Table of Contents

Government tariffs exert a substantial tax and financial impact on Canadian enterprises in the form of duties on imported products. The effects are greater than just the immediate costs of paying duties and impacts income tax positions, cash positions, pricing and competitiveness. This discussion examines the impact that tariffs have on businesses on these facets.
1. Survey of tariffs in Canada
In Canada, tariffs are supervised under the Customs Tariff by the Canada Border Services Agency (CBSA). The rates depend on the Harmonized System (HS) the goods fall under, their origin and the trade agreement applying to the goods (CUSMA, CETA, or CPTPP).
Business entities experience fluctuations in landed cost of targeted raw materials, ingredients, or end items when tariffs have (or have been amended) either single-handedly or by effect or reaction to trade difference. This has knock-on effects of tax and accounting treatment.
2. Direct Monetary and Tax Consequences
  • a) Non-deductibility of Tariffs in Input Tax Credits
Tariffs are not regarded as GST/HST, thus they do not create input tax credits. Rather, they are considered to be part of the cost of the imported goods. Consequently, companies will not be able to recover tariff amounts by claiming an input tax credit like they can on internal purchases made using the GST/HST.
  • b) Treatment as Part of Inventory Cost

Under Canadian tax rules and accounting standards (IFRS or ASPE), tariffs are included in the cost of inventory. This increases the carrying value of inventory on the balance sheet. When inventory is sold, the higher cost of goods sold (COGS) reduces taxable income.

It implies that as long as the tariffs are not deductible as an expense when paid, they effectively lessen the amount of taxable profit in the long-run as the inventory is discharged. This deduction may affect cash flow and tax planning based on the time of deduction. 

3. Effect on Cash flow and Working Capital
Tariffs present an immediate cash flow out since goods must be paid for on import into Canada and therefore, revenue may be generated quite later than tarrifs have been paid. This puts working capital in difficulties and more money is required to finance the buying of the inventory.
Companies that utilize large inventories or long lead time can be severely burdened by the cash flow particularly when they experience an abrupt increase in the level of the tariff rates. In other industries, like manufacturing or retailing, tariffs may eat into the margins where there is no option to transfer costs to the consumers.
4. Effect on Transfer Pricing and Transactions between Companies
Transfer pricing should be given critical thought by the Canadian companies that are importing goods through related parties. The transfer price can be the value used to calculate tariffs, which is not necessarily the value used to calculate tax reporting.

Misalignment involving customs value and transfer price may pose some problems, which include: 

  • Possible modifications of values of customs declarations
  • Heightened attention of the CBSA and CRA
  • Chances of double taxation in case transfer pricing is corrected without the same change to the customs
Effective planning is needed to align the instrument of transfer price policies with the regulations of customs valuations.
5. Tariffs and Trade Remedy Measures
Besides the normal tariffs, Canada exercises the practice of countervailing and anti dumping tariffs on some imports which are considered unfairly priced or subsidized. These measures are:
  • Non-recoverable
  • Part of the cost of inventory
  • Deductible as COGS upon sale

The cost of manufacture can be written off as COGS when sold. 

But they may be so much more than standard tariffs which makes the financial and tax consequences even more serious. 

6. Impact on Pricing and Profitability
When tariffs increase the landed costs, businesses face decisions:
  • Absorb the costs, reducing gross margins and taxable income
  • Increase prices, potentially losing market share
  • Restructure supply chains, incurring additional transition costs

These decisions have tax consequences. Lower margins reduce taxable income, but higher prices can reduce sales volumes, further impacting profitability and tax liability. 

7. Potential Income Tax Planning Opportunities

Some businesses may mitigate tariff impacts through: 

  • Valuation planning: Structuring transactions to legally reduce customs value (e.g., excluding certain charges).
  • Duty relief programs: Such as Canada’s Duty Relief Program and Drawback Program, which allow recovery of tariffs if goods are re-exported. d.
  • Supply chain restructuring: Sourcing goods from countries with preferential tariff rates under free trade agreements.
  • Inventory management: Accelerating turnover to recognize higher COGS sooner.

Each strategy has implications for income tax reporting and compliance. 

8. Accounting Treatment Under IFRS and ASPE
Tariffs paid on imported goods are capitalized in inventory and do not appear as an immediate expense. When inventory is sold:
  • The higher cost is recognized as COGS.
  • Gross profit is correspondingly reduced.
The difference in timing between the outflow of cash (when the goods are imported) and the recognition of the expenses (when the goods are sold) needs to be managed carefully in terms of cash flow projections and tax estimation.
9. Implications of GST/HST
Even though the tariffs do not incur input tax credits, goods imported into the country attract GST/HST which is charged on:

Customs value + Tariffs + Excise duties (in case) 

The GST/HST is refundable through input tax credits in case the importer is GST registered. Hence, the increase of the tariffs induces an increase in the GST/HST base but does not cause an enduring tax liability on recoverable GST/HST.
10. Record-Keeping and Compliance Considerations

Tariff costs must be carefully documented: 

  • Customs declarations and import invoices must be retained.
  • Supporting records for inventory costing must be complete.
  • Transfer pricing and customs valuation reconciliations should be periodically reviewed.
  • Any duty relief claims must be supported with detailed evidence of re-export or qualifying .

Non-compliance use can lead to reassessments, penalties, and interest charges from CBSA. 

Conclusion

Tariffs have a material and multi-layered impact on Canadian businesses’ tax positions, cash flow, and profitability. They: 

  • Increase the cost of inventory and reduce taxable income when goods are sold.
  • Require up-front cash outlays with delayed tax deductibility.
  • Complicate compliance with transfer pricing and customs valuation rules.

Ensure tax and supply chain planning can be done to minimize the net effect. 

Competent experience on both tax planning, customs compliance, and supply chain management is required to navigate through such matters. 

What Faber LLP can do
Faber LLP offers holistic advice to Canadian businesses that need understanding of tariff consequences in terms of taxes and finances. Our company can:
  • Compare tariff exposure in your supply chain
  • Help in inventory costing and reporting taxation
  • Check on transfer pricing policies to be in line with customs regulations
  • Apply to various duty relief and drawback programs
  • Recommend on restructuring the supply chains to maximize costs
  • Plan cash flow to lessen the burden on the working capital
With Faber LLP’s guidance, you can minimize risk, improve compliance, and make informed decisions about pricing, sourcing, and profitability in a tariff-affected environment.

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