comply with import requirements and paying duties and taxes.

    Recommendation. The Canada Border Services Agency should review its penalties in order to better protect import revenues and ensure compliance with trade programs.

    Recommendation. Unless otherwise specified in a free trade agreement, the Canada Border Services Agency should review the period allowed for retroactive changes on the import form, without compromising the Agency’s ability to conduct compliance verifications.

Controlling goods

Overall, we found that the Canada Border Services Agency and Global Affairs Canada did not work together to adequately manage the limits on quota-controlled goods coming into Canada. We estimated that in 2015, the Agency should have assessed $168 million of customs duties on imports of quota-controlled goods that exceeded volume limits. These goods included dairy, chicken, turkey, beef, and eggs. Also, some goods, imported under the Duties Relief Program, were diverted into the Canadian economy, rather than exported as required by the program. The Agency did not ensure that these diverted goods, such as chicken, were reported to the Agency and the applicable duties paid as required.

These findings matter because one of the objectives of customs duties is to protect certain Canadian markets by limiting the imports of goods that compete with Canadian products.

Reviewing and analyzing the customs duties regime

Overall, we found that the Department of Finance Canada reviewed the Customs Tariff only for specific purposes. For example, it reviewed tariff items when negotiating trade agreements. We found that the Department also considered the budget and economic implications of changes to the customs duties. We also found that many tariff items generated little revenue. In our opinion, the Department needs to review all tariff items regularly to make sure they still serve the interests of Canadian consumers and businesses.

These findings matter because the customs duties system affects the Canadian economy and should be periodically reviewed to ensure it continues to best serve the interests of Canadians and protect industries.

The Department of Finance Canada refused to provide us with the documents that might have contained the analysis on the Canada Border Services Agency’s administrative costs for the $20 minimum threshold for charging customs duties on postal and courier imports.

Entity Responses to Recommendations

The audited entities agree with our recommendations, and have responded (see List of Recommendations).

Related Information

Report of the Auditor General of Canada
Type of product Performance audit
Topics
Entities
Completion date 3 March 2017
Tabling date 16 May 2017
Related audits

For more information

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The Auditor General’s Comments

Large video and transcript