International Trade Committee on Oct. 18th, 2017

[The Chair, Liberal, Mark Eyking]

I call the meeting to order.

Good afternoon, everyone. Sorry, I'm running a little late. I can't blame the weather because it's a beautiful day out there.

We're honoured to have Mr. Ferguson here. Thank you for coming, sir, and bringing your...we wouldn't call them sidekicks, would we? Your advisers? Your assistants?

Thank you for coming before our committee. Our committee's been quite active in the last while. As you may know, we have finished the European agreement, we were working on TPP, and now our main study is NAFTA.

Without further ado, you have the floor, sir.

[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 are Richard Domingue and Philippe Le Goff, who were responsible for the audit.

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

In the 2015-16 fiscal year, federal government revenue from those duties was more than $5 billion. Many tariff items raised little revenue. For example, in 2015, 1,973 tariff items generated only $26 million. That is less than one half of 1% of duty revenues. In addition, 57% of customs duty revenues were generated by only three categories of goods, those being apparel, footwear, and vehicles and auto parts.

We found that the Canada Border Services Agency was unable to assess all customs duties owed to the government because its import controls were not working adequately.

The import forms filled out by importers and customs brokers were not always useful to the agency. For example, the quality of the product descriptions entered on the forms was generally poor. Almost 75% of the records we examined did not have descriptions that allowed us to determine whether the importers used the correct tariff classifications. Therefore, we questioned why the agency required the importers to provide product descriptions.

To expedite trade, the agency did not compare the goods with the information on the import form or on the invoice at the border. Goods were released at the border for delivery to their destinations. Within five days after release, the agency confirmed the amount of duties and taxes owed. We believe that this self-assessment system with little validation allowed some importers to be non-compliant with the import rules and regulations.

Importers are responsible for ensuring that the information provided is accurate, but they often use customs brokers to help them prepare import forms. We found that, despite known non-compliance with import rules, the agency did not monitor the performance of customs brokers. The agency has the power to suspend or cancel a broker's licence; however, it rarely suspended a licence because of concerns about a broker's overall performance.

We found that the Canada Border Services Agency and Global Affairs Canada didn't work together to adequately manage the limits on quota-controlled goods coming into Canada for the five imported goods we examined, which were dairy, chicken, turkey, egg products, and beef. The first four of these goods are covered under the supply management system.

Canada applies tariff rate quotas to control the volume of these goods, which can be imported into Canada at a lower rate of duty or duty-free. Once that volume has been imported, duties are applied 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 observed that a significant volume of controlled goods entered Canada without the required permit. We estimated that in 2015, $131 million worth of dairy, chicken, turkey, egg products, and beef were imported without a permit. If the appropriate duties had been applied to the excess volume, the government would have assessed $168 million in additional customs duties.

We also found that the duties relief program, administered by the Canada Border Services Agency, could not always prevent the diversion of goods into the Canadian economy. The program allows importers to import goods without paying duties as long as they are used to add value to goods that are later exported.

In 2016, the agency completed six compliance verifications of high-risk importers under the duties relief program and found that none of these importers complied with the program's requirements. The agency later suspended the licences of these importers.

Finally, we examined the $20 minimum value to import goods duty-free by mail or courier. This amount has not changed since 1992, but the volume and total value of incoming parcels have increased significantly. The agency did not have the staff to inspect all incoming parcels, which meant that duties and taxes were not always assessed when they should have been. The agency determined that administering customs duties on goods imported through the postal service and valued at less than $200 resulted in a net cost to the government.

Overall, the Government of Canada assesses customs duties and controls goods coming into the country according to methods that are complex and difficult to administer. This means that the program operates differently in practice than on paper.

The Canada Border Services Agency, Global Affairs Canada, and the Department of Finance Canada have agreed to our recommendations.

Mr. Chair, this concludes my opening statement. We'd be pleased to answer any questions the committee may have.

Thank you.

[The Chair, Liberal, Mark Eyking]

Thank you, sir, and thank you for the hard work you and your staff did. There are some revealing findings there. Hopefully we can get some action on those.

We're going to go right to questions, if you're ready. We'll try to keep dialogue with the MPs to five minutes.

We are going to start with the Conservatives. Mr. Carrie, you have the floor.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair.

I want to thank you and your staff, Mr. Ferguson, for being here.

In number 11, in your conclusion, you say, “Overall, the Government of Canada assesses customs duties and controls goods coming into the country according to methods that are complex and difficult to administer. This means that the program operates differently in practice than on paper.”

I think the CBSA found that over 20% of the goods imported into Canada were misclassified and may not have paid their full duty. That seems really high. In your opinion, is that the result of people intentionally misclassifying things, or is it honest confusion by importers with the classification system?

[Michael Ferguson]

Mr. Chair, obviously it's always difficult to precisely say how people are reacting, but I think in this case there is probably enough evidence to say that there are some importers who are using the rules to their best advantage.

That's why we also commented on the number of adjustments made after the fact. In many cases, importers have up to four years to go back and change what they originally declared as coming into the country, and there is quite a bit of that happening. We say in the report that, again, the Canada Border Services Agency recognizes that the longer an importer has to make that type of change, the more likely it is that the change really wasn't an appropriate one to make.

It's hard to say to what extent there may have been importers perhaps stretching the rules to the best of their advantage, but it's certainly safe to say that it does happen.

[Colin Carrie, Conservative, Oshawa, ON]

As you know, we've been looking at NAFTA and at trade deals. It's what we do here. I think everybody around the table would like to see more trade, better trade, more efficient trade, but of course that would include more efficiencies and better access, and things happening at the border.

In your report, you recommend that CBSA consider implementing “automated means to validate accounting declarations for quota-controlled goods to be charged customs duties at a lower rate”.

What would be the advantage and disadvantage of automating the validation of these declarations? Are there ways we could use technology or types of automation to make things a bit more efficient and accurate?

[Michael Ferguson]

I think we talked about a lot of this in paragraphs 2.53 and 2.54. I believe that the issue was fundamentally that the permitted volumes that importers were allowed to bring in and the actual volumes that were brought in, those two pieces of information, were maintained in two different systems and in fact in two different organizations. There was nothing that was done to bring that information together to make sure that what came in under the permits for quota-controlled goods was within the total maximum volume that was allowed to come in.

What we ended up having to do in this case was go back to Stats Canada information to try to figure out what came in and to what extent it appeared to be above the permitted volumes, the authorized volumes. I think our point was they had these pieces of information, but they were maintaining the information in two different systems. Nobody was systematically comparing the two. At the end of the day we found out that $131 million worth of goods came in that were not properly permitted or were above the volumes, and should have had the higher rates of duties applied to them but didn't.

[Colin Carrie, Conservative, Oshawa, ON]

How am I doing for time?

[The Chair, Liberal, Mark Eyking]

You have a half minute left. Do you want a short snapper?

[Colin Carrie, Conservative, Oshawa, ON]

Yes.

I was watching your body language, Mr. Ferguson, and you had one hand here and one hand there. I was wondering if this is an example of the right hand not knowing what the left hand's doing in government.

I think everybody agreed with your recommendation. Do you think that they're going to be giving enough resources to CBSA to correct these problems?

[Michael Ferguson]

As per normal, CBSA has prepared an action plan, and I believe it has presented that action plan already to the public accounts committee, or sent it to the public accounts committee. They haven't yet appeared for a hearing, but they do have an action plan.

I believe many of the dates in their action plan are into 2018 and—are there some in 2017?

[A voice]

Yes.

[Michael Ferguson]

Okay.

There is an action plan. I think this committee might also be interested in looking at that action plan and looking at what they say they're going to do and when they're going to do it and make sure that the department is actually living up to that action plan.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

We're going to move over to the Liberals now.

Mr. Fonseca, you have the floor.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

Thank you, Mr. Chair.

Thank you, Mr. Ferguson and your team, for the report and the recommendations.

When we look at these current challenges and issues, I want to stick to looking at the efficiencies and where those can be brought in and how we overcome those.

We talk about the resources. Could you break that down? When we look at our IT infrastructure, is it a human resource gap that we have in terms of addressing these issues, or is it that we need more harmonization to build in those efficiencies, especially at our ground border?

Some of the companies that have come in and presented to us—Amazon, FedEx and others—talked about how difficult it is when they try to get across the border with the many line items that they have to sift through. It doesn't matter if it's footwear or apparel or food goods. Whatever it is, we have, as I see here, 7,400 tariff items, and most of the country's customs revenue is generated from 567 items. Is that not harmonized right now, especially with the United States, in terms of those tariff items, whatever the line item that they have to mark down on the form to be able to get that item across the border?

[Richard Domingue, Principal, Office of the Auditor General]

Thank you. Thank you, Mr. Chair.

There is some harmonization with the U.S. and with the WTO. For example, there are 3,493 items that are duty free because of WTO rules. There is harmonization, yes, with the U.S.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

The reason I bring it up is they bring it up often as an irritant, as a loss of productivity, in the sense that it is adding extra costs to the product because of the challenge of finding that line item and getting their customs brokers to go all through this. Has a discussion been had around getting customs brokers together from different countries, especially from our biggest importers or exporters, so that we can harmonize these line items?

[Michael Ferguson]

Probably the best way for me to answer that is by saying that when we do an audit we look at what the process in place is. We're not really looking at whether there should be more or fewer line items. That's the policy side of things. It's for the government to decide how they want to apply the whole tariff rate.

Our bigger issue is that a system exists on paper that says how tariffs are going to be applied, but then the organizations can't actually make sure that this system is working in practice. That's probably a significant irritant for Canadian businesses. They think they are working under one set of rules, but if that set of rules isn't actually applied the way it's written on paper, it causes them frustration.

As to the overall question of efficiency, we touched on it in a couple of places in the report. One was a case in which the agency, I believe, said that it costs them more to apply the $20 threshold than they actually collect. I think that essentially is the case up to a threshold of $200: it costs more to apply the rules than they collect. Now, that may be fine, but I think this is a piece of information that is useful in setting overall policy.

They have a place on the form for descriptions to be entered when something is coming into the country, but most of that information is not useful. We found, I think, 1.1 million lines for which they had multiple descriptions but only one classification code. They might have 50 items in their description, but only one classification code.

Then there was another large percentage of them in which all they put in the description was something like “kits”. You can't apply a classification code when all you're describing is “kits”. Why bother asking importers to fill in the description, then? It's not required, as I understand it, but it's still there, and importers are filling it in.

Canada Border Services Agency also identified that if they had more compliance officers, they could collect four to 10 times the salary of that officer in additional duties.

I think we touched, then, on some of the issues about efficiency, but our main message in the whole audit is to somehow try to get the system to work in practice the way it's supposed to work or is described to work on paper.

[The Chair, Liberal, Mark Eyking]

Thank you, sir.

We are going to move over to the NDP now.

Ms. Ramsey, you have the floor.

[Tracey Ramsey, NDP, Essex, ON]

This is so interesting, to be honest. We hear pieces of this in all of the trade agreements we're discussing, and certainly around NAFTA. We'll definitely keep an eye on that action plan that you were talking about at the public accounts committee.

Could you, though, speak to any of the particular staffing challenges CBSA highlighted to you during the reporting process?

[Michael Ferguson]

I think those were the only two they did actually highlight to us, one being that if they had more compliance officers they could collect more revenue, and the other being that it costs them more to collect the low-dollar-value duties on parcels coming through the mail.

[Tracey Ramsey, NDP, Essex, ON]

The de minimis question is one that is coming up as well. It's obviously an ask that the U.S. has in NAFTA.

I wonder, though, whether any type of look has been taken at the amount we are losing in trying to collect the duties at the border against the jobs affected in the retail sector. We've heard from retailing and from chambers of commerce that they think there will be an impact from that de minimis shifting. It's not just the border snapshot, then; it's about the wider impact.

I want to ask you about the “misclassified” category. They are saying they believe that over the past 15 years, 20% of the goods imported into Canada have been misclassified. Can you talk to us a little about whether there are certain categories that are consistently misclassified and whether you have narrowed it down at all to any particular types of categories?

[Michael Ferguson]

We make that reference in paragraph 2.21 of the audit, which says:

Over the last 15 years, the Agency's compliance verifications on specific goods revealed that importers misclassified imported goods more than 20 percent of the time.

That's a long-term percentage.

Regarding particular types of goods, I don't think we have any information about whether some goods were more likely to be misclassified than others.

[Tracey Ramsey, NDP, Essex, ON]

Okay. We certainly heard here about diafiltered milk. You mentioned the pizza kits and things like broiler chickens. Are you saying there wasn't any specific misclassification around those?

[Michael Ferguson]

Well, we certainly found some issues.

I think we mentioned the duties relief program, for example, and the fact that some goods were being imported and then some value-added was being put into the process in Canada. They were supposed to be exported again, but often products were getting diverted into the Canadian market. That was something that tended to happen, particularly with marinated chicken.

Other than that, we know there are problems as well with the diafiltered milk. I think part of the issue around diafiltered milk is knowing whether it's diafiltered milk or not when it shows up at the border, because how do you know what the protein percentage is in the product?

Certainly we did notice some of those issues. In terms of this misclassification issue, it wasn't broken down by type of product.