What the new USMCA “de minimis threshold” means for retailers in Canada

On September 30, 2018, the United States, Mexico and Canada announced the completion of negotiations toward a new free trade agreement – the United States-Mexico-Canada Agreement (USMCA).

When these negotiations started, the US originally proposed an $800 USD exemption for both taxes and duties on goods imported by courier or post.

On August 27^th, Mexican negotiators agreed to a $100 USD (approx. $128 CAD) exemption on duties and on its 16% value added tax (VAT). Even though there was a lot of pressure from the U.S. because of the Mexican concession, the Canadian team successfully negotiated a deal to cap the sales tax exemption at $40 CAD, while establishing a new limit of $150 CAD exempting duties only.

This is significant to retailers because, on average, an exemption on sales taxes and duties is SEVEN times larger than an exemption for duties alone.

12.25% Average Sales Tax Across Canada

2% Average Duties in Retail Prices

	Threshold	Taxes Reduced	Price Reduction
US Demand	$1023 ($800 USD)	14.50%	$148.28
Mexican Agreement	$128 ($100 USD)	14.50%	$18.55
What We Delivered	$150	2.25%	$3.37
	$40	14.50%	$5.80

*Note: Sales Tax is applied after Duties, therefore there is a cumulative impact that is factored into “Taxes Reduced”.

The table above demonstrates through the Price Reduction column the price advantage an American online seller would experience. The USMCA, on average across all retail goods, has a limited impact – only a $3 difference, on average, on a $150 retail good. Canadian retailers have been protected against a massive change in the competitive landscape.

Further, this change only applies to couriered shipments, and not postal shipments. Postal shipments are still subject to the old threshold of $20.

You might have guessed – De Minimis is Latin. What you likely didn’t know is the meaning behind that Latin expression. It comes from the phrase de minimis non curat praetor, which translates as “The magistrate does not concern himself with trifles”. Nowadays, those magistrates are Canadian customs agents, and the trifles are small quantities of taxes and duties.

The De Minimis Threshold sets the value of goods below which no duties or taxes are collected by customs. Currently, that DMT amount is set at $20 CAD. Originally, American negotiators proposed an increase to $800 CAD, and more recently the Mexican government proposed a $100 USD figure.

The other item that’s keenly of interest to RCC and retailers are what that DMT applies to. Currently, that $20 number applies both to duties, and to sales taxes.

Duties vary by product type and add anywhere from 0% to 20% to a product’s value. On average, the duty paid at the border (when looking at all imports) are an estimated 2% of the retail price of a product.

Sales taxes, on the other hand, are applied to products at a constant rate. What exactly is that rate?  It varies  by province. In Ontario, it’s the HST rate of 13%. In Quebec, it’s the GST-QST rate of 14.975%. If we take the combined sales tax rate of each province, and weight it by sales of retail goods, sales taxes average 12.25% across Canada.

The United States has long had a far higher de minimis rate than Canada. It was at the $200 USD level until March 2016, when it was raised to $800 USD.

But there is no comparison between Canada and the U.S.

First, the United States does not have a federal sales tax, so there is no federal sales tax advantage created for inbound shipments. The U.S. also does not collect state and local sales taxes at the border or for interstate shipments (though may do so in future following a recent U.S. Supreme Court decision), so the playing field is far more level between inbound and local sales.

Second, the United States utterly dominates its own online retail space, with only 22% of U.S. customers reporting having made a purchase from a non-U.S. seller. By contrast, 67% of Canadians report having made online cross-border purchases. The scale of U.S. warehouse operations is such that the U.S. can easily afford to offer a high de minimis level, while pushing other countries to raise their own levels.

On average, an exemption on sales taxes and duties is SEVEN times larger than an exemption for duties alone.

That said, the average duty rate of 2% in Canadian retail prices is only that – an average. There are some categories of goods facing significantly higher duty levels, most notably in apparel and footwear. High tariff areas will be our primary focus when looking to government to respond to changes made by the USMCA.

On the broader trade file, RCC will continue to advocate to level the playing field between online vendors shipping into Canada, and retailers operating here. RCC believes there is no reason to impose high duty rates, which have become a hidden tax on Canadian consumers, particularly on goods that are no longer manufactured in Canada.