Public Accounts Committee on Nov. 9th, 2017

[The Chair, Conservative, Kevin Sorenson]

Good morning, everyone. Welcome. This is meeting number 78 of the Standing Committee on Public Accounts, and it's Thursday, November 9, 2017.

I will remind all committee members and guests with us and those in the audience that today we are televised, so I would encourage you to mute your cellphones or other communication devices.

Today we are studying “Report 2, Custom Duties” from the spring 2017 reports of the Auditor General of Canada.

As our witnesses, we have this morning, from the Office of the Auditor General, Mr. Michael Ferguson, the Auditor General of Canada, and Richard Domingue, principal.

I know I'll embarrass him, but I'll also say that Mr. Domingue will be retiring in a few weeks, and this will be his last visit to committee. Mr. Domingue started his career at the Library of Parliament in 1988 as an analyst on the House of Commons finance committee. He also worked as an analyst on the public accounts committee in the early 1990s, and in 1999 he joined the Office of the Auditor General of Canada. Mr. Domingue's audits touch mostly on financial and economic areas, such as long-term fiscal sustainability and public sector pension plans. He has appeared more than 20 times before various House of Commons and Senate committees over the years, including a dozen times before the public accounts committee. Thank you for being here today, and we wish you all the best in the future.

We have, from Canada Border Services Agency, Mr. John Ossowski, president; and Brad Loynachan, director of trade policy.

From the Department of Finance, we have Mr. Rick Stewart, assistant deputy minister, international trade and finance branch; and Scott Winter, chief, international trade policy division, trade and tariff policy, international trade and finance branch.

From the Department of Foreign Affairs, Trade and Development, we have Mr. Steve Verheul, assistant deputy minister, trade policy negotiations.

We have a number of opening statements, so for that reason we want to begin right away.

We'll first turn to our Auditor General, Mr. Ferguson.

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

Mr. Chair, thank you for this opportunity to discuss our spring 2017 report on customs duties.

Our audit focused on whether the Department 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 one per cent of duty revenues. In addition, 57% of customs duty revenues were generated by only three categories of goods: 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 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. 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: 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 dollars' 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 six 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 would be pleased to answer any questions the committee may have.

Thank you.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Ferguson.

We'll now move to Mr. Ossowski, please.

[John Ossowski, President, Canada Border Services Agency]

Good morning, Mr. Chair, and members of the committee. Thank you for the opportunity to appear today along with my fellow witnesses.

I am joined by Brad Loynachan, director of trade policy within the CBSA's trade and anti-dumping programs directorate, whom I may turn to in responding to some of your questions.

I will begin by saying that we agree with the five recommendations made to the CBSA by the Auditor General.

In response, we have developed a detailed action plan which is now being implemented. The plan reflects the essential role the agency has to maintain the integrity of our country's customs duties regime and the importance of this regime to Canada's competitiveness and prosperity.

I will begin with a brief review of the roles that each of the departments here today play in the customs regime. As a way for the federal government to obtain revenue and protect certain sectors of the economy, this regime is intrinsically linked to the mandate of all three departments.

Finance Canada is responsible for developing and implementing policies on trade and tariffs, including the customs tariff. It also provides analysis and advice on the government's international trade and finance policy agenda.

As for the CBSA, our overall mandate is twofold. We secure the border, while ensuring that goods and people cross the border as expeditiously as possible. Under our facilitation role, we are also responsible for assessing the duties and taxes owed to the Government of Canada. Increasingly, we do this job in a fast-paced, complex global trade environment, one characterized by a 30% increase in the number of individual importations since 2012.

Maximizing the benefits of trade for Canadians and Canada's prosperity is central to the government's policy agenda, and the CBSA takes its role in supporting trade very seriously.

Global Affairs Canada is responsible for controlling the import of goods for which Canada requires an import permit, such as beef, chicken, and dairy products. The goods are listed on the import control list found in the Export and Import Permits Act.

Returning to the CBSA, I wish to stress our dual mandate: we prevent the entry of those travellers or goods posing potential threats to Canada while facilitating the free flow of legitimate cargo and people at the border.

As mentioned, our officers assess duties and taxes on goods coming across the border, totalling more than $71 million in duties and taxes per day. A large part of this comes from the importation of commercial goods, which is central to our discussion today.

Assessing duties and taxes is a shared responsibility between importers and the CBSA. Let me be clear. Our customs regime is grounded in voluntary compliance by the importers and risk management by the CBSA. Much like Canadians are expected to voluntarily declare and pay their taxes, the Customs Act places the onus on importers to self-assess and ultimately pay their trade-related duties and taxes. Importers or their brokers are expected to provide correct declarations to the CBSA, and the agency then risk assesses the declaration.

For importers potentially posing a threat to Canada's security or safety, the agency examines the shipment to decide whether it should be released, refused entry, or confiscated. After the goods have been released, the agency confirms the duties and taxes owing and accepts the payment. The CBSA has the legislative right to conduct trade verifications to ensure compliance with all import requirements, including the proper assessment of duties and taxes, and the issuance of applicable penalties.

While it's our job to protect the health, safety, and security of Canadians, we must do so in ways that facilitate legitimate trade across our borders to keep the economy moving. This is a process that we seek to improve all the time. That brings me to to our response to the report's recommendations.

In the report, the Auditor General found that the agency's controls on the import of supply-managed goods were inadequate. We recognize the seriousness of this finding given our country's strong commitment to the supply management system.

From this finding, the report's fourth recommendation called on us to work with Global Affairs Canada to better enforce tariff rate quotas by reviewing the process of verifying permits. In response to this recommendation, the CBSA acted quickly to strengthen pre-existing compliance measures.

Specifically, we have increased the number of trade compliance verifications targeting supply-managed goods, so that additional duties and taxes owing as a result of non-compliance will be assessed. Since April 2016, this change has yielded $72 million in additional revenues that would not have otherwise been assessed.

We also moved to audit participants in our duties relief program, under which certain pre-authorized companies are allowed to import goods without paying customs duties at the time of importation on the condition that the goods are later exported. CBSA verifications are ongoing and have resulted in the suspension or revocation of eight licences since May 2016.

Moving forward, we will continue on this track of increased verifications, making sure that the integrity of Canada's supply management regime is upheld through the proper assessment of duties and taxes and adherence to program conditions.

We will also review how the CBSA validates that goods being imported respect permits issued by Global Affairs Canada. We will address any gaps in the process while exploring automated means to carry out these functions more efficiently. We will complete this review by September 2018.

The Auditor General's fifth recommendation, also pertaining to controlling goods, called for making licences under the duties relief program renewable, and requiring a financial deposit from importers proportional to the value of the duties at risk. In fulfilling the agency's commitment to strengthening compliance as referred to in recommendations 4 and 5, we will, in consultation with Global Affairs and Finance, complete this work by March 2019.

Moving to the Auditor General's other recommendations, related to the assessment of duties, we also take seriously the finding that misclassification of imported goods has taken place.

As such, we will follow recommendation 1, which calls for a review of our customs brokers regime, including consideration of a licensing process that requires periodic assessment of a broker's compliance record, and shared liability between brokers and importers when it comes to compliance with certain requirements. This review will include consultations with impacted stakeholders, including customs brokers. We will complete this review by September 2018.

In response to recommendation 2, our agency will review its penalties, aiming to create a more meaningful deterrent to those importers who do not comply with the law relating to import revenues or with the agency's trade programs. To do this, we will consider strengthening the rules around specific penalties, namely, our administrative monetary penalty system, or AMPS, as well as the rules around seizures and qualifications for the CBSA's privilege programs, such as the trusted trader program. Again, consultation with our stakeholders will be an important component of the review.

Finally, Mr. Chair, we also agree with recommendation 3, which is to review the time period allowing for adjustments to be made to import declaration forms after the fact without compromising our ability to conduct compliance verifications. To this end, in consultation with our stakeholders, our agency is conducting a review of the current legislative provisions that will be completed by December 2019. As always, we seek the optimal balance between the agency's ability to conduct meaningful compliance verifications and our responsibility to facilitate trade.

In closing, let me say again that we take this report's findings seriously, and our actions speak to this. Let me also reiterate that trade facilitation is critical to Canada's prosperity, and our agency is committed to responding to the needs of the import and export communities to help enhance Canada's competitiveness.

I wish to thank the Auditor General for his report and recommendations, and for helping us to make further improvements.

With that, I'm now pleased to take your questions.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Ossowski.

Now we'll move to Mr. Stewart, please.

[Rick Stewart, Assistant Deputy Minister, International Trade and Finance Branch, Department of Finance]

Thank you, Mr. Chairman and members of this committee. Good morning to you all. We appreciate the opportunity to be here today.

The Deputy Minister of Finance sends his regrets for not being available to participate today.

I will begin my remarks with a brief overview of the role of the International Trade and Finance Branch with respect to customs duties. I will then say a few words about the Auditor General's findings and the actions we are taking to address this recent recommendation to the department to review Canada's tariff regime.

The Minister of Finance has legislative and policy responsibility for Canadian import policy, including Canada’s tariff regime, which is governed by the customs tariff and its underlying orders and regulations. The international trade and finance branch provides analysis and advice on trade and tariff policy issues to support the minister in this capacity. The branch is also involved in drafting related legislation, orders and regulations, and supporting their implementation.

With respect to customs duties, our analysis and advice is guided by proactive tariff policy principles in support of important economic policy objectives. In recent years, this has included numerous measures to assist various economic sectors, support consumers, and ensure tariff programs for developing countries are aligned with global realities. These efforts are in addition to the many changes made to the legislation as a result of trade agreements, and to simplify its structure and administration.

Regarding the customs duties audit finding, the Department of Finance was largely regarded as effectively fulfilling its responsibilities. The report concluded that when the department reviewed customs duties, whether it be in the context of FTA negotiations or in support of various other government priorities, the analysis conducted was sound.

The report nonetheless recommended that the department conduct a review of the Customs Tariff to identify if there are any specific tariff items that no longer meet their policy objectives and that could possibly be modified.

As outlined in our response to this recommendation, the department has agreed to undertake such a review, taking into account Canada’s tariff policy objectives and international obligations, among other factors. In fact, in accordance with the timelines provided in our detailed action plan, this review is currently under way by my officials. Our objective for this review is to identify specific tariff items that could be modified, as well as other technical simplifications to the tariff structure that would help reduce red tape and ease administrative burden and compliance costs for businesses. Our aim is to provide recommendations to our minister in the coming months and to implement any resulting changes by the end of 2018.

Before I end, I would like to thank the Auditor General for the constructive feedback provided in the report. We look forward to working ahead on our recommendation.

Thank you once again for your time. We look forward to answering your questions.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Stewart.

We'll now turn to Mr. Verheul, please, from Foreign Affairs, Trade and Development.

Welcome.

[Steve Verheul, Assistant Deputy Minister, Trade Policy and Negotiations, Department of Foreign Affairs, Trade and Development]

Thank you and good morning, Mr. Chair and members of the committee. I'd like to start by thanking you for inviting us to appear today.

On behalf of Global Affairs Canada I would like to thank the Auditor General for the work of his office on this important issue. We acknowledge the findings and recommendations of the report and look forward to discussing the steps taken to address some of his findings. First, I would like to provide some information on the role of Global Affairs Canada as it relates to the customs tariff.

Global Affairs Canada is responsible for administration of import controls under the Export and Import Permits Act. It is the government authority for the review of and the issuance of permits regarding the import of products contained on the import control list. This list contains many different types of goods, including various agricultural products, textiles and apparel, certain steel products, and certain strategic and military goods. The majority of items contained on the import control list are identified by the customs tariff classification.

Under certain bilateral and multilateral commitments, Canada has established tariff rate quotas for agricultural products, including supply-managed goods, which allow for a certain predetermined volume of products to be imported at a low rate of duty. Importers wishing to claim the low rate of duty for these goods normally require a shipment-specific permit issued under the Export and Import Permits Act. Imports of these goods without a shipment-specific permit can normally only be facilitated at the higher rate of duty as identified in the customs tariff. There are certain exemptions for imports of goods for personal use.

Global Affairs Canada has a close working relationship with the Canada Border Services Agency, which is responsible for the assessment of the goods imported into Canada and the enforcement of border controls. Import permits issued under the authority of the Export and Import Permits Act are shared electronically on a transaction-by-transaction basis with the Canada Border Services Agency in order to facilitate their administration of border controls and tariff classification of the imported goods. This information process is facilitated via Global Affairs Canada's export and import control system software and the Canada Border Services Agency's accelerated commercial release operations support system. As such, ensuring that tariff rate quotas are respected and that supply-managed goods entering Canada are properly assessed is a shared goal of both Global Affairs Canada and the Canada Border Services Agency. We take seriously the responsibility to administer the import control component of Canada's system of supply management.

A key finding of the OAG report regarding the management of customs duties was that a certain volume of controlled goods subject to tariff rate quotas was imported into Canada at the low rate of duty without the required shipment-specific import permit, thereby negatively impacting the integrity of Canada's system of tariff rate quotas and duties payable to the Government of Canada. In order to address this finding, the OAG recommended that Global Affairs Canada and the Canada Border Services Agency work collaboratively to better enforce tariff rate quotas.

In response to the OAG's findings and recommendations, the department has instituted a process by which officials of the Canada Border Services Agency will receive regular breakdowns of all permits issued for agricultural goods subject to import controls under the Export and Import Permits Act. This will assist CBSA officials in their post-shipment verification activities and improve the effectiveness of the enforcement of tariff rate quotas.

The information is being shared under established information-sharing authorities. We believe that strong interdepartmental co-operation is one of the main strengths of Canada's import control program. I can assure you that Global Affairs Canada is fully committed to strengthening our efforts in this important area.

We will be happy to respond to your questions on these or other matters. Thank you.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Verheul.

We'll now move into our first round of questioning.

The first round goes to Mr. Lefebvre, please. You have seven minutes.

[Paul Lefebvre, Liberal, Sudbury, ON]

Thank you, Mr. Chair.

Before I start, Chair, as you know, we have pretty much a committee policy that we ask that deputy ministers join us at the meetings, so I would like to have an explanation as to why the deputy minister of finance and the deputy minister of foreign affairs are not here.

I would just like to have your explanation, please, Mr. Chair.

[The Chair, Conservative, Kevin Sorenson]

Maybe I can have Mr. Stewart answer.

We were aware that he was unable to be here today. He was here on October 17 for the public accounts, and we were pleased with that. I think we knew that he wasn't going to be able to attend.

Mr. Stewart, would you like to add to that?

[Rick Stewart]

Thank you, Mr. Chair.

What I would add is that certainly my deputy minister takes appearances at all committees seriously, and it is with regret that he was not able to be here today due to conflicting obligations.

[Paul Lefebvre, Liberal, Sudbury, ON]

All right.

With respect to Global Affairs, is it the same answer?

[Steve Verheul]

It is essentially the same answer, yes. Our deputy minister is currently in Da Nang at the APEC ministerial meeting with the Prime Minister and is unable to appear today.

[Paul Lefebvre, Liberal, Sudbury, ON]

That's a strong answer. I'm satisfied with that, if the rest of my committee members are satisfied to continue.

[Some hon. members]

Agreed.

[Paul Lefebvre, Liberal, Sudbury, ON]

Okay.

[The Chair, Conservative, Kevin Sorenson]

I'm very pleased that Mr. Verheul is here. I'm sure we won't be disappointed, and likewise for Mr. Stewart.

[Paul Lefebvre, Liberal, Sudbury, ON]

Thank you. Yes, I agree.

With that, Mr. Chair, can I start my time?

[The Chair, Conservative, Kevin Sorenson]

Yes, go ahead.

[Paul Lefebvre, Liberal, Sudbury, ON]

Again, thank you, everyone, for being here this morning.

I just want some explanation before I start the questions.

Mr. Ossowski, you say the system we have under the CBSA is voluntary compliance by importers and risk management, and the risk is managed by the CBSA, much like Canadians have a voluntary compliance when they file their taxes. We have to put everything in there. If not, the CRA comes back and they reassess us to determine what we actually owe in taxes.

However, we have a system to verify that, which is called a net worth assessment. If you file zero on your taxes over the years, basically the CRA comes back and says, “Well, on a net worth assessment, we think you're actually worth this, and therefore you need to pay your taxes at x amount.”

Is there the same system for importers? At the end of the day with the voluntary compliance, from what we see here, if you didn't properly declare, there are not the strong checks and balances in place to address that. Is there a parallel system? You're comparing it to a taxpayer compliant system, but is there a system that is similar for the importers?

[John Ossowski]

We probably have it a little better, because you have to provide some documentation to us with every import. That is unlike the tax system, where you potentially could not file for a particular year, even though you're obliged to, and then you could do some catch-ups.

However, the basics of it, though, are that you have to look for the appropriate classification of what the importation is. We look for that in every circumstance. Sometimes it's done electronically, and sometimes it's in a paper format. It depends on what the good is and the mode of how it's coming in.

[Paul Lefebvre, Liberal, Sudbury, ON]

How often is that reviewed or audited? Obviously, anybody could put whatever they want on the forms. There have to be checks and balances in place. What are the audit measures?

[John Ossowski]

To put it in context, we do 17 million commercial releases a year, so there is a lot of volume and complexity that we're talking about here. That said, we do anywhere between 1,500 and 1,800 verifications a year.

I think what the Auditor General has pointed out and we have responded to is that we're probably biased a bit too much towards the random, and now we're doing more on the targeted side. That's why I was able to report in my opening remarks about some of the increased assessment revenues that we've been able to collect.

[Paul Lefebvre, Liberal, Sudbury, ON]

That leads me to my next question with respect to supply management. We have a supply management system in place to protect Canadian producers to ensure there's not an increase in volume and that people could just skirt the system. However, from what we've seen from the Auditor General's comments, basically in the system that we have, the checks and balances were not properly there. That obviously led to these results that we're seeing, which are very, very concerning. We legislated and have a system to protect our Canadian producers, but we rely on CBSA to ensure that happens. If it doesn't, the system is for nothing.

What do you say to that? Where are you guys with that recommendation?