As members will be aware, negotiations on NAFTA concluded last night, and have given rise to a new deal: the U.S.-Mexico-Canada Agreement (USMCA). For its part, the Retail Council of Canada was in active conversations with the Federal government throughout the negotiations.  RCC is generally pleased that the Canadian negotiating team delivered a deal that protected Canadian retailers from most of the unreasonable demands made by the US side.

When these negotiations started, the US originally proposed an $800 USD exemption for both taxes and duties on goods imported by courier or post. Last month, Mexican negotiators agreed to a $100 USD (approx. $128 CAD) exemption on duties and also on its 16% value added tax (VAT). Notwithstanding US pressure and the big 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 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)

14.25%

$145.78

Mexican Agreement

$128 ($100 USD)

14.25%

$23.36

What We Delivered

$150

2.00%

$3.00

$40

14.25%

$5.70

 

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.

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.

While RCC is relieved that Canada did not agree to the $800USD that American negotiators were demanding, giving the US only a very small fraction of what it was pushing for, RCC notes that there is still an unlevel playing field between online vendors shipping into Canada, and retailers operating here, whether in bricks-and-mortar stores or online.  Particularly on goods that are no longer manufactured in Canada, there is no reason to impose high duty rates, which have, in essence, become a hidden tax on Canadian consumers.

RCC has lobbied the Federal government in the past to remove duties on imports by retailers and will renew efforts with even greater vigour in light of the new USMCA deal.

For more information about USMCA, contact Karl Littler, Senior Vice President, Public Affairs at [email protected].

 

Frequently Asked Questions about USMCA

  1. How did we make out on this deal, from Retail’s Perspective?

The big item Canadian retailers were eyeing through out negotiations was the De Minimis Threshold. If you’d like a background in that, see Question 2.

When US Negotiators originally came to the table, they asked for a De Minimis Threshold of $800 USD. Likely, that $800 number was mostly posturing and bluster – in public communications it seems more like the US was asking for $200 USD tax and duties exemption at the table. United States Ambassador Kelly Craft used that $200 USD number in a speech at the Economic Club. That’s the stated position of Scotty Greenwood, the CEO at the Canadian-American Business Council, and the number used in a series of petitions circulating called “Dump the Duties”. In Canadian terms that would be a $254 CAD exemption would be on both taxes and duties.

The Mexican’s increased the tax and duty exemption to $100 USD, or about $128 CAD.

In this agreement, the exemptions on taxes and duties went from $20 CAD to $40 CAD.

Now, this agreement also puts into place a new exemption level, for goods at or below $150 CAD. That exemption, however, is only on duties. Taxes and Duties are 7 times larger than duties alone, so an exemption from Duties has a much lower impact on retail prices.

To understand ‘is this a good deal’, let’s run the math on how the asks would have impacted prices. The American push for $200 USD, taxes and duties, would have resulted in a $36 CAD reduction in price. In this agreement, at an average duty rate of 2%, at $150 CAD, prices are reduced by $3 CAD. The US came into the negotiation asking for $36 dollars worth of exemptions, they ended up with only $3. From our perspective, that’s a win for Canadian Retail.

  1. What is the De Minimis Threshold?

The De Minimis Threshold (DMT) sets the value of goods below which no duties or taxes are collected by customs. Historically, that DMT amount is set at $20 CAD. The Retail Council of Canada was very active through out negotiations, frequently speaking with the Federal Government to convey the message that exempting US goods from both taxes and duties at a threshold like $200 would have a negative effect on Canadian Retail. As an acceptable compromise, we’ve been pushing for an exemption from only duties.

Duties vary by product type and add anywhere from 0% to 313.5% to a product’s value. On average, the duty paid at the boarder (when looking at all imported items) are an estimated 2% of the retail price of a product.

Taxes, on the other hand, are applied to every type of product crossing the boarder at a constant rate. What exactly is that rate? It varies a bit by province. In Ontario, it’s the HST rate of 13%. In Quebec, its QST rate of 14.975%. If you take the provincial sales tax rate of each province, and weight it by the average amount of imports that province receives, we can estimate that tax to be 12.25%.

In other words, average taxes and duties are 7 times larger than average duties alone. While exempting imports from taxes and duties would undermine Canadian Retailers (who are forced to apply sales taxes, like HST and QST) and effectively subsidizes US distributors operating outside of Canada, by reducing only duties, there is minimal impact on Canadian retailers.

  1. What happened to the De Minimis Threshold as a result of this deal?

The old De Minimis Threshold exempted duties and taxes on purchases of $20 CAD or less. That rate doubles under this agreement, to $40 CAD.

In addition, there is a new threshold created for purchases of $150 CAD or less. That new threshold is an exemption of only duties.

Taxes and Duties are about 7 times larger than duties alone, so this change will not majorly effect the competitive landscape in Canada, and won’t really impact retail prices for consumers.

  1. How will the increase in the De Minimis Threshold impact consumers?

Overall, there won’t be a large impact on consumers, as there won’t be a major impact on Canadian Retailers.

There are two components to importing goods; taxes and duties. Across all retail goods, taxes are 6 times larger than duties. In other words, an exemption for taxes and duties would be over 7 times larger than an exemption for duties alone. Let’s walk through that with an Ontario-specific example. Here, HST is 13%. Duties average 2% of the final price across retail goods. The $150 threshold only exempts duties, which means the majority of products imported from the US will be impacted by about 2%