Advance Rulings and Duty Drawback – CBSA v. Dorel Industries Inc.

The following has been written by Gordon LaFortune, Managing Partner of Woods LaFortune LLP, and reproduced with permission.

The case referred to in the article is the recent Federal Court of Appeal Decision in Canada (Border Services Agency) v. Dorel Industries Inc., 2014 FCA 258 (CanLII). Please also refer to the Federal Court case for further details.

The recent Federal Court of Appeal Decision in Canada (Border Services Agency) v. Dorel Industries Inc., 2014 FCA 258 (CanLII) [“CBSA v. Dorel“], has made it more important for importers, who receive duty drawback or other refunds from the Canada Border Services Agency (CBSA), to obtain Advanced Rulings so they can keep that money.

The CBSA’s ability to recover duty drawback payments made to an importer came up CBSA v. Dorel in connection with duty drawback payments made to Dorel on futon covers imported from China and exported to the U.S. Dorel imported futon covers from China, inserted a futon mattress in the futon cover, punched plastic jiffies through the mattress in a process called “tufting”, closed the zipper on one end of the cover and packaged the covered futon mattress with a metal frame for export to the U.S. In response to Dorel’s request for a Same Condition Process Ruling, the CBSA issued the “same condition” ruling on September 14, 2011. The Same Condition Process Ruling allows drawback or deferral of customs duties on goods exported in the “same condition” in which they were imported. Imported goods may undergo certain operations in Canada and still meet the criteria to be considered to be exported in the “same condition” so long as they do not materially alter the characteristics of the good.

Dorel was paid drawback of duties paid on the imports on the basis of this “same condition” ruling. The Federal Court noted that there was no suggestion that Dorel misrepresented its process or that it failed to disclose information when it requested the “same condition” ruling. Dorel did not make false representations to the CBSA or conceal relevant information concerning its process in its Duty Drawback Application. Dorel did not obtain an advance ruling before importing and exporting the futons, but in the circumstances probably did not consider that an advance ruling was necessary.

Following an audit of Dorel’s facility, the CBSA concluded that the product did not qualify for “same condition” treatment. The CBSA issued a new “same condition” ruling on February 23, 2012 to replace the original ruling. On the basis of that new ruling, the CBSA demanded repayment of all the amounts paid to Dorel, plus interest, under Section 114 of the Customs Tariff Act. Dorel challenged the CBSA at the Federal Court claiming, in part, that the CBSA’s demand that the drawback amounts paid on the basis of the first ruling was unreasonable. The Federal Court overturned the CBSA decision, finding that while the CBSA could modify or revoke a “same condition” ruling, it could not retroactively apply the February 2012 ruling to recover the amounts paid to Dorel on the basis of the September 2011 ruling. The Court considered that the CBSA’s decision to retroactively apply the February 2012 ruling violated the presumption that Parliament does not intend to confer power on bodies, such as the CBSA, to make regulations or orders that are retroactive, and found that the CBSA’s decision to apply the February 2012 ruling was unreasonable because Parliament had not explicitly given the CBSA the right to apply this Order retroactively.

The Federal Court of Appeal later overturned the Federal Court’s decision. In doing so, the Court provided limited reasons for its decision and did not explicitly address the scope of the CBSA’s authority. Instead, the Federal Court of Appeal found that because Dorel did not have an advanced ruling and could not point to other evidence establishing that it had a right to retain the duties paid, the CBSA had the right to recover repayments of these duty drawback amounts. Consequently, in the absence of an advanced ruling establishing “same condition” or other similar evidence, it will be more difficult for an importer to keep a refund or drawback payment made by the CBSA because the Federal Court of Appeal has implicitly agreed that the CBSA has the right to issue a new ruling and recover any payments made on the basis of that new ruling as if it had never made the original ruling.

Like pre-approved mortgages, Advanced Rulings provide assurance to importers, clearly defining their liability prior to importation or, alternatively, by binding the CBSA to accord specific treatment to the imported goods. Companies who intend to import request an Advanced Ruling from the CBSA for a number of issues including the tariff classification of the imported goods, its origin, its proposed marking and whether the good would benefit under any of Canada’s free trade agreements. Once an Advanced Ruling is issued, it will be applied by the CBSA to all goods imported by the Applicant that meet the terms of the Advanced Ruling until the ruling is modified or revoked.

Advanced Rulings are available to importers, but they are not mandatory. Importers who are confident in their assessment of tariff classification, origin or other matters can import the goods without first requesting an Advanced Ruling. However, the Federal Court of Appeal has now pointed to the inherent risk in that strategy. The Court’s decision seems to be unreasonable, but it will likely stand until it is overturned or restricted to the particular facts of the Dorel case by another panel of the Court. It is unlikely that the Supreme Court of Canada would hear an appeal of this case if it is asked. Therefore, for the foreseeable future, without an Advanced Ruling, at least in cases similar to the facts in Dorel, the CBSA can apparently revoke rulings and demand repayment of monies on the basis of subsequent rulings with impunity.