By Peter McRae, CEO of Platinum Freight Management

Canada’s $20 tax-free-threshold is about to rise to $150 after holding low at $20 for at least 30 years. It can be called a necessary response to an increasingly global marketplace, but the impacts of the change could be positive, negative or neutral, time will tell. I for one will be watching closely for the next year, as a Customs Broker licensed in Australia, New Zealand and Canada. We can look at Australia’s experience of a high tax-free threshold to consider the possible impacts of the change in Canada.

In an increasingly global marketplace, the economic cost of importing - and how to tax imports appropriately - is difficult to determine, but immensely important. There is no one answer on how governments should tackle their own Tax-Free Threshold (TFT), or if they should even have one (Canada and New Zealand have long sat in this camp). The magic number on a country’s TFT is still a work in progress. Australia has recently debated this issue and then aborted its own plans to change. Here we see Canada moving a little in Australia’s direction, so perhaps there is something Canada could learn from the Australian way.

Canada has operated an efficient import processing system for many years, working with an almost zero TFT. But in responding to a global marketplace and adjusting in order to participate more fully in it, can Canada remain efficient in the future?

*Photo: Canada Border Services Agency Facebook*

The change from virtually no TFT to $150 TFT is modest. Compared to Australia’s $1000 threshold, we could say it will be too modest still. But it will still have impact, both positive and negative.

Canada, Mexico and the US have operated for years with the North American Free Trade Agreement (NAFTA) and this change could be tied up in discussions around NAFTA. We can surmise that, given that USA provides its citizens with an $800 threshold, a step is being made to increase trade between them. The change does promote spending, and the US wants Canadians to spend it in the US. On the flip side, it works for Canadian consumers too. Suddenly Canadians can access the same items cheaper, simply by buying across the border. The benefits of buying online will increase, particularly if the seller offers free shipping, which it often will. Good news for the purchaser, and for the international online retailer.

The postal companies and the express carriers will also win in two ways – they will get more business as shipping increases, and the packages will move through faster, unimpeded by red tape in Customs Processing, this translates to better efficiencies and impressive meeting of KPIs.

This is a huge advantage for the Canadian Border Services Agency (CBSA) too. At present, every single parcel entering Canada must be verified from the declaration sticker or the consignment note to determine taxes due. If no tax processing is required, the requirement for CBSA officials to closely monitor each package will be significantly lessened. There will be huge reductions in bottlenecks to process and release small parcels. This takes the pressure off border processing staff. But it could also mean reductions in head count for processing teams.

Which leads us to the downsides.

Canada’s retail landscape will be heavily affected, as has been highlighted already by the Retail Council of Canada. The change upsets the playing field for Canadian retailers. Customers will continue to try on items in store, where retailers are paying for rent, insurance, utilities, advertising and employment, as well as duty and GST/provincial taxes on the items they import to sell locally. But after sampling in store, customers can buy online for less. Being so close to the US, shipping times will be short.

Australia has the same issue but, on our distant shores, the cost of shipping hikes up the price often beyond what the local retailer is charging. While our playing field is far from fair, distance can limit the financial appeal of buying online compared to buying locally.

Another major concern is around revenue loss through fraud. Yes, CBSA will collect less tax for goods worth under $150, that much is clear and a non-issue for Canada, but only if the declared value is accurate. Which, if it’s not being checked as closely, could be easier to get away with. Here’s where Australia is the example. The loss to Canada could move into the billions when Canada’s new TFT opens the flood gates. Let’s hope Canada heeds but does not follow the Australian example.

I have talked about this at length through the Australian lens. Less Customs officials examining the small print on the importing declarations, or not even checking the declarations if the value states under $150, means more parcels slip in unnoticed. If authorities are no longer looking, they are inviting importers to value far more expensive goods just under the limit and then just slip through unnoticed.

In March this year the Canadian International Freight Forwarders Association has already addressed its concerns regarding fraud. The Financial Post reported in 2017 that Canada is already losing $1 billion in taxes via the postal system. If there is $1 billion being lost now, what will this figure be in two or five years under a looser system?

In Australia, importers don’t have any reason to be honest if they don’t have any reason to believe they will be caught. And in Australia they don’t get caught. But perhaps in Canada they will, it remains to be seen. The biggest stopgap will be the number of processing staff kept on, and the regulatory decisions about how much to check and how often.

Australia, Canada, New Zealand and the United States are parties to the World Customs Organization (WCO). In applying the WCO cross-border e-commerce framework of standards, it has been addressed that customs authorities will continue to face challenges around illicit trade and fraud. The WCO Customs Risk Management Compendium explains the risk significance matrix, if the consequence is high and if the likelihood is high then extensive management is required.

High likelihood must be countered with high consequence. Australia has not put in place high consequences to its high likelihood for fraud, which is where Canada could observe and learn. This will be the difference between massive economic loss over time and an importing system that is moving with the times and responding to the increases in global trade.

For further information about Platinum Freight Management, go to www.platinumfreight.com.au

Peter McRae is a Certified Customs Specialist in Canada and the USA. He is also a Certified Trade Compliance Specialist in Canada. With 20 years industry experience, McRae runs a successful customs brokerage that he founded in Australia in 2000. Platinum Freight® Management is a leading independent customs brokering and freight forwarding company operating in Australia and with international offices, including New Zealand and soon Canada.

For further information or to contact Peter McRae, please contact Kristy Gordon with K’s Word Communications.

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