Evidence of meeting #61 for Agriculture and Agri-Food in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was seed.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Michael Ferguson  Auditor General of Canada, Office of the Auditor General
Richard Domingue  Principal, Office of the Auditor General
Dave Carey  Director, Government Affairs and Policy, Canadian Seed Trade Association
Rebecca Lee  Executive Director, Canadian Horticultural Council
Ken Forth  Chair, Trade and Marketing Committee, Canadian Horticultural Council

11:05 a.m.

Liberal

The Chair Liberal Pat Finnigan

Welcome everyone to our meeting of the Standing Committee on Agriculture and Agri-Food.

I'd like to welcome Mr. Michael Ferguson, Auditor General of Canada.

Today we are looking at the report that deals mainly with customs duties.

We will begin with Mr. Ferguson's presentation.

Mr. Ferguson, you have 10 minutes. Please go ahead.

11:05 a.m.

Michael Ferguson Auditor General of Canada, Office of the Auditor General

Thank you.

Mr. Chair, thank you for this opportunity to discuss our spring 2017 report on customs duties. Joining me at the table is Richard Domingue, the principal responsible for the audit.

Our audit focused on whether the Department of Finance, Global Affairs Canada, and the Canada Border Services Agency carried out their roles to manage customs duties on the many goods imported into Canada each year.

I want to highlight two observations for this committee, as they relate to imports, that could have an impact on the agricultural sector and the food processing industry.

First, let me address the issue of quota-controlled goods. As you know, Canada applies tariff rate quotas to control the volume of certain imported goods, such as dairy, chicken, turkey, and egg products. These tariff rate quotas limit the volume of goods that can be imported into Canada at a lower rate of duty. Once that volume has been imported, duties apply at a higher rate.

In the audit, we noted a discrepancy between the volume authorized by Global Affairs Canada and the volume declared to the Canada Border Services Agency as eligible for a lower rate of duty. We compared the volume permitted to individual importers by Global Affairs Canada in 2015 with Statistics Canada's import data, which is based on the Canada Border Services Agency's information. We observed that a significant volume of controlled goods entered Canada without a permit. This means that some importers did not pay the appropriate amount of customs duties. We estimated that, in 2015, some 131 million dollars' worth of dairy, chicken, turkey, beef, and eggs were imported without the appropriate permit. Had the duties been properly assessed on goods that exceeded quotas, the government would have collected $168 million in customs duties.

The second observation I want to highlight relates to the duties relief program. This program, administered by the Canada Border Services Agency, allows importers to bring goods into Canada duty-free as long as the goods are further processed in Canada and later exported. For example, chicken can be imported duty-free if it will be used as a topping on frozen pizzas that will be later exported.

We found that the duties relief program had few mechanisms to prevent the diversion of goods into the Canadian economy, especially for those subject to a high rate of duty. We found that there were few incentives for importers to comply with the rules because import licences under the program never expire and because there is no requirement for a financial deposit by importers.

In 2016, the Canada Border Services Agency completed six compliance verifications of duties relief program participants. It found that all six importers of goods under supply management didn't comply with program requirements and were diverting goods into the Canadian market without the proper assessment and collection of duties. The agency later suspended the licences of these importers.

Overall, these are two examples of government activities that operate differently in practice than on paper. Our audit showed that the principles of supply management weren't applied as intended because quota limits on some imports weren't enforced properly, imported agricultural products destined for export were diverted into the Canadian market, and applicable duties weren't always assessed and collected. As a result, Canadian producers may face unexpected competition from some importers.

Mr. Chair, the Canada Border Services Agency, Global Affairs Canada, and the Department of Finance have agreed with our recommendations.

This concludes my opening remarks. We would be pleased to answer any questions the committee may have.

Thank you.

11:05 a.m.

Liberal

The Chair Liberal Pat Finnigan

Thank you, Mr. Ferguson.

The first question goes to a member of the Conservative Party.

Mr. Anderson, please go ahead.

11:05 a.m.

Conservative

David Anderson Conservative Cypress Hills—Grasslands, SK

Did you have to do any work on the complications in the system? I know when you come across the border and you're bringing things in, it seems like even the customs agents can't figure out the tariffs. There are so many products to identify. Did you take a look at the complexity of the system, or were you just trying to track down the two issues you identified?

11:05 a.m.

Auditor General of Canada, Office of the Auditor General

Michael Ferguson

We looked at the system much more broadly than was expressed in the issues I just mentioned. We started with the descriptions that are supposed to be attached to goods coming across the border. We thought we would look at those descriptions to see whether they were being properly classified when they came across the border. Essentially what we found was that the descriptions being collected are not very helpful in actually identifying what's coming across the border.

I have made the comment that there is a lot of complexity in the customs-duty process, and in being able to know exactly what is coming across the border so that the right duties can be applied. I think there is a lot of complexity that makes the job of the Canada Border Services Agency particularly difficult.

11:05 a.m.

Conservative

David Anderson Conservative Cypress Hills—Grasslands, SK

One more question and then I'll turn it over to Mr. Shipley.

Do you have any suggestions that would actually reduce the size of government bureaucracy rather than expand it?

11:05 a.m.

Auditor General of Canada, Office of the Auditor General

Michael Ferguson

I'm going to take a quick look at the recommendations. Essentially what we're saying is that there are a number of aspects of this that should be looked at. If the descriptions aren't particularly useful in applying the classifications, you might wonder why they are asking for descriptions to be applied at all.

We also looked at goods coming across the border through the mail system. If it's a good that duties apply to, the duties are supposed to be applied on anything with a value of over $20 that comes in through the mail or by couriers. There are lots of times during the year when they can't do that, however, so sometimes they apply the duty limit at a higher rate than they are supposed to. That's something else we said they should look at. In fact, there was a study done by the Canada Border Services Agency indicating that applying duties on goods coming in through the mail at anything below $100 costs more to collect than the amount taken in from the duties themselves. There were a number of those types of things that we said should be looked at from the point of view of examining the efficiency of the whole system.

11:10 a.m.

Conservative

David Anderson Conservative Cypress Hills—Grasslands, SK

That's a very frustrating point, especially for people bringing in goods.

11:10 a.m.

Conservative

Bev Shipley Conservative Lambton—Kent—Middlesex, ON

The audit goes from January 2013 to May 2016. You made the incredible statement that the activities operate differently in practice than on paper. Was there a previous audit done on the agencies?

11:10 a.m.

Auditor General of Canada, Office of the Auditor General

Michael Ferguson

I'll ask Monsieur Domingue to respond to that.

11:10 a.m.

Conservative

Bev Shipley Conservative Lambton—Kent—Middlesex, ON

In your recommendations, there's always a date. I remember that previously we actually enforced a date when they had to meet the recommendations they agreed upon. Was there a previous audit when there was an agreement to fix some of these things, and where are they at now in terms of their status?

11:10 a.m.

Auditor General of Canada, Office of the Auditor General

Michael Ferguson

I will ask Mr. Domingue to answer the first part of that question. I can tell you that what normally happens is that we issue our recommendations and then the department responds in a report. They also prepare an action plan, a more detailed action plan, for the public accounts committee. I'm not sure whether that's been done on this one yet or not. At some point, though, they will do an action plan and it will have more of those details in it. I can't tell you what they've done since we issued the audit.

11:10 a.m.

Conservative

Bev Shipley Conservative Lambton—Kent—Middlesex, ON

The reason I ask is that it's concerning. If we have what they're putting on paper, but they are not fulfilling it as an agency, it becomes a concerning issue. I wouldn't mind if you could give the committee that background.

With respect to quota-controlled goods, it's not just the dollars that have not been collected on unassessed duties; it is also the cost to the industry. They didn't collect the duties on the import or export side. Did you find any information on what it actually costs the industries that were affected?

11:10 a.m.

Auditor General of Canada, Office of the Auditor General

Michael Ferguson

I think the important part of this issue is the impact on industry, because these are goods coming across the border in excess of quotas, so that's competition that Canadian industries didn't expect they were going to have to deal with.

I think it's important for people to understand that, yes, we did say that the value of the quota-controlled goods that entered Canada without permits was about $131 million. If they had entered Canada with the duties being applied, the duties would have been $168 million. The important thing to recognize is that probably if the system had been operating the way it should have been, the government wouldn't have collected the $168 million, because the importers wouldn't have brought them in at that level of duty.

I think it's not the $168 million of uncollected duties that is important; it's the $131 million worth of additional products competing with those of domestic producers, which they wouldn't have expected would be competing with them, that is important.

11:10 a.m.

Conservative

Bev Shipley Conservative Lambton—Kent—Middlesex, ON

Thank you very much.

11:10 a.m.

Liberal

The Chair Liberal Pat Finnigan

Thank you.

I want to apologize. I forgot to introduce Mr. Domingue; it was a slip on my part. Welcome.

Now, Mr. Longfield, go ahead for six minutes.

11:10 a.m.

Liberal

Lloyd Longfield Liberal Guelph, ON

Thanks, Mr. Chair.

Thanks, both of you, for coming here. It's a good topic for us to look at. I know supply management will be a topic of conversation this year.

Have you looked at the root causes of why, as you mentioned in your presentation, businesses weren't following the rules? Is part of that because they don't recognize or they don't validate supply management? If it's coming from the States, are they assuming that we're under the same principles that they're under?

11:15 a.m.

Auditor General of Canada, Office of the Auditor General

Michael Ferguson

Well, I can't speak to the motivations for what was going on. I think essentially what we were doing was saying that there are quota limits that are applied, and we would expect that those quota limits are actually being enforced. Or under the duties relief program, they're supposed to make sure that those goods are not being diverted into the Canadian market, and in some cases they were. They were doing investigations on those, so that's something the department could probably give you more details on if you want to hear from them.

I can't speak to the exact motivation. I think any time you have this type of a system, there are always going to be people who try to figure out whether there are ways to get around it.

The other thing we talked about was that they weren't using the information they had about the types of problems that existed, to go back to look at some of the customs brokers to see whether, through the customs brokers, they could make sure that the system was better enforced or apply penalties if they needed to apply penalties in some cases.

I think in this type of system there are always incentives for people to try to figure out ways to get around it, and the department needs to be doing a better job of enforcing, looking for places where there is non-compliance, and then perhaps imposing penalties if they need to when there is non-compliance.

11:15 a.m.

Liberal

Lloyd Longfield Liberal Guelph, ON

Thank you.

The departments of the government have approved the recommendations, or have agreed with the recommendations. One of the recommendations is to make licences renewable, conditional on an importer's compliance record, so that would give us some recourse to the people who are not following our quota systems. Is there any kind of a timeline on that? What are the next steps?

In terms of an audit, I'm used to getting an audit from auditors with a management review letter. The management review letter will say, “These are the items that we're looking at for you to address and to get back on within a time frame.” Is that the kind of response that the government would normally give you?

11:15 a.m.

Auditor General of Canada, Office of the Auditor General

Michael Ferguson

In terms of the response to making licences renewable, they said that:

The Canada Border Services Agency will, in relation to making licences renewable and requiring a financial deposit, consult with the policyholder of the Duties Relief Program, the Department of Finance Canada, in considering these potential improvements to compliance. This will be completed by October 2018, dependent upon the outcome of program consultations led by Global Affairs Canada and the Department of Finance Canada.

That's a little bit of an “off in the future” type of thing, and it sounds like just some internal discussions and things like that, so it's not really a particular commitment. I think in the action plan that they would probably have to prepare for the public accounts committee, we would expect to see more details about exactly what they were going to do, and perhaps some timelines.

11:15 a.m.

Liberal

Lloyd Longfield Liberal Guelph, ON

Very good. Thank you.

You also talked about the recommendation to explore automated means to validate, and we are looking at pre-clearance in other areas. Would this fall under pre-clearance type legislation that we're considering right now, or is this something that would be in addition to what we're considering?

11:15 a.m.

Richard Domingue Principal, Office of the Auditor General

This would be in addition to what we recommended. What we noted was not so much an issue with the pre-clearance, but more an issue regarding the fact that the rules were not followed. It was not an issue of misclassification, per se; it was an issue of the importers importing agricultural goods that were either diverted out of Canada and duties not paid, or about the quota.

I'm not sure automation would solve that issue. The only thing that could be an advantage of adding an automated system is to check the licences against the actual import. Right now, it's in two different systems. A truckload could arrive at the border with no licence, and it has five days to get one, but meanwhile whatever was in the truck is long gone.

11:15 a.m.

Liberal

Lloyd Longfield Liberal Guelph, ON

Right, okay.

It takes two parties, the exporter from the States and the importer from Canada, to understand the system. Maybe in my first question that's where I was diving in, thinking the Americans may not appreciate the complexities, or they do and they're ignoring them. But if we put them right in front of them electronically, they have to comply before they get clearance at the border. You shouldn't leave your facility until you know you have electronic pre-clearance.

11:20 a.m.

Principal, Office of the Auditor General

Richard Domingue

We didn't look at the pre-clearance per se, but we noted in the report that there was.... There are two heads to the beast. You have GAC on one side and CBSA on the other side, and they don't really collaborate. That, in itself, was a weakness in the program.

11:20 a.m.

Liberal

Lloyd Longfield Liberal Guelph, ON

Thank you very much. It's good to have those details. I appreciate it.