If you’re looking for more information about CBSA Bonded Warehouses, then you’ve come to the right place. In this article, we’re going to take a look at what exactly these types of warehouses are and how they can help you, whether you’re an entrepreneur, established business or importer acting on behalf of other firms. It’s important to note from the outset that not all warehouses in Canada are the same. The type of warehouse that we’re going to discuss here brings a number of benefits that help to take some of the risks out of your enterprise and keep your balance sheet healthy.
If you want to supply goods into and out of Canada, then you want to know whether you have to pay import duties the moment that they arrive on Canadian soil or if you can defer taxes until you release the goods for consumption in the Canadian market. In this article, we’re going to answer this question and many more by looking at the policies of the Canada Border Services Agency and the role of CBSA Bonded Warehouses.
By the end, you’ll have an understanding of what these facilities are and how they can benefit the financial position of your firm.
Thousands of companies import and export goods to and from the Canadian market. If these goods come from countries that do not have free trade agreements with Canada, they’re subject to trade duties. Trade duties are taxes that importers and exporters must settle with the Canadian authorities when supplying goods to Canada, or from Canada to countries that do not have a free trade agreement with Canada.
Trade duties present a problem for companies engaged in international trade. While customers shoulder the burden of the tax in the final purchase, companies have to pay import duties based on the MSRP of the products if they want to sell them in the domestic Canadian market.
Bonded warehouses, however, provide a helpful workaround. Bonded warehouses are select facilities approved by the CBSA that allow companies to defer the payment of customs duties until they sell products into the market.
If you’re a company owner that imports products from overseas into Canada or exports abroad, you’ll immediately see why this is so appealing. If you have to pay import/export duties up front, you take an immediate hit to your cash flow. You must pay taxes now but may have to wait until you receive money from buyers in the future. After a large shipment, therefore, your cash position can take a significant hit, making your business less financially stable.
There’s an opportunity cost of paying duties up front too. You can’t use the money you pay in taxes to accumulate interest in the bond market or invest in other aspects of your company. Making large upfront payments before you’ve received money for the goods can erode wealth creation over the long-term.
So, how exactly does a bonded warehouse work in practice? Bonded warehouses in Canada are privately-run facilities that participate in the Customs Bonded Warehouse Program operated by the CBSA. The idea is to provide a space in which companies can store items and defer the payment of taxes and duties until the release of goods to market. Custom bonded warehouses are, therefore, a way of giving both importing and exporting firms inventory flexibility while making the timing of tax payments more financially manageable.
CBSA Bonded Warehouses can benefit the following types of organizations and businesses:
Once you operate a bonded warehouse in Canada, you’re able to defer all of the taxes that you’d ordinarily have to pay until you eventually come to sell the goods. It’s important to note that bonded warehouses are not a government-run facility, nor are there specific bonded warehouses that you must use. Instead, bonded warehouses are best thought of as being part of the Custom Bonded Warehouse Program. You can either choose to use a warehouse already in the network or build one of your own and apply for membership.
If you’re a business owner, you can appreciate the utility of being able to defer taxes with a bonded warehouse. As we discussed, being able to put off taxes until you actually sell your goods helps to dramatically improve your cash position and avoid costly cash flow issues.
It’s worth pointing out that there are other advantages too. Let’s take a look at some of the benefits you can expect.
While most business leaders will be most interested in the duty deferment component of CBSA bonded warehouses, there are many other benefits, particularly if you decide to slot into the existing network. Bonded warehouses provide the same efficiencies and benefits that you find in the private third-party inventory management industry. In fact, given that CBSA bonded warehouses are private facilities with membership of the Custom Bonded Warehouse Program, this is precisely what you’d expect.
As with any program of this nature, there are rules and regulations to prevent abuse of the system. The main goal of the program is to grease the wheels of international trade, helping to reduce transaction costs associated with cross-border trade. It is not designed as a tax avoidance scheme or a way for companies to indefinitely defer tax payments on goods entering and leaving Canada.
If you’re thinking about using CBSA bonded warehouses, you probably have questions about what is allowed under the system, and what’s forbidden.
The CBSA defines what it calls “allowable activities” in its policy document. These are actions that you can apply to the goods in your inventory while inside a bonded warehouse.
Take a look at the following examples of what are allowable “minor alterations” under the scheme:
The CBSA rules also allow you to perform other minor modifications of stock such as cleaning, preserving, diluting, sorting and grading, and trimming, slitting, and cutting. The basic idea is that you’re doing things that prepare the goods for market. You’re not doing anything that adds value, besides enabling products to remain in storage for longer.
What about other regulations? As you might imagine, once inside a custom bonded warehouse, inventory has to meet the regulatory requirements of Canadian law. Banned goods cannot be imported to CBWs, for instance. Neither can products that do not meet government department requirements - including permits and authorizations.
Anyone who wants to operate a custom bonded warehouse must complete Form E401 - Application for a License to Operate a Customs Bonded Warehouse. You must then take this form to the CBSA office that’s closest to the location of the proposed warehouse. If you plan on using a third-party warehouse, you must still complete the form.
If you run a business looking to ship freight to or from Canada, then the question of timing is essential. How long can you keep goods in a CBSA bonded warehouses?
The standard answer is that you’re allowed to keep goods in storage for four years. This length of time differs from that of the US where the authorities there let exporters and importers keep inventory for five years tax-free.
The start of the four years begins from the moment that the goods enter the warehouse. However, while the four-year limit applies to the majority of products, there are some exemptions.
Schedule 19 of the Custom Bonded Regulations lists four groups of goods all with varying time limits. The first group are non-consumer goods, including aircraft, ships, drilling supplies and other heavy plant and machinery. These goods attract a time limit of 15 years. The second category is beer and wine. The CSBA allows you to hold these in bonded warehouses for five years. The third category includes goods that you might want to use for marketing purposes. So, for instance, if you’ve imported products that you’d like to display at a trade show or exhibition. In this case, you have 90 days before the tax is due.
All other goods fall into the fourth category and attract the four-year limit we discussed above.
The CBSA’s role is to oversee bonded warehouses in Canada and ensure that the businesses using them remain compliant with the regulations set out in the Customs Bonded Warehouses Regulations Document. The rules put specific requirements on CBSA warehouses, dictating how they must operate if they wish to remain a part of the Custom Bonded Warehouse Program.
Here are some of the things that the CBSA does regarding bonded warehouses:
The primary role of the CBSA in bonded warehouses is to oversee operations. As you can see, they’re similar to any other regulatory body. They don’t have any experience in operating warehouses themselves. Instead, they set the rules and then use the law against anyone who violates them. The purpose of the organization in this regard is to establish that importers and exporters correctly use the facilities, and manage them according to CBSA standards.
While official figures are not available on the precise number of bonded warehouses in Canada, common sense leads you to suspect that there is a high number. Custom bonded warehouses in Canada are facilities that are licensed by the CBSA and have obtained a license to operate. These warehouses don’t have to be custom-designed storage spaces in the traditional sense. They can be any facility that meets the requirements of the Custom Bonded Warehouses Program.
This fact means that the number of bonded warehouses in Canada is likely to be high. A business can create a custom bonded “warehouse” out of its existing office space if it wants, as long as it meets the regulatory requirements set out in Memorandum D7-4-4. This memorandum provides general guidelines and information that the occupiers of custom bonded warehouses in Canada must follow. These guidelines include detailed instructions for how companies are allowed to both process and store bonded goods in their possession.
As you might expect, space in custom bonded warehouses isn’t free, just as it isn’t for any other storage facility. There are many costs associated with using these facilities, besides any tax or duties that you might be liable to pay.
The first charge relates to storage area accommodation. If you’re using a third-party warehouse, then you’ll need to pay a fee that is proportional to the space you need. Different warehouses have different rates, so it’s worth inquiring ahead of time to find out which offers the best value.
The second cost you’ll likely face is the cost of insurance. The more valuable the goods in your inventory, the more your insurance premiums will be.
The third cost is customs duty handling charges. The CBSA considers goods in bonded warehouses in Canada to be imports that have not yet attracted import duties.
The Receiver General for Canada also has an additional requirement for Customs Bonded Warehouses. Warehouses must offer a security of 60 percent of the total amount of duties and taxes owed at any given time. The idea here is to ensure that even if there is a dispute or issue with the business model, the Receiver General still gets paid.
An FTZ is a “free trade zone” - a special area in Canada where businesses can get tax exemptions for goods and materials that come into the country. The idea of FTZ is to allow companies to import products into Canada for assembly and then re-export them abroad without attracting taxes. As with bonded warehouses, it’s a way for businesses wanting to ship freight to avoid double taxation and only pay duties in one country.
Businesses can store goods in an FTZ, process them, or assemble them as they see fit. Then, if the products are destined for a foreign market, the company doesn’t pay any duties or taxes. Or, if the goods are for the Canadian market, the company can defer paying taxes until the products are sold.
At first glance, FTZs and bonded warehouses seem quite similar, but there are several differences.
It’s important to note that the CBSA considers FTZs in Canada to be outside of the territory of Canada for collection of trade duty purposes. The border authorities do not insist that companies create a record for when particular goods entered the country in an FTZ, whereas they do for a bonded warehouse. As a business, you’re free to ship products from a bonded warehouse to an FTZ. However, if you move products to an FTZ, it must be for destruction or export purposes. You cannot process goods in an FTZ and then send them back to a bonded warehouse for distribution in Canada.
We’ve hinted already in our discussion that you’re able to make changes to goods while in a bonded warehouse, but there are limits to the kinds of changes that you can make. In general, you’re not permitted to make changes that will substantially alter the character of the goods that you intend to import or export. The primary role of the Custom Bonded Warehouse Program is to provide you with a facility for the delay of tax payments on your inventory. It’s not meant to be a way to bypass certain import or export restrictions.
So what changes can you make?
Labeling is essential if you need to distribute items in the post or ship to a variety of locations. It helps make it clear who the intended recipient is, what’s in a particular parcel, and provides tracking facilities. Labeling, according to CBSA rules, does not constitute a significant change to the goods themselves.
Many companies need to verify that the items in their inventories are functional. The CBSA, therefore, allows importers and exporters to test the goods in their possession to ensure that they are fit for the market.
Some chemicals and other products require dilution before being shipped. You could argue that this involves a material change to the product, but it is allowed under the CBSA rules.
The CBSA allows companies to sort and grade inventory in bonded warehouses.
Companies are allowed to service and maintain equipment in bonded warehouses. This feature is particularly helpful for companies importing and exporting expensive vehicles, such as airplanes.
While bonded warehouses might seem like a great choice for the majority of businesses there are alternatives. What's more, these alternatives may be far more suitable for particular kinds of operations.
Here are some of the alternatives to bonded warehouses:
Which of these programs you choose is related to the kinds of activities that you undertake. Each comes with a host of benefits but also qualifications.
Take the Duties Relief Program, for instance. This program, available through bonded warehouses, relieves duties on goods that you import into the country for processing. The qualification, however, is that you must export them within four years.
The Drawback Program is similar. The program refunds duties on goods coming in and out of the country. To claim, however, the products must have been exported within the last four years.
The Export Distribution Center Program provides upfront relief on Goods and Services Tax (GST) and Harmonized Sales Tax (HST). You’re able to take part in the program if exports make up 90 percent of your sales and 90 percent of the money your business makes is from commercial activities.
The Exporters of Processing Services is something different again. This program allows companies to import goods that are not destined for the Canadian market and then export them back without paying duties. The interesting thing about this program is that it does not place any restrictions on the value of the sales that you can add to the goods of non-residents. So, for instance, you could import cars, modify them, and then ship them off overseas at a massively inflated value, attracting no additional tax.
Some goods enter Canada in the form of an in-bond shipment. The vast majority of these in-bond shipments come from the US, Canada’s largest trading partner. The way the concept works is simple. Instead of processing the truck carrying goods at the border and settling any import duties there and then, it is allowed to travel on Canadian highways “in-bond.”
In-bond cargo, like CBSA bonded warehouses, helps to make the process of conducting international trade smoother. The in-bond truck drives to the appropriate bonded warehouse or CBSA office, deposits the goods, and then returns to its depot. The products then remain in the warehouse or offices until the seller in Canada distributes them. Once released, the seller then pays any import duties owed to the Canadian government.
It’s worth pointing out that only bonded highway carriers are allowed to take part in in-bond shipment processes. These are entities that the CBSA trusts to make the requisite deliveries to approved facilities throughout Canada.
Any business that wants to make use of a bonded warehouse has to complete Form E401 which we discussed above. They must also provide the CBSA with additional information about the bonded warehouse that they intend to use.
Here are some of the details that you’ll need to include in your application to the CBSA:
Once the CBSA receives your application, they will consider it. If they believe that what you propose meets the requirements of the Custom Bonded Warehouses Program, then they will grant you a license with a unique number.
If you’re planning on shipping goods to Canada, then you need partners who you can trust to get the job done. While navigating Canada’s complicated import and export rules can be a challenge, we’re here to help simplify the process and give you what you want: effortless shipping. We can help you ship everything from clothes to wood, all while keeping you apprised of NAFTA Certificate of Origin regulations and duty on commercial product regulations from the U.S. to Canada.
At R+L Global Logistics, we’re committed to shipping goods to Canada and helping you find solutions that enable you to defer taxes and get exemptions where applicable. We serve clients of all sizes, from mom-and-pops to large multinationals. We are your single point of contact for all shipping services that you might need for Canada. We work in cities and states all along the border, including Sweet Grass in Montana. Our team of specialists can deal with issues surrounding CBSA bonded warehouses, in-bond transport, the Canadian Duties Relief Program and much, much more. With R+L Global Logistics as your partner, you’re able to open up new markets, protect against double taxation, and improve your cash flow by deferring duties on imports and exports to Canada.