By John W. Boscariol

June was a very busy month for the International Law Section as it presented two programs on timely international trade matters, both in conjunction with the American Bar Association Section of International Law Canada Committee and the Canadian Bar Association National Section of International Law.

By Guy P. Lander

The SEC recently amended disclosure requirements for issuers in the oil and gas industry. These amendments reflect the SEC’s recognition that significant development in the industry, including technological advances and development in the types of projects undertaken, have occurred. Consequently, the existing rules were disconnected from industry practice and were of limited utility to market participants and investors.

By John W. Boscariol and Orlando E. Silva

The Canadian Government has recently announced plans for further tariff relief to benefit Canadian businesses. The proposal follows the year’s earlier round of tariff relief measures on machinery and equipment that have been in effect since January 28, 2009. At that time, the government also made a commitment to undertake further consultations with industry for the purpose of providing tariff relief in additional areas.

By H. Scott Fairley

As most section members are aware, the OBA submitted commentary prepared by a joint working group of this Section and Civil Litigation, co-chaired by this writer and Colin Stevenson from our friends in Civil Litigation (hereinafter, the "OBA Commentary"), text available at: www.oba.org, under “Public Affairs – Submissions” to the Law Commission of Ontario’s Cross-border Litigation Project (“CLP”) at the end of April this year. The balance of the working group were also experienced litigators: Jonathan Hood, Kevin Johnson and Antonin Pribetic.

By John Boscariol

Memorandum D13-4-13: “Post-Importation Payments or Fees: Subsequent Proceeds” (the “Guidelines”) released in July by the Canada Board of Services Agency (“CBSA”) may be seen as a “shot across the bow” from the Agency regarding the inclusion of administration, management and other post-importation payments in the value for duty of goods imported into Canada. The CBSA’s views on the law in this area will be of particular significance for importers engaged in related party transactions for goods, services and technology.

By Greg Kanargelidis and Elysia Van Zeyl

A recent decision by the Canadian International Trade Tribunal ("CITT") demonstrates the complexity of international trade rules, but also the resulting benefits to those companies who take extra care to work through them in detail. In this case, the importer of certain T-shirts who outsourced assembly to Mexico, successfully demonstrated that the goods were eligible for “duty-free” importation into Canada under the North American Free Trade Agreement ("NAFTA"). However, the journey leading to the result was not entirely free of complications.

By John Boscariol

On October 20, 2009, the International Law Bar came together in the Distillery District in Toronto to honour one of their own, Jon R. Johnson. Jon was presented with the 2nd Annual OBA Award for Excellence in International Law for his leadership, expertise, integrity and very significant contributions to international law during his four decades of practice.
 

John Boscariol*

June was a very busy month for the International Law Section as it presented two programs on timely international trade matters, in conjunction with both the American Bar Association Section of International Law Canada Committee and the Canadian Bar Association National Section of International Law. 

Both programs were well attended and involved lively discussion from speakers and participants on the significant economic and trade challenges facing Canada, the United States and other nations during this time of financial turmoil.

International Trade, the Financial Crisis and the Role of the G-20: Do We Need Another Bretton Woods?
On June 5, 2009, in an informal and interactive session offered via video hook-up at locations in Toronto and Washington DC, the Honorable Pierre Pettigrew, former Canadian Minister of Foreign Affairs and the Minister of International Trade, discussed his views on the current economic crisis and whether it raises the need for a restructuring of current international institutions. 

In addition to discussing the role of the G-20 and the Bretton Woods institutions, Pierre Pettigrew addressed questions and led discussions on a wide range of international issues including climate change and international environmental policy, Buy America, the global economic and political role of China today, and United States policy and multilateralism.

Canada – U.S.A. Border Issues: A New Bridge for Old Allies
On June 9, 2009, the Committee presented a program on Canada - U.S. border issues at locations in Toronto, Ottawa and Washington DC linked by video and web. 

Although highly integrated trade relations between Canada and the United States have provided strong and lasting benefits to both economies, developments such as the implementation of the Western Hemisphere Travel Initiative, the inclusion of Buy America provisions in the Obama Administration’s stimulus package, and recent statements from the U.S. Administration equating the Mexican border with the Canadian one have placed strains on our relationship. These are issues which have taken on heightened significance in the current economic climate. 

Former Canadian ambassador to the United States, Michael Kergin and Birgit Matthiesen, a special adviser to Canadian Manufactures and Exporters, provided attendees with an analysis of these challenges as well as potential short and long-term solutions. The program focused on the recommendations contained in the speakers’ recently released Border Issues Report for the Canadian International Council, titled “A New Bridge for Old Allies”, which can be found at http://www.canadianinternationalcouncil.org/research/workinggro/borderswor/cicborderi. The speakers discussed a range of issues raised by participants in all three of the program locations, including Buy America preferences, differing regulatory regimes in Canada and the United States, and other hot-button trade and investment issues arising in the bilateral relationship.

*John Boscariol, McCarthy Tetrault LLP, is Chair of the OBA Section of International Law and Co-Chair of the ABA SIL Canada Committee.
 

Guy P. Lander*

The SEC recently amended disclosure requirements for issuers in the oil and gas industry. These amendments reflect the SEC’s recognition that significant developments in the industry, including technological advances and changes in the types of projects undertaken, have occurred. Consequently, the existing rules were disconnected from industry practice and of limited utility to market participants and investors. 

The new rules are effective for registration statements filed under the Securities Act on or after January 1, 2010 and for annual reports on Forms 10-K and 20-F filed under the Securities Exchange Act for fiscal years ended on or after December 31, 2009. Companies may not elect to follow the new rules before the effective dates. Additionally, none of the new or amended rules require the retroactive revision of past reserve estimates. Finally, the new requirements apply to “foreign private issuers”¹ as well as to “domestic issuers.” 

The definitions and classifications used in Canadian National Instrument 51-101 form the basis, in large measure, of the new SEC rules. One significant difference, however, is that the SEC rules will continue to require the use of historical, rather than forecasted, prices and costs in pricing reserves.

Many Canadian companies that file registration statements or reports with the SEC do so under the Canada/United States Multijurisdictional Disclosure System (“MJDS”). The MJDS permits qualified Canadian companies to meet U.S. requirements by filing with the SEC and distributing to U.S. investors disclosure documents they prepared and reviewed under Canadian law and practice. Hence, many of the changes to the rules relating to oil and gas reporting requirements will not affect the current disclosure practices of many Canadian companies in the industry.

The Proposing Release may be found at: http://www.clm.com/publication.cfm/ID/188, and the Adopting Release may be found at http://www.sec.gov/rules/final/2008/33-8995.pdf.

Timing of Pricing
For reserve reporting purposes, the amendments require that the price used in calculating the estimated value of reserves be the unweighted arithmetical average of the closing prices in effect on the first day of each month of the fiscal year (rather than the last day of each month contemplated in the Proposing Release). This replaces the existing rule that required the price used to the price in effect on the last day of the fiscal year. The reporting company may, at its option, include a reserves sensitivity analysis table that demonstrates what the reserve estimates would be if they were based on different price and cost criteria (such as a range of prices and costs that may reasonably achieved, including standardized futures prices or management’s own forecasts), provided that the price and cost schedules and assumptions on which the alternate reserves estimates are based are disclosed.

Prices Used for Accounting Purposes
The Proposing Release contemplated the continued use of the single-day, year-end price for accounting purposes (i.e., to determine depreciation and, in the case of companies using the full cost accounting method to determine the limitation on capital costs (the ceiling test)), notwithstanding the change mentioned above to the use of average prices in effect during the period for reserve reporting purposes. In response to objections to this approach reflected in several comment letters, the SEC changed its position in the Adopting Release by amending the full-cost accounting rules to use a single price. Such a price is based on a 12-month average consistent with the reserve reporting modifications discussed above. 

Bitumen and Other Non-Traditional Resources
The Adopting Release amends the definition in the SEC rules of “oil and gas producing activities” to include the extraction of saleable hydrocarbons, in the solid, liquid or gaseous state from oil sands and, provides that they are intended be converted into oil and gas, from shale, coalbeds or other non-renewable natural resources. Also included in the definition are activities undertaken with a view to such extraction and certain activities relating to the processing or upgrading of natural resources from which synthetic oil or gas can be extracted. In a departure from the Proposing Release, the new rules focus on the final product rather than on the method of extraction, so that the prices of synthetic oil and gas may be used to determine the economic producibility of the reserves for reserve estimation purposes. 

Definition of “Proved Reserves”
The new rules specify the definition of “proved reserves” by spelling out that the requirement that geographical and engineering data demonstrate that reserves so classified are recoverable with “reasonable certainty.” The term “reasonable certainty” means that if a “high degree of confidence” exists that the quantities will be recovered. The “high degree of confidence” criterion was adopted in lieu of the criterion “much more likely to be achieved than not” that the SEC initially recommended in the Proposing Release. The Adopting Release states that while , in the SEC’s view, the two criteria share a similar meaning, the terminology was modified to address suggestions in comment letters that the term proved reserves be treated consistently with the language used in the Petroleum Resource Management System (a widely accepted standard developed by several organizations within the oil and gas industry). The new rules permit the use of either the “deterministic” or the “probabilistic” method for estimating reserves. These distinct methods are based on definitions contained in the Canadian Oil and Gas Evaluation Handbook. A “deterministic estimate” is “based on using a single ‘most appropriate’ value for each variable in the estimation of reserves, such as the company’s determination of the oil or gas in place in a reservoir, multiplied by the fraction of that oil or gas that can be recovered.” A “probabilistic estimate”, on the other hand, is “obtained when the full range of values that could reasonably occur from each unknown parameter (from the geoscience, engineering, and economic data) is used to generate a full range of possible outcomes and their associated probabilities of occurrence.” Where the deterministic method is used, the “reasonable certainty” requirement for proved reserves means a high degree of confidence that the quantities will be recovered. When the probabilistic method is used, the requirement is for a minimum 90% probability that the quantities recovered will actually be equivalent to or exceed the estimate. 

Unproved Reserves (“Probable Reserves” and “Possible Reserves”)
The amendments permit the disclosure of unproved reserves (although such disclosure would be voluntary because it may involve increased risk of litigation). “Probable reserves” are reserves that, taken together with proved reserves, are as likely as not to be achieved. This means that, when deterministic methods are used, it is as likely as not that the actual remaining quantities recovered will equal or exceed the sum of estimated proved plus probable reserves. Similarly, when probabilistic methods are used, there must exist a minimum 50% probability that the actual quantities recovered will equal or exceed proved plus probable reserves estimates. “Possible reserves” are estimates that are less likely to be recovered than probable reserves. When deterministic methods are used, the total quantities actually recovered from the project have a low probability to exceed the aggregate of proved, plus probable, plus possible reserves. When probabilistic methods are used, there must be at least a 10% probability that the actual quantities recovered will equal or exceed the sum of proved, probable and possible reserves. 

Disclosure Tables
Despite some concerns raised in comment letters to the Proposing Release, the new rules require that the disclosure document contain a table disclosing, both in the aggregate and by geographic area, estimated proved developed, proved undeveloped and total reserves (using prices and costs under existing economic conditions). The table may, at the option of the issuer, state probable and possible reserves, but only if there is disclosure of the relative uncertainties related to the reserve estimates. 

Preparation of Reserve Estimates; Reserve Reports
In the Proposing Release, the SEC acknowledged the practice of certain companies (especially larger ones) to internally prepare reserves estimates, and rejected the requirement that all reserves estimates necessarily be prepared or audited by independent third parties. Significantly, the Adopting Release, rejected objections to such an approach as expressed in comment letters. As contemplated in the Proposing Release, the amendments require companies to disclose the qualifications of the person primarily responsible for preparing reserves estimates and, in the event an audit has been conducted, of the person conducting such an audit. The amendments also require that companies explain in the filed disclosure documentation the internal controls used to assure objectivity in the reserves estimation process and the qualifications of the technical person primarily responsible for preparing such reserves estimates. Additionally, should a company rely on a third party for reserves estimates, the new rules require that the consent of such third party named in the disclosure document be filed with the SEC. Moreover, the company is required to file with the SEC a report of the third party summarizing the scope of the work performed and the conclusions arrived at. The requirement for a summary report, rather than a full reserves report, is more detailed and may be lengthier.

Additional Disclosures
The Proposing Release contemplated the adoption of a new rule requiring a narrative description (either in the MD&A or in a separate section) of a specified list of topics (i.e., changes in prices, technical changes and changes in the status of concessions) to supplement the reconciliation required by SFAS 69. Adverse reactions to the rigidity of the proposed rule led the SEC to abandon the need for the specified new disclosure item. Instead, the Adopting Release establishes a list of five topics companies should consider to satisfy their MD&A requirement, including a discussion of known trends, demands, commitments, uncertainties, and events likely to have a material effect on the company.

Conclusion
The SEC’s changes to disclosure requirements are significant. Consequently, oil and gas companies should closely review the new rules to understand how these changes will affect their reserve disclosure going forward.

*Guy P. Lander is a partner at Carter Ledyard & Milburn LLP in New York City, where he practices corporate and securities law for international and domestic companies and financial institutions. Over the years, his practice has emphasized a wide range of financial transactions, including U.S. and international public and private offerings, listing foreign companies on U.S. exchanges, mergers and acquisitions. Mr. Lander also devotes a significant part of his time to regulatory matters for financial services firms. He advises securities brokerage firms, money managers and hedge funds on their structuring, documentation, compliance, business activities and significant transactions. He can be contacted at lander@clm.com or (212) 238-8619.

_________________________________

¹ “Foreign private issuers” are, generally, public companies formed under non-U.S. laws that are eligible to file their annual reports with the SEC on Form 20-F or Form 40-F.

Guy P. Lander (c) 2009 all rights reserved.
 

John W. Boscariol and Orlando E. Silva*

The Canadian Government has recently announced plans for further tariff relief to benefit Canadian businesses. This proposal follows the year’s earlier round of tariff relief measures on machinery and equipment that have been in effect since January 28, 2009. At that time, the government also made a commitment to undertake further consultations with industry for the purpose of providing tariff relief in additional areas.

Based on preliminary discussions with industry stakeholders, the government has stated its intention to reduce to free the Most-Favoured-Nation ("MFN") tariff on a list of manufacturing inputs and on additional machinery and equipment. The scope of the current round of proposed tariff reductions is significantly greater than the earlier round - the proposed list covers tariffs items from over 30 chapters of the Schedule to the Customs Tariff. The earlier round covered only machinery and equipment under Chapters 84 and 85. 

In its invitation to submit views on the proposed MFN tariff elimination list, (which can be found at http://www.gazette.gc.ca/rp-pr/p1/2009/2009-09-19/html/notice-avis-eng.html#d101) the Government has also stated that is willing to accept views on other tariff items that should also be considered for further tariff reduction that are not on the current proposed list. 

The tariff items chosen for the proposed list were selected based on the following criteria:

• goods covered by these tariff items are used in the production of other goods;
   
• eliminating the tariff on these goods will reduce production costs for Canadian industry; and
   
• requests from stakeholders for eliminating MFN tariffs to enhance competitiveness.

Canadian manufacturers, processors and importers should be carefully reviewing the proposed list and consider whether to express support for or object to any particular proposed tariff item elimination. 

This is also a unique opportunity for businesses that use imported inputs in their manufacturing or processing activities to advocate for tariff items that they believe should be slated for tariff reduction and added to the proposed list.

Submissions in this regard were made to the Department of Finance by November 6, 2009. 

*John Boscariol (jboscariol@mccarthy.ca / 416-601-7835) and Orlando Silva (osilva@mccarthy.ca / 416-601-8028) are partners in the International Trade and Investment Law Group at McCarthy Tétrault LLP.
 

H. Scott Fairley*

As most section members are aware, the OBA submitted commentary prepared by a joint working group of this Section and Civil Litigation, co-chaired by this writer and Colin Stevenson from our friends in Civil Litigation (hereinafter, the "OBA Commentary"), text available at: www.oba.org, under “Public Affairs – Submissions” to the Law Commission of Ontario’s Cross-border Litigation Project (“CLP”) at the end of April this year. The balance of the working group were also experienced corss-border litigators: Jonathan Hood, Kevin Johnson and Antonin Pribetic.

Osgoode Law Professor, Janet Walker, was the principal author of the Consultation Paper on Reforming the Law of Crossborder Litigation [:] Judicial Jurisdiction (March, 2009) (hereinafter, the “Consultation Paper”), text available at: www.lco-cdo.org , under “Projects” and “Codification of judicial jurisdiction in Ontario” for the Commission’s CLP, supported by a committee of experts, primarily private international law academics from across the country. The focus of the Consultation Paper was to elicit stakeholder input on the general question: “[W]ould the interests of Ontario residents be best served by developing a statute on judicial jurisdiction or would it be preferable to allow the common law to continue to evolve without introducing legislation? If a statute should be developed, what are the main concerns that it should address?”

One touchstone for this law reform initiative was the perception, primarily from academic critiques of rapid common law developments on the subject, as to what circumstances – and applying what criteria – should courts accept or decline jurisdiction at the legal threshold of jurisdiction simpliciter, and again at the discretionary threshold of forum non conveniens (“FNC”) analysis. See, e.g. T. Monestier, “A Real and Substantial Mess: the Law of Jurisdiction in Canada” (2007), 33 Queen’s L.J. 179. Another was the fact that several other provinces, British Columbia, Saskatchewan and Nova Scotia had enacted a Model Law promulgated on this subject in 1994 by the Uniform Law Conference of Canada (“ULCC”): the Court Jurisdiction and Proceedings Transfer Act (“CJPTA”). The Consultation Paper reasoned that, if a statutory codification was to be pursued in Ontario, should it not improve upon the CJPTA, taking into account common law developments since 1994, and perhaps seeking to harmonize common law principles with the Civil Code of Quebec. See: Title III, Book X of R.S.Q. 1991, c. 64, Arts. 3134-3154.

The International Law Section had been approached directly by Prof. Walker to provide its views to the Commission’s CLP and our Joint Working Group with Civil Litigation was established as a result. Our recommendations differed somewhat from what the OBA understood to be the principal thrusts of the Consultation Paper. First, we expressed the view that the common law as understood and applied in Ontario had achieved a great deal in clarifying and improving on the law of jurisdiction and, as such, was not generally in need of a “fix”. However, largely based on experience and post-enactment case law from the provinces that have adopted the CJPTA, we formed the view that an Ontario statute conforming reasonably closely to the CJPTA model had merit as a potentially clearer and more concise guide to judges and counsel. The OBA Commentary did not endorse the strategy of an independent statutory model mirroring all the nuances – or addressing the perceived shortfalls – of post 1994 judge-made law on point.

The leading Ontario case law on jurisdiction remains the pronouncements of the Ontario Court of Appeal in a series of cases known as the Muscutt quintet after Muscutt v. Courcelles (2002) 213 D.L.R. (4th) 577; see: J. Walker, “Beyond Real and Substantial Connection: the Muscutt Quintet”, in T. Archibald and M. Cochrane eds., Annual Review of Civil Justice 2002 (Toronto: Carswell, 2003). Muscutt summarized and restated criteria to inform the “real and substantial connection” test first elaborated by the Supreme Court of Canada in the seminal case of Morguard Investments Ltd. V. De Savoye, [1990] 3 S.C.R. 1077, in relation to the recognition and enforcement of foreign judgments by Canadian courts only if enforcing courts were satisfied under this test that the originating court had properly assumed jurisdiction at first instance. The Muscutt court was essentially elaborating on the same test in the role of the originating court, not as an enforcing court. As such, these decisions constitute part of a general liberalization of the common law in Canada to render governing rules in crossborder litigation more congruent with the realities of a globalized marketplace. 

This modernization of Canadian conflict of laws jurisprudence has not been without hardship for Canadian defendants, just as they have created opportunities for foreign litigants seeking to enforce foreign legal decrees. See: H. Scott Fairley, “Open Season: Recognition and Enforcement of Foreign Judgments in Canada After Beals v. Saldanha” (2005), 11 ILSA J. Int’l & Comp. L. 305. In turn, they contributed to international codification efforts to establish common principles on the assumption of jurisdiction and on the recognition and enforcement of judgments between jurisdictions, notably within the Hague Conference of Private International Law, as well as domestically through the efforts of the ULCC. See: H. Scott Fairley, “In Search of a Level Playing Field: The Hague Project on Jurisdiction and the Recognition and Enforcement of Foreign Judgments”, in C. Charmody et al eds., Trilateral Perspectives on International Legal Issues: Conflict and Coherence 57 (New York: Transnational Publishers, 2003); H. Scott Fairley and John Archibald, “After the Hague: Some Thoughts on the Impact on Canadian Law of the Convention on Choice of Court Agreements” (2006), 12 ILSA J. Int’l and Comp. L. 417. The text of the Hague Convention on Choice of Court Agreements (“HCCCA”), concluded on 30 June 2005 (not yet in force for Canada) can be found at:www.hcch.net. As of this writing, Mexico is the only country to have ratified the HCCCA, but both the United States and the European Union have officially announced they intend to and is and the Government of Canada is expected to do so, currently pursuing a draft model implementing statute that should be introduced in the ULCC later this year (This writer is a member of ULCC working group, assisting in the drafting of the model implementing legislation).

It will be seen that, at least from a Canadian perspective, the process of codifying crossborder litigation principles, both domestically and internationally, began with concerns over recognition and enforcement, the end-game in international litigation. The Consultation Paper and the OBA Commentary now address the possibilities of law reform at the threshold of this process.

The OBA Commentary concludes that the CJPTA “is not outdated” as a statutory model for Ontario, a perception informed by the recent decision of the Supreme Court of Canada in the Teck decision released in January, 2009. Apparently the Consultation Paper was prepared for the Commission before the decision was rendered, as it is not referenced therein. Chief Justice McLachlin concluded with reference to section 11 of the CJPTA, addressing FNC analysis, that it “constitutes a complete codification of the common law test for forum non conveniens. It admits of no exceptions.” Teck Cominco Metals Ltd. v. Lloyd’s Underwriters [2009] SCC 11, at para. 22. In light of the Chief Justice of Canada’s comment, one might be tempted to conclude that, even without enactment in Ontario, elements of the CJPTA are authoritative pronouncements of the common law. For present purposes, the statutory guideline in CJPTA s. 11 for judicial discretion to decline jurisdiction under FNC analysis provides a good example: 

11.(1) After considering the interests of the parties to a proceeding and the ends of justice, a court may decline to exercise its territorial competence in the proceeding on the ground that a court of another state is a more appropriate forum in which to hear the proceeding.

(2) A court, in deciding the question of whether it or a court outside [enacting province or territory] is the more appropriate forum in which to hear a proceeding, must consider the circumstances relevant to the proceeding, including

(a) the comparative convenience and expense for the parties to the proceeding and for their witnesses in litigating in the court or in any alternative forum,

(b) the law to be applied to issues in the proceeding,

(c) the desirability of avoiding multiplicity of legal proceedings,

(d) the desirability of avoiding conflicting decisions in different courts,

(e) the enforcement of an eventual judgment, and

(f) the fair and efficient working of the Canadian legal system as a whole. 

Such language will hardly stifle judicial creativity in the instant case, but the clarity and convenience of the typology for judges to apply is also evident. 

Then, with respect to the Consultation Paper’s expressed concern for harmonization with the civil law of Quebec, the Commentary further concludes: “The OBA does not believe Ontario’s law needs to mirror that of Quebec, so long as they are compatible.”

In the view of the OBA Working Group, the Consultation Paper is a well written treasure trove of content on the subject it addresses: 63 pages, inclusive of appendices incorporating, among other things, both the CJPTA and the HCCCA; providing one stop shopping for an overview of the field and most current developments and issues. The OBA Commentary submitted to the Commission is an even more concise 15 page document, which provides specific responses to each of the 24 specific questions posed by the Consultation Paper. As such, the OBA Commentary is best approached and digested in conjunction with the Consultation Paper.

My purpose here is not to summarize or critique the specific content of either document, so much as to remind everyone interested that they are both there, well worth the read despite the time it takes to do so. The majority of this Section’s membership not being litigators, but often called upon to address cross-border litigation risk, will benefit from the packaged overview. 

Underlying both documents is the message that the law in this area is both dynamic and subject to legislative scrutiny across Canada, as well as subject to judicial elaboration on statutory prescriptions in those jurisdictions that have already enacted the CJPTA. In this regard, further to the FNC example quoted above, the CJPTA does not appear to be stifling the common law, so much as simplifying some of the basic principles the common law has already identified and entrenched.

It remains to be seen what – if any – action the Ontario legislature will take based on the Consultation Paper or on subsequent reports and recommendations from the Commission’s CLP. If nothing comes of this increasingly prodigious effort, the status quo for litigants coming to and defending in Ontario will hardly be intolerable. Nevertheless, it remains the case that the common law of judicial jurisdiction throughout Canada is subsisting in an ever more ambitious age of statutes. In that regard the OBA Commentary has offered the view that, “[w]hile the CJPTA will not resolve all issues, its enactment will optimize the goals of greater relevance, effectiveness and accessibility.” If we are essentially right in that assessment, then the risks are clearly less than the potential rewards for cross-border litigants in having this kind of statutory guide for Ontario courts.

*H. Scott Fairley, Partner, Theall Group LLP., Public Affairs Liaison, OBA International Law Section Executive (2009-2010)
 

John Boscariol*

Memorandum D13-4-13: “Post-Importation Payments or Fees: Subsequent Proceeds” (the “Guidelines”) released in July by the Canada Board of Services Agency (“CBSA”) may be seen as a “shot across the bow” from the Agency regarding the inclusion of administration, management and other post-importation payments in the value for duty of goods imported into Canada. The CBSA's views on the law in this area will be of particular significance for importers engaged in related party transactions for goods, services and technology.

Importers should be carefully reviewing the Guidelines, a copy of which can be found at http://www.cbsa-asfc.gc.ca/publications/dm-md/d13/d13-4-13-eng.pdf, to address any potential exposure in terms of their liability for customs duties, GST, penalties and interest.

CBSA takes an aggressive position throughout the Guidelines that all amounts paid by importers directly or indirectly to vendors will be presumed to be dutiable as subsequent proceeds unless acceptable evidence to the contrary can be provided. 

Amounts to be Included for Purposes of Determining Customs Duty and GST Liability

Canada’s Customs Act (the “Act”) provides for the addition of a number of different amounts to the price paid or payable for imported goods, to the extent that they are not already included, for purposes of determining value for duty, i.e., the basis for determining an importer’s customs duty and GST liability. These include certain commissions and brokerage, royalties and license fees, packing costs, assists, transportation and related charges up to the point of direct shipment to Canada, and subsequent proceeds. 

The Guidelines set out CBSA’s views of the kinds of payments that fall within the phrase “subsequent proceeds” as it appears in subparagraph 48(5)(a)(v) of the Act. That provision states that “the value of any part of the proceeds of any subsequent resale, disposal or use of the goods by the purchaser thereof that accrues or is to accrue, directly or indirectly, to the vendor” must be included in the value for duty of the goods. A typical example arises when an importer pays a specified percentage of the resale price of the goods to the vendor, in addition to the price paid for the goods. In those circumstances, that amount is usually considered a subsequent proceed that must be included in the value for duty declared to CBSA.

Key Elements of CBSA’s Policy

The Guidelines, however, go on to identify a number of circumstances in which CBSA will consider amounts paid to be subsequent proceeds, some of which may come as a surprise to importers that make payments for management and administration fees. These kinds of payments are generally made for services of the various departments of a business, including marketing and promotion, accounting, financial, legal, employment, management consultation, and taxation. 

Briefly put, the key elements of CBSA’s policy on its interpretation of the Act’s requirements in this regard are as follows:

1. CBSA excludes management and administration fees from value for duty on the basis of a discretionary administrative policy. 

CBSA takes the position that there is no statutory exemption from value for duty for these amounts. Under their “discretionary administrative policy”, such payments will only not be considered dutiable subsequent proceeds if all of the following conditions are satisfied:

(a) the services are rendered for the operation of the business in Canada

CBSA will examine whether the services were actually performed for the importer. Where the specific service was not provided or there is no agreement to specifically charge for such an amount, CBSA is of the view that the payment would not meet the requirements of its policy and therefore should be included in the value for duty.

(b) the amount of the charge is in accordance with arm’s length principles

The amount of the payment must be comparable to the price that would be charged by an unrelated party. In cases where costs are shared among a number of related companies, including the importer, the method of allocation must be reasonable and appropriate in the circumstances. The CBSA also notes that apportionment of these costs among related parties must be based on a comprehensive review of the expenses which should be carried out in advance of determining the share allocated to the Canadian importer. Management fees determined after the fact are more likely to be challenged by the CBSA. Although it is appropriate to include an amount for profit in such charges, the CBSA will challenge profit amounts that they feel are excessive — i.e., such amounts will be treated as being dutiable.

(c) the services provided are justified for the operation of the business in Canada

CBSA expects an importer will establish that the specific activity performed by the related party is a service for which a charge is justified. This involves the question of whether the importer for whom the management and/or administrative services are being carried out would either have been willing to pay for the activity if performed by an unrelated service provider or have performed the activity itself.

2. The importer’s method of determining the charge for the services is important.

A methodology based on the total cost incurred by the vendor and distributed amongst the recipients of the services, including the importer, based on usage is viewed as a “legitimate approach”. An approach that calculates payment based on a percentage of the net sales of the goods is viewed as problematic because it may not necessarily meet the requirements that the payment must be for the services rendered for the operation of the business in Canada. In such a case, CBSA will demand further substantiation of actual costs before excluding the payment from value for duty.

3. CBSA presumes that service fees paid by the importer to the vendor are dutiable. 

An importer may rebut this presumption by providing evidence, i.e., “sufficient information”, indicating that the fees are in accordance with the arm’s length principle and that they relate to justifiable services actually rendered for the Canadian business operation. “Sufficient information” is defined under the Act as “objective and quantifiable information that establishes the accuracy of the amount … or adjustment”.

CBSA states that this information consists of documentation that describes the nature of the service for which payment is being made, the basis on which it is paid, and proof that actual services are being provided and paid for. This includes commercial invoices, inter-company agreements and other proof of payment.

4. Financial transactions such as dividend payments are not to be included in value for duty but certain conditions must be met.

CBSA recognizes that dividends are not subsequent proceeds but requires that in order to take advantage of this exclusion the dividends must meet the definitions and requirements under Canadian tax law (including the non-resident Part XIII requirements of the Income Tax Act) and be substantiated by Canada Revenue Agency dividend payment forms regarding payments to non-residents. The CBSA also explicitly excludes other financial payments from subsequent proceeds, including payments for the issuance, assumption, redemption or repayment of a debt, payments for the issuance, redemption or acquisition of share capital, and other financing activities.

5. Research and development fees are generally viewed as dutiable.

Appendix A of the Guidelines specifies that amounts paid to a vendor by the importer for research and development must be included in the value for duty of the goods. These do not appear to fall within the CBSA’s policy for the exemption of management and administration fees. In contrast, Appendix B discusses marketing and promotional fees which the CBSA appears to exempt on a similar basis as further described further above. CBSA will, however, exclude R&D amounts where the foreign vendor is contracted to undertake research for a Canadian importer, all costs and risk of failure are borne by the importer, and ownership of research accrues to the importer.

What does this mean for importers?

Importers, and particularly those dealing with related parties, should be carefully reviewing all payments made in addition to the selling price of imported goods to determine whether any are vulnerable to inclusion in value for duty. The payment of management and administration fees should be examined to ensure sufficient factual and documentary support exists to meet the requirements of the CBSA’s policy on exemption from value for duty.

Missing from CBSA’s Guidelines is any discussion of payments made by importers to parties related to the vendor instead of the vendor itself. Often, importers may purchase goods from one related party and make payments for management and administrative services to another related party. It is unclear whether under CBSA’s subsequent proceeds policy such payments would not be dutiable or whether CBSA would engage in a fact-specific analysis as to whether such payments “directly or indirectly” accrue to the vendor. In these circumstances, it would be prudent for importers to ensure that payments to parties related to the vendor also meet the requirements of the Guidelines for exclusion from value for duty.

Importers can expect that this policy will be followed in audits, assessments, customs rulings, administrative appeals, and other CBSA enforcement activities. It is important to keep in mind that these are only administrative guidelines setting out the CBSA’s interpretation of the law. Their application will be subject to the requirements of legislation (including the Act), case law and Canada’s international treaty obligations regarding customs valuation. Notably, the World Trade Organization’s Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 provides a general rule that payments made by importers to vendors which “do not relate to the imported goods” must not be included in value for duty.

*John Boscariol is Chair of the Ontario Bar Association International Law Section and Leader of the International Trade and Investment Law Group at McCarthy Tetrault LLP. He can be reached at 416-601-7835 or jboscariol@mccarthy.ca.
 

Greg Kanargelidis and Elysia Van Zeyl*

A recent decision by the Canadian International Trade Tribunal ("CITT") demonstrates the complexity of international trade rules, but also the resulting benefits to those companies who take extra care to work through them in detail. In this case, the importer of certain T-shirts who outsourced assembly to Mexico, successfully demonstrated that the goods were eligible for “duty-free” importation into Canada under the North American Free Trade Agreement ("NAFTA"). However, the journey leading to the result was not entirely free of complications.

The recent CITT decision in A & G Inc. d.b.a. Alstyle Apparel v. President of the Canada Border Services Agency dealt with imports into Canada of certain T-shirts made exclusively of U.S. origin parts that were sewn together in Mexico. The importer and the Canada Border Services Agency ("CBSA") were in agreement as to the proper tariff classification of the goods¹ and also that the goods qualified for preferential tariff treatment under the NAFTA. The issue concerned how much of a benefit under NAFTA was available to the goods at issue.

In particular, at the time the T-shirts were imported into Canada in March 2001, all customs duties had been eliminated on qualifying goods originating in the U.S.; however, customs duties imposed on qualifying goods originating in Mexico were still subject to the gradual elimination provisions under NAFTA. At the time the T-shirts were imported, they would be “duty free” if the “U.S.” tariff rules applied, but would be subject to duties of 5% if the “Mexico” tariff rules applied.

In arriving at its decision, the CITT referred to one international agreement,² no fewer than four statutes,³ and no fewer than five regulations.⁴ Once the CITT worked through the various applicable statutes and regulations, the CITT concluded that the issue could be resolved by the country of origin marking rules: namely, the T-shirts would be subject to the “US” tariff or “Mexico” tariff depending on which “country of origin” applied to the goods.

The CITT first considered the rules in the Customs Tariff on when “preferential tariff treatment” may be claimed on imported goods and the two conditions that must be met. The first is the requirement that “proof of origin” will be shown. This essentially requires that an exporter’s certificate of origin be issued and available to the CBSA. The CITT noted the certificate requirement, but did not confirm whether factually the certificate was duly prepared and in existence. The second condition for preferential tariff treatment to apply is a demonstration that the goods are in fact eligible for the preferential tariff treatment claimed (i.e., either the duty-free US tariff or the 5 % Mexico tariff).

In considering whether the US tariff or Mexico tariff should apply to the T-shirts, the CITT zeroed in on the NAFTA Tariff Preference Regulations, which in turn required a detailed review of the Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations (the “NAFTA Marking Regulations”). The relevant rules comprised 10 separate sections, subsections and/or paragraphs which are drafted so that they must be considered in sequential order until a provision is found that is applicable to the goods at issue.

The CITT reviewed 9 of the 10 rules before finding one that was applicable to the T-shirts at issue, namely the rule dealing with “simple assembly.” In particular, Section 7(b) of the NAFTA Marking Regulations indicates that if the production of goods is by “simple assembly” and the parts that merit equal consideration have the same country of origin, the country of origin of the parts applies to the goods. Four requirements must be satisfied in order for the goods to meet the definition of “simple assembly”. The goods at issue met the first and second criterion which required there to be five or fewer parts, all of which were foreign. The third criterion, which was also met, was that the goods be assembled by sewing. Finally, the most complex requirement under definition of “simple assembly” is that the five or fewer components must fit together “by bolting, gluing, soldering, sewing or any other means without more than minor processing”.

The Tribunal noted that there were two possible interpretations of this criterion under the English text of the Regulation. One possible interpretation was that the fitting together of the pieces must take place by “sewing” or “any other means without more than minor processing.” The other possible reading was that the assembly must take place by “sewing... without more than minor processing” or by “any other means without minor processing”.

Fortunately for the Appellant, the French text of the NAFTA Marking Regulations resolved these ambiguities. The French wording and punctuation clarified that it is permissible for something else, in addition to sewing, to be done to the goods (e.g., the addition of a label) so long as it is “minor processing”. Accordingly, the Tribunal was of the view that the proper interpretation was that the means of fitting together five or fewer parts by sewing constitutes a “simple assembly”. The Tribunal then determined that the various t-shirt components meriting equal consideration had the same country of origin - the United States - and therefore the goods were considered U.S.-origin and subject to the U.S. preferential tariff, which enabled duty-free importation of the goods.

This decision highlights the benefits that may accrue to traders who take the extra time to understand rules of origin, complex as they may be, and who structure their operations to take advantage of the preferential tariffs. The decision should provide some comfort to companies, like the appellant in this case, that outsource to the extent that generally goods will not lose their entitlement to a preferential tariff based simply on the fact that their assembly has taken place in another territory so long as that assembly operation does not go beyond sewing (or bolting, gluing, soldering, or any other means, as the case may be) in addition to other “minor processing”.

*Greg Kanargelidis, Blake, Cassels & Graydon LLP and Elysia Van Zeyl, Counsel, Department of Justice, Canada Border Services Agency Legal Services Unit

_________________________________

¹ The goods in issue were classified under tariff item No. 6109.10.00 of the schedule to the Customs Tariff.
² North America Free Trade Agreement.
³ Customs Tariff, S.C. 1997, c. 36; Customs Act, R.S.C. 1985 (2d Supp.), c. 1; Official Languages Act, R.S.C. 1985 (4th Supp.), c.31; Interpretation Act, R.S.C. 1985, c. I-21.
⁴ NAFTA Rules of Origin Regulations, S.O.R./94-14; Proof of Origin of Imported Goods Regulations, S.O.R./98- 52; NAFTA Tariff Preference Regulations, S.O.R./94-17; Determination of Country of Origin for the Purposes of Marking Goods (NAFTA Countries) Regulations, S.O.R./94-23; CCFTA Verification of Origin Regulations, S.O.R./97-333.

John Boscariol*

On October 20, 2009, the International Law Bar came together in the Distillery District in Toronto to honour one of their own, Jon R. Johnson. Jon was presented with the 2nd Annual OBA Award for Excellence in International Law for his leadership, expertise, integrity and very significant contributions to international law during his four decades of practice. 

A partner at Goodmans LLP since the 1980s, Jon was involved in some of the most important developments in international trade law in Canada over the years. He advised the Canadian government during the negotiations of the Canada U.S. Free Trade Agreement and the North American Free Trade Agreement. He has also advised the government on NAFTA Chapter 11 investor-state claims and in numerous WTO challenges, including those involving the Canada-U.S. Auto Pact, patent protection for pharmaceuticals, and softwood lumber. In addition to teaching extensively in the field of international trade law, Jon has also authored numerous books and articles, including The North American Free Trade Agreement: A Comprehensive Guide, sometimes referred to as the “NAFTA Bible” by practitioners in the area. 

Among those celebrating with Jon were his wife Patricia and son Jon, his assistant Bonnie Parr, and other colleagues from Goodmans. The Section is honoured to recognize Jon for his significant accomplishments, and we look forward to many more in the coming years. 

*John Boscariol, Chair of the Ontario Bar Association International Law Section, and Partner, McCarthy Tétrault LLP. 

Mark your calendars! The 35th Annual OBA Institute of Continuing Legal Education 2010 will take place on Tuesday, February 16th, 2010 at the Fairmont Royal York in Toronto. Don’t miss the joint program with the International Law Section and the Citizenship and Immigration Law Section:

Navigating the International Assignment Maze: Immigration, Employment and Taxation Issues in Foreign Worker Transfers

Pre-register today at: www.oba.org/Institute2010