Memorandum D8-2-11

Ottawa, March 31, 2006

Goods returning to Canada after being altered or worked on outside Canada

In Brief

This is a new memorandum. It has been published to address various concerns that have been raised relating to the term “alteration” as it appears in tariff item Nos. 9992.00.00 and 9971.00.00 of the Customs Tariff and the term “work” as it appears in the Canadian Goods Abroad provisions in sections 101 to 105 of the Customs Tariff.

In addition, this Memorandum clarifies the goods and services tax/harmonized sales tax (GST/HST) treatment of goods returning to Canada after being altered or worked on abroad and the documentation of these goods.

Memorandum

This Memorandum addresses various concerns that have been raised relating to the term “alteration” as it appears in tariff item Nos. 9992.00.00 and 9971.00.00 of the Customs Tariff and the term “work” as it appears in the Canadian Goods Abroad provisions in sections 101 to 105 of the Customs Tariff. In addition, this Memorandum clarifies the goods and services tax/harmonized sales tax (GST/HST) treatment of goods returning to Canada after being altered or worked on abroad and the documentation of these goods.

Table of Contents

• Legislation
• Guidelines and General information
  • Definitions
  • Difference between work and alteration
  • Goods and services tax/harmonized sales tax
    (GST/HST) treatment
  • Documentation
  • Drawback
• Additional information

Legislation

Tariff item No. 9992.00.00 reads as follows:

Tariff item No. 9971.00.00 reads as follows:

Tugs and pusher craft of heading No. 89.04;

The legislative references in the North American Free Trade Agreement (NAFTA) read as follows:

The Canadian Goods Abroad provisions, in sections 101 to 105 of the Customs Tariff, read as follows:

1. the goods were repaired outside Canada after being exported for the declared purpose of being repaired;
2. equipment was added to the goods outside Canada; or
3. he goods were the product of Canada and work was done outside Canada on the goods.

(2) Emergency repairs — Subject to section 104, if an application is made in accordance with section 102, relief shall be granted from the payment of the whole of the duties that, but for this section, would be payable in respect of aircraft, vehicles or vessels returned to Canada after their exportation if

1. the aircraft, vehicles or vessels were repaired outside Canada as a result of an unforeseen contingency that occurred outside Canada; and
2. the repairs were necessary to ensure the safe return to Canada of the aircraft, vehicles or vessels.

(3) Regulations — The Governor in Council may make regulations

1. on the recommendation of the Minister, prescribing the manner for determining what goods are considered to be a product of Canada for the purposes of subsection (1); and
2. on the recommendation of the Minister of National Revenue, defining the words “aircraft,” “vehicles” and “vessels” for the purposes of subsection (2).

102. Application — An application for relief under section 101 must be

1. accompanied by evidence satisfactory to the Minister of National Revenue that the goods were exported and
   1. in respect of goods referred to in paragraph 101(1)(a), repairs could not have been made in Canada at the place the goods were located before their exportation or within a reasonable distance of that place,
   2. in respect of equipment referred to in paragraph 101(1)(b), the equipment added could not practicably have been added in Canada, or
   3. in respect of goods referred to in paragraph 101(1)(c), it would not have been practicable to do the work in Canada; or
2. if the application is made under subsection 101(2), made in the prescribed form and manner, with the prescribed information, at the time of the return to Canada of the goods in respect of which the application is made.

103. Release of returned goods — Subject to section 104, goods in respect of which relief is granted under section 101 before they are released may be released without any payment of duties.

104. Conditions for relief — Relief shall be granted under section 101 in respect of goods that were returned to Canada after being exported only if

1. relief, conditional on the exportation of the goods, was not granted in respect of any duties paid or payable; or
2. if an application for relief under subsection 101(1) is made, the portion of the duties, calculated in accordance with paragraph 105(1)(b), has been paid.

105.(1) Value for duty of work abroad — For the purposes of subsection 101(1), the portion of the duties in respect of which relief is granted under that subsection shall be

1. the amount that, but for that subsection, would be payable in respect of the returned goods

   less

2. the amount obtained by applying the rate that would, but for that subsection, be applied to determine the duties under paragraph (a) to the value of
   1. in respect of goods referred to in paragraph 101(1)(a), the repairs made outside Canada,
   2. in respect of equipment referred to in paragraph 101(1)(b), the equipment added and related work done outside Canada, or
   3. in respect of goods referred to in paragraph 101(1)(c), the work done outside Canada.

(2) Regulations — For the purposes of subsection (1), the Governor in Council may, on the recommendation of the Minister of National Revenue, make regulations prescribing the method of determining the value of repairs made, equipment added and work done outside Canada.

The legislative references in the Value of Imported Goods (GST/HST) Regulations are as follows:

Subsection 2(1) defines a “process” as:

2.(1) In these Regulations,

“process,” in respect of any goods, includes the adjustment, alteration, assembly, maintenance, manufacture, production, modification, overhaul, packaging, repackaging, repairor testing of the goods.

Section 13 is as follows:

For the purpose of subsection 215(2) of the Act [Excise Tax Act], if

1. goods (referred to in this section as “exported goods”) have been exported for the purpose of processing them,
2. goods (referred to in this section as “processed goods”) are imported for the first time after that processing and are accompanied by evidence satisfactory to the Minister [Minister of National Revenue] that they are the exported goods in their processed state or that they incorporate the exported goods,
3. the exported goods were not last imported in circumstances
   1. in which tax, calculated on a value determined under these Regulations (other than this section and sections 8 and 12), was payable,
   2. in which the goods were prescribed goods under a provision of the Non-Taxable Imported Goods (GST/HST) Regulations, other than paragraphs 3(j) and (k),
   3. in which a person was entitled under section 215.1 of the Act to claim a rebate in respect of the goods, or
   4. if the goods were last imported before 1991, in which either

      (A) tax under Part VI of the Act was not payable on the goods, or

      (B) relief from the payment of, or a refund or remission of, that tax was provided,

      on the condition that the goods be exported within a certain period, and

4. where a supply has been made of the exported goods or the processed goods
   1. outside Canada,
   2. to a recipient entitled under section 252 of the Act to claim a rebate in respect of the supply, or
   3. in circumstances in which the supply was included in Part V of Schedule VI to the Act,

      the processed goods are not being imported for the first time after that supply was made,

      the value of the processed goods shall be determined by the formula

      A + B

      where

      A is the value of the processing, including the value of any goods that were added to the exported goods, and

      B is the remaining duties payable in respect of the processed goods.

Guidelines and
General Information

Definitions

1. For the purposes of administering tariff item Nos. 9992.00.00 and 9971.00.00, the term “alteration” consists of an operation that does not destroy the essential characteristics of a good or create a new or commercially different good. An operation or process that is part of the production or assembly of an unfinished good into a finished good is not an alteration. This definition of “alteration” originates in Article 318 and Note 11 of the North American Free Trade Agreement. The term “essential characteristics” is administered as meaning the important distinguishing features or qualities of a good.
2. For the purposes of administering the Canadian Goods Abroad Program, the term “work” refers to an operation that changes the shape of a good or imparts new and different characteristics to a good that become an integral part of the good itself and did not exist in the good before the process was applied to it. An operation or process that is part of the production or assembly of an unfinished good into a finished good is also considered to be “work.” For the purposes of the Canadian Goods Abroad Program, an “alteration” is considered to be “work.”
3. The term “value of the processing” used in this Memorandum means the value of the alteration or work done abroad, the value of any assists and the value of any freight and associated charges incurred prior to or at the place of direct shipment of the good back to Canada. With regards to owner-supplied equipment, which is Canadian-sourced, duty-paid or duty-free, such materials are considered to be “assists” and form part of the value of the processing of the good upon its return to Canada. At the time of export, the importer can request a drawback of any customs duties previously paid on the owner-supplied equipment. The transportation costs of sending the goods to a location outside Canada and the cost of insuring the goods from the date of export to the date the good begins its return journey to Canada also form part of the value of the processing calculation.

   Difference between work and alteration

4. In some cases, it is very clear when the process applied to a good is “work.” For example, cloth exported and made into shirts and wood exported and made into tables. The process applied to the goods materially altered the essential characteristics of the goods. Therefore, the goods will not qualify for tariff item No. 9992.00.00 and the importer should expect to pay full customs duty on the goods when they return to Canada, unless the goods meet the conditions of the Canadian Goods Abroad Program. The Canada Border Services Agency (CBSA) must authorize use of the Canadian Goods Abroad Program before the goods are exported to be worked on.
5. For example, tomato juice under tariff item No. 2009.50.00 is exported from Canada in barrels to the United States to be mixed with other vegetable juices and bottled into single servings. When the juice returns to Canada, it will have lost its classification as tomato juice.
   It will be a commercially different good classified under a different tariff item (in this case, tariff item No. 2009.90.40). Therefore, the juice does not qualify under tariff item No. 9992.00.00.
6. Where a good retains its essential characteristics after being processed, the process is still considered “work” if the process is a step in the manufacturing process.
7. For example, wooden frames under tariff item No. 4414.00.00 imported from Germany are exported from Canada to the Barbados to be painted. When they return to Canada, a mirror is installed in the frames and they are offered for sale. Even though the frames remain classified under tariff item No. 4414.00.00 and they will retain their essential characteristics, the painting of the frames is considered “work,” i.e. the painting is a step in the production of an unfinished good into a finished good. Therefore, the frames do not qualify under tariff item 9992.00.00. In addition, because the frames are not a product of Canada, they do not qualify under the Canadian Goods Abroad Program and the frames are subject to full customs duty.
8. Generally where the importer is the end-user of the goods, processes applied to the goods while outside Canada that do not alter the essential characteristics of the goods are considered to be “alterations.” For example, school buses exported by a school board to the United States to have seat belts installed are eligible under tariff item No. 9992.00.00 because the school board is altering a finished good. However, school buses exported by a school bus manufacturer to have seatbelts installed would not qualify for tariff item No. 9992.00.00 because the installation of the seatbelts in this case is a step in the production of an unfinished good into a finished good.
9. For information regarding specific importations, please contact the nearest CBSA Client Services Office. Office locations can be obtained by dialing the automated Border Information Service at 1-800-461-9999 (English) or 1-800-959-2036 (French).

   Goods and services tax/harmonized sales tax (GST/HST) treatment

10. Goods returning to Canada that have been altered or worked on are subject to customs duties on the value of the good. The goods may be subject to GST/HST on the value of the processing work. Section 13 of the Value of Imported Goods (GST/HST) Regulations may apply to goods classified under tariff item Nos. 9992.00.00 or 9971.00.00, accounted for under the Canadian Goods Abroad Program, or classified in Chapters 1 to 97 of the Customs Tariff.
11. Where the conditions of section 13 of the Value of Imported Goods (GST/HST) Regulations are met, GST/HST is only payable on the value of the processing. Generally, this treatment is conditional on the last importation of the good (i) not having been based on a reduced value; (ii) not having been made on a non-taxable basis; and (iii) not having given rise to an imported goods rebate for the tax on the importation.
    The good must also not have been supplied prior to its re-importation without GST having applied to that supply as a result of the supply being made outside Canada or being a zero-rated supply for export. Also, the recipient of that supply must not have been entitled to a non-resident rebate in respect of the supply. The application of tax on the reduced value applies where the goods are exported for processing including adjustment, alteration, assembly, maintenance, manufacture, production, modification, overhaul, packaging, repackaging, repair or testing of the goods.
12. For information regarding the application of GST/HST to a specific importation, please contact the Canada Revenue Agency at the number listed in paragraph 21 of this Memorandum.

    

    Documentation

13. Where section 13 of the Value of Imported Goods (GST/HST) Regulations applies, there are four different scenarios. For all four scenarios, the goods are accounted for on Form B3, Canada Customs Coding Form. The Tariff Item Nos. 9971.00.00 and 9992.00.00 Accounting Regulations, the Canadian Goods Abroad Program and section 13 of the Value of Imported Goods (GST/HST) Regulations also require the importer to present acceptable proof of export and an invoice containing a complete description and costs of the foreign processing.

    Scenario One: Classified under tariff item Nos. 9992.00.00 or 9971.00.00

14. Where the goods are entitled to the benefits of tariff item Nos. 9992.00.00 or 9971.00.00, the value for duty (VFD) reported on Form B3 is the value of the processing. “9992” or “9971” must appear in field 28 to validate reporting the VFD in this manner. Failure to use one of these identifiers may result in the application of an Administrative Monetary Penalty (AMP) for incorrectly valuing the goods. The GST/HST owing will be calculated on the value of the processing.

    Scenario Two : Duty free when classified in Chapters 1 to 97 of the Customs Tariff

15. A two-line entry is required to correctly report the value for duty.

    1st line: The first line reports the value of the goods according to the valuation provisions in the Customs Act. GST/HST tax status code “50” is entered in field 35. The customs duties and GST/HST owing calculated against this line are “0.”

    2nd line: The second line reports the same classification number as the first line but the VFD in field 37 is shown as the value of the processing. The customs duties owing will calculate as “0” and the GST/HST owing will be calculated at 7%.

    Scenario Three : Dutiable when classified in Chapters 1 to 97 of the Customs Tariff, entitled to the provisions of the Canadian Goods Abroad Program.

16. A two-line entry is required.

    1st line: The VFD on the first line is the Canadian value of the good at time of export. The Canadian value of the good is calculated as the value of the good at the time of importation according to the valuation provisions in the Customs Act, less the value of the processing work done outside of Canada. Special authorization code 98-04-0101 is entered in field 26. This code fully remits the customs duties and GST/HST owing against this line.

    2nd line: The second line reports the same classification number but the VFD shown is the value of the processing. Customs duties and GST/HST are calculated and collected on this VFD.

    Scenario Four: Dutiable when classified in Chapters 1 to 97 of the Customs Tariff, not entitled to the provisions of the Canadian Goods Abroad Program.

17. A two-line entry is required.

    1st line: The first line shows the value for duty according to the valuation provisions in the Customs Act. GST/HST tax status code “50” is entered in field 35. Customs duties are paid against this line.

    2nd line: The second line reports the same classification number. The value for duty is the value of the processing and the customs duties owing as calculated by the first line. Special authorization code 90-0130 is entered in field 26. This code provides relief from the customs duties that would otherwise be calculated against this line. GST/HST is paid on the VFD.

18. For example, a sailboat classified under tariff item No. 8903.91.00 manufactured in Great Britain is imported into Canada without any hardware or a sail. It is sent from Canada to the United States to have brass hardware installed. The value of the processing (cost of the hardware, installation, transportation of the vessel to the factory in the United States and insurance) is $5,000. The vessel returns to Canada, the sail is installed and the vessel is offered for sale. The sailboat is not eligible for tariff item No. 9992.00.00 because the process that it underwent in the United States was not an alteration. Although the sailboat retains its essential characteristics, it was not a finished good when it was exported to the United States. The vessel would not qualify for the Canadian Goods Abroad Program because the sailboat is not a product of Canada. Form B3 would be completed as follows:

    1st line:
    field 27 – classification No. 8903.91.00

    field 37 – VFD $40,000 (valued according to the valuation provisions of the Customs Act)
    field 36 – GST/HST code 50 (GST/HST owing calculated as “0”)

    The duty rate is 9.5% and the duty owing would be calculated as $3,800.

    2nd line:
    field 27 – classification No. 8903.91.00

    field 37 – VFD $8,800 ($5,000 plus $3,800)

    field 26 – special authorization code 90-0130 (relieves the customs duties owing).

    The GST/HST is calculated at 7%. The amount of GST owing is $616. The importer will pay $4,416 in customs duties and taxes.

19. Where section 13 of the Value of Imported Goods (GST/HST) Regulations does not apply, the goods are documented on Form B3 with a single line entry. The value for duty is reported according to the valuation provisions in the Customs Act, even where the goods are entitled to the benefits of tariff item Nos. 9992.00.00 or 9971.0.00. In the latter case, “9992” or “9971” must appear in field 28 to reduce the customs duties owing to “0.” The GST/HST is paid on the VFD.

    Drawback

20. In the case where goods have been worked on while outside Canada and do not qualify for the Canadian Goods Abroad Program, but duty and tax were previously applied, the importer/exporter can apply for a drawback of the customs duties paid when the goods were originally imported. In the previous examples, outlined in paragraphs 7 and 18, the importer may be eligible for a drawback of the customs duties paid on the wooden frames when they were imported into Canada from Germany, and on the sailboat when it was originally imported from Great Britain. For further information on drawbacks, refer to Memorandum D7-4-2, Duty Drawback Program, and Memorandum D7-4-3, NAFTA Requirements for Drawback and Duty Deferral.

    Additional Information

21. Any questions regarding the GST/HST should be directed to:
    Manager
    Border Issues Unit
    General Operations and Border Issues Division
    Excise and GST/HST Rulings Directorate
    Policy and Planning Branch
    Canada Revenue Agency
    Place de Ville, Tower “A,” 15th floor
    320 Queen Street
    Ottawa ON K1A 0L5
    Telephone: (613) 952-8810
    Facsimile: (613) 992-1233

References

Issuing Office -

Trade Incentives and Refunds Unit

Legislative References -

Tariff item No. 9992.00.00
Tariff item No. 9971.00.00
Article 318 and note 11 of the North American Free
Trade Agreement
Sections 101 to 105 of the Customs Tariff

Headquarters Files -

6564-1

Superseded Memoranda "D" -

N/A

Other References -

D8-2-1, D8-2-25, D8-2-26

Services provided by the Canada Border Services Agency are available in both official languages.