The Canada Border Services Agency (CBSA) released D-Memo on Subsequent Proceeds in July 2009. It is important to highlight that importers who pay management/administrative fees to a foreign parent, who is the exporter of goods to Canada, (or another person in the same corporate group as the importer and/or exporter) may be required to voluntarily amend Customs Declarations after the initial importation if there is a subsequent payment of management/administrative fees. In addition to the adjustment to the customs declaration of the valuation for customs duty purposes, the importer must pay any additional duties and GST/QST/HST. It is expected that this will be a significant verification issue and a basis for redeterminations of duties/taxes payable, plus interest and penalties.

On June 11, 2009, Bill S-2 received Royal Assent. Bill S-2 contained a change to the Customs Act (the "Act") which requires subsequent proceeds to be added to price paid or payable for the purposes of calculating value for duty. Paragraph 48(1)(c) of the Customs Act provides as follows:

"when any part of the proceeds of any subsequent resale, disposal or use of the goods by the purchaser is to accrue, directly or indirectly, to the vendor, the price paid or payable for the goods includes the value of that part of the proceeds or the price is adjusted in accordance with paragraph (5)(a)".

Paragraph 48(5)(v) of the Act previously required for customs valuation purposes, that the price paid or payable be adjusted by adding amounts equal to, "the value of any part of the proceeds of any subsequent resale, disposal or use of the goods by the purchaser thereof that accrues or is to accrue, directly or indirectly, to the vendor."

The CBSA has recently provided importers guidance on its interpretation of these requirements in D-Memo D-13-4-13 "Post-Importation Payments or Fees "Subsequent Proceeds"" (July 8, 2009). The CBSA has stated that:

[12] Management and/or administrative fees are one type of payment that should be examined to determine whether they are "subsequent proceeds"/ "Management and/or administrative fees" are not defined in the Customs Act, as such, there is no legislative basis for their inclusion as an addition to price paid or payable. CBSA allows the exclusion of management fees and/or administrative services as a discretionary administrative policy based on the CBSA's definition of management fees and/or administrative services. The definition generally includes the functions of planning, direction, control, coordination, systems or other functions at a managerial level. These functions may involve services fir various departments of a business, such as accounting, financial, legal, electronic data processing, employee relations, management consultation, labour negotiations, taxation, relating to management and/or administration.

[13]Sometimes, in addition to selling goods, vendors will offer management and/or administrative services to their purchasers. This is common between related parties, particularly in multinational groups where one member will provide services to other members within the group.

[14] To illustrate, a Canadian importer purchases goods from its parent company located in the United States. The related parties have determined their affairs are best organized by centralizing some or all of the management functions. Both parties enter into an agreement where the vendor performs these activities for the importer for a fee. The payments for there services are made separately from any payments related to the purchase of goods.

[15] Payments made for management and/or administrative services may meet the criteria to be subsequent proceeds, since the payments are remitted to the vendor after the importation of the goods and they are often based on the resale, disposal, or use of the goods in Canada. However, in certain circumstances (as outlined in paragraph 12), CBSA allows some payments made for management or administrative services to be excluded from the subsequent proceeds provisions of the Act."

The above statements can be interpreted to be a warning by the CBSA that they plan to review management and administrative fees on a going forward basis (and potential retroactively prior to June 11, 2009). As a result, it is critical that multinational companies consider the effects of payments of such management and administrative fees for customs compliance purposes.

The CBSA gives further guidance in D-Memo D-13-4-13 where it will exclude payments from the requirement to adjust the price paid or payable, make adjustment filings, and pay additional duties and GST/HST/QST.

The CBSA provides the following test that must be satisfied if a payment is not recorded as an adjustment upwards to the price paid or payable:

Whether or not the test is satisfied will be determined on a case-by-case basis.

It should be noted that the CBSA has raised a few warnings, such as:

  • The CBSA will look at the nature of the specific services that have been provided and whether the services were actually performed.
  • The CBSA will look at (and want to review) the written agreements between the parties.
  • If the management/administrative fee is charged by a parent company to its Canadian subsidiary based on a percentage of sales in Canada, the CBSA may take the position that the fee does not bear any relation to the actual value of the services rendered.
  • Further substantiation of actual costs would be required in order to meet the requirements of sufficient information.
  • For the management and/or administration services to be considered rendered, no portion of the amount charged should be for services already provided by Canadian personnel.
  • Centralized costs (to share the costs between numbers of related companies be comparable to the price that an unrelated party would pay and the method of allocation of these costs must be reasonable and appropriate to the circumstances of the importer’s business.
  • The apportionment of management fees and /or administrative services costs between related parties should be based on a comprehensive review of the expenses in proportion to the benefits received.
  • The amounts must be related to the Canadian operation.
  • In order to be considered a legitimate fee for management and/or administration services, an importer must establish that the specific activity performed by their related party is a service for which a charge is justified and delivers some kind of benefit.

Please click here to review a copy of D-Memo D-13-4-13.