Source: Trade Law
Link: Proving FTA preferential tariff eligibility: The evidentiary burden in Canada
Counsel, Woods LaFortune
As is the case with most free trade agreements, importers simply claim preferential tariff eligibility at the time of import. This claim can later be subject to verification by the customs administration in view of determining if it was valid. Proving preferential tariff entitlement requires assembling and presenting relevant facts and documents that support the claim. But just how much evidence is necessary in order to discharge that burden? In Canada there has always been a disconnect between what the Canada Border Services Agency (CBSA) deems necessary in the course of an origin verification and what the courts find satisfactory in the course of a judicial review. What follows are certain illustrations of that disconnect and how it usually gets resolved by Canadian courts.
Although Canada is a signatory to many free trade agreements, the North American Free Trade Agreement (NAFTA) is by far the most popular and widely used given the amount of trade that takes place between the United States of America (USA) and Canada. For this reason, we drafted our comments with the NAFTA rules of origin in mind. That said, most of the other free trade agreements work in a similar fashion and our remarks would equally apply as concerns them. We should also mention that, at the request of the USA, the NAFTA was recently renegotiated by the parties. Although a new agreement was reached, it hasn’t gone through the ratification process by the respective legislatures at the time of writing this article and thus our comments relate to the text currently in force as of October 31, 2019.
The burden of proof in NAFTA claims
At the risk of sounding too simplistic, importers and exporters need only prove that which is necessary in order to demonstrate eligibility, not all that the customs administration may find interesting to collect in the context of verifications. CBSA has a habit of asking for the exact same things in every origin verification they undertake regardless of how goods are said to qualify: they always ask for producer records, costed bills of material, sources supply for the materials, etc. At times, most of this information is unnecessary to demonstrate preferential tariff entitlement.
One such example can be found in the DeRonde case. In 2009 the CBSA decided to conduct a NAFTA origin verification of new truck tires that had been exported to Canada by DeRonde Tire Supply Inc, a US-based tire supplier. The US exporter had certified the tires were originating under NAFTA and provided Certificates of Origin to the Canadian importers who made claims of NAFTA preferential tariffs at the time of clearance. CBSA had asked for copies of bills of materials, costed sheets, a listing of all suppliers of materials, even affidavits from the tire producers substantiating the origin of the tires. DeRonde explained that they had made claims of NAFTA eligibility based on their own “knowledge” that the goods qualified, a valid basis that NAFTA specifically allows. However, CBSA denied the NAFTA preferential tariff entitlement for having failed to present all records they had requested. Ultimately the Canadian International Trade Tribunal (CITT) decided in favour of DeRonde. It was satisfied with the case that had been presented, namely that the actual North American plant where the tires had been produced happen to be identified in the marking engraved in the tire itself; this marking was a requirement of the US Department of transportation. To the satisfaction of the Tribunal a valid demonstration had been made of production occurring entirely in North America, a requirement of the NAFTA. DeRonde further made the demonstration, via expert witness, that even assuming the non-originating status of all materials that go into the manufacture of a tire, all such material would undergo the specific tariff shift rule specified in Schedule 1 of the NAFTA Rules of Origin Regulations. But more importantly, the Tribunal was satisfied that DeRonde had discharged its burden of proof and demonstrated on balance of probability that the tires originated under NAFTA and were entitled to the preferential tariffs.
Other eligibility considerations
Over and above the alleged failure of DeRonde to provide sufficient records supporting NAFTA origin qualification, CBSA also attacked said qualification with a myriad of other allegations: the tires had potentially been comingled with other non-originating tires while in inventory, the Certificate of origin prepared at the time was invalid because it indicated that the tires had been produced only with originating materials (a false declaration in the eyes of CBSA), photographs of the tire markings that were introduced in evidence left a doubt as to whether they depicted the actual tires that had been imported at the time. All such allegations, while they could hypothetically be true, were made absent any concrete evidence or even indication they might be true. On the contrary, witness testimony during trial was all it took for the Tribunal to rule them out. Believable statements made by credible witnesses were sufficient to convince the Tribunal.
In a more recent case, Maples Industries, Inc. v President of the Canada Border Services Agency, the rules of tariff classification were used to reject the application of a lesser-known NAFTA rule of origin: intermediate materials. Maples Industries was a US-based producer of carpets. It had certified the NAFTA eligibility of carpets it had exported to Canada. CBSA informed them that a NAFTA verification would be conducted at their facility to validate the claim.
As allowed by NAFTA, Maples elected to choose a self-produced material to be substituted for the actual non-originating materials it had sourced from foreign suppliers in order to show that the Schedule 1 specific rule of origin had been met. This rule described a tariff-shift requirement only, from a raw material tariff classification to a finished carpet tariff classification. Self-produced materials are those that are made by the producer at an intermediate stage of the production cycle, before the finished product is created. CBSA took the position that the self-produced material (a tufted fabric) had the essential character of the finished good (a carpet), hence there was no tariff shift at all, a proposition that Maples disputed. The Tribunal rejected CBSA’s argument after a careful examination of the rules of tariff classification applicable to the intermediate material. This appears to be a new trend and is clearly an indication to the trade that CBSA will use all of the tools at their disposal to attempt to deny NAFTA origin.
Last, let’s mention an older decision that set an important precedent in NAFTA origin justification, that of MRP Retail Inc. v President of the Canada Border Services Agency. This case illustrates the point that a Certificate of origin cannot easily be rendered void to deny NAFTA tariff preference eligibility. The facts are as follows: MRP retail was a Canadian importer of clothing. It had purchased T-shirts from California Sunshine, a California-based clothing company. California Sunshine had cut to shape the various components of the T-shirts, which were then sent to Mexico for sewing, returned to the USA for printing, and then sold and shipped to MRP in Canada.
CBSA had once again alluded to many defects of origin, in particular with respect to the NAFTA Certificate of Origin that had been presented, to deny preferential tariff entitlement. It had stated namely that the Certificate erroneously identified California Sunshine as the “Producer” of the T-shirts when part of the production actually took place in Mexico and had been performed by a Mexican sewer. It had also stated that the field “Blanket period” had been left blank, preventing the connection of the Certificate with the period of importation under review.
The Tribunal made two very important clarifications: the first is that a producer can outsource some of the work as long as it commissions and directs the entire manufacturing process at all times; the second is that, although the Proof of Origin of Imported Goods Regulation requires the existence of a certificate of origin as a prerequisite to NAFTA preferential tariff entitlement, the form itself was never prescribed by the regulations and thus cannot be so easily rejected for certain defects of completion. In the words of the Tribunal, even if California Sunshine had not been the producer, the requirement to present a valid Certificate would have nonetheless been satisfied. The same goes for the absence of dates in the blanket period field.
The Bottom Line
Although the courts have signalled in a very clear way that NAFTA origin and preferential tariff eligibility is something that is demonstrated on balance of probability, CBSA persists in expecting a much higher evidentiary burden. Canadian authorities still wish to question every possible theory of non-eligibility and expect to receive proof beyond a reasonable doubt before ruling out their assumptions. What’s more, NAFTA verification procedures today still expect the same degree of detail and a panoply of documents in order to proceed with the origin analysis and serve as a prerequisite for any determination of eligibility.
In light of the clear disconnect between the authorities’ expectations and the Tribunal’s views, we anticipate many more cases will be brought for judicial review in order to confirm free trade entitlements. Those who are confronted with a NAFTA denial should take the above comments into consideration.
 DeRonde Tire Supply Inc. v President of the Canada Border Services Agency, CITT AP-2011-014 (July 29, 2015)
 Canadian International Trade Tribunal, AP-2014-009 (July 18, 2016)
 Canadian International Trade Tribunal, AP-2006-005 (September 27, 2007)