New free trade deal with U.S. will see Canada's duty-free limit raised to $150 from $20
Old rules saw tax and duty thresholds set at same level, but that's no longer the case
Retailers say they are OK with new trade rules that will allow Canadians to buy more from the United States duty free — because dire alternatives that would have been worse never came to pass.
One aspect of the new U.S.-Mexico-Canada Agreement announced over the weekend is an increase in the so-called de minimis threshold for duty-free shopping — the amount that Canadians can buy from a store in the U.S. and import to Canada without having to pay a duty.
Under the old rules, Canada's limit was $20. That's much less than what the U.S. allows, a discrepancy that American trade officials were pressuring Canada to fix. Mexico agreed to raise its limit to $100 US from $50 previously, when officials agreed to their portion of the free trade deal in August.
Canada appears to have made a similar move, raising the de minimis threshold for duty-free purchases to $150.
In one sense that's bad news for Canadian retailers, because it means Canadians can buy more from U.S. retailers over the internet, before being dinged with duties. But as economist Derek Burleton at Toronto-Dominion Bank put it, "it could have been worse."
Given that some had been lobbying for Canada's level to be set exponentially higher than that, the Retail Council of Canada said Monday that they will take it.
"That's a pretty big coup for our negotiation team," said Karl Littler, the senior vice-president of public affairs with the Retail Council of Canada, which represents 45,000 Canadian stores. "De minimis was the big one for us, and it has landed significantly better than we had feared at the outset."
Far more important than the new duty-free limits, Littler says, are the thresholds at which sales taxes will be levied. Under the old rules, $20 was the limit for both — meaning you could buy something from the U.S. for up to $20 and not pay any sales tax at all on the purchase, something that gave U.S. retailers a clearly unfair advantage.
The new rules will see those two figures decoupled from each other, and the tax threshold will rise to $40.
"We care much more about the $40 number than we do about the $150 number," Littler said. That's because while the concept of duties create a lot of anxiety, in reality they are fairly minimal when compared to sales taxes, averaging about two per cent according to Littler's calculations — although they can be higher than that for some types of products.
Official data shows Canada collected $5.5 billion in duties last year, a figure that is dwarfed by the hundreds of billions that Canadian retailers sold last year. A two per cent duty is unlikely to move the needle on a purchasing decision too much, but the same can't be said about taxes, where it can add up to 15 per cent to a purchase price, in some provinces, Littler says.
Put another way, under the new rules, when someone in Canada buys something online from the U.S. costing $149, they'll be spared a duty that likely would have cost them $3. But they'll have to pay $22.35 in taxes if they live in a province with a 15 per cent tax rate, as is the case in all of Atlantic Canada. In Ontario, the tax would be $19.37. In B.C., it would be $17.88.
They'd pay those taxes in Canada too, but the tax-free threshold gives U.S. retailers a leg up. And that gap just got a little wider.
It's something economist Brett House at Scotiabank has been banging a drum about for more than a year, which is why he lamented the missed opportunity to lower the tax threshold even if Canada was bound to be forced to raise its duty-free level.
"If you have to choose, push the [de minimis threshold] on duties up higher … but then push the sales tax threshold down," he said. "Every time you push it up you are making the playing field less level for retailers."
Splitting the duty-free limit from the taxation limit is a great idea in principle, and House says the final numbers the sides agreed upon was likely a concession on some other parts of the agreement.
"If it got us something elsewhere, we'll never really know, but maybe it was a useful concession," he said.
Canadian retailers want same deal
While the retailing group says the deal could have been worse, one of the biggest retailers in Canada wants the government to extend the advantage they have just bestowed on foreign retailers to domestic ones, by exempting them from import duties up to $150, too.
"We are also very much for reduced costs for consumers," Canadian Tire spokesperson Andrea van Vugt said Monday, "but they have just incentivized Canadian consumers to shop at foreign retailers."
That's because when Canadian Tire imports products from areas outside North America, the retailer must pay myriad import duties — costs that get rolled into the retail price.
Canadian Tire also has to charge sales taxes on everything, but under the new rules, "we can't sell the exact same product for the exact same price in Canada."
That is why the retailer hopes the federal government will consider granting them the same level of duty exemptions that they have just granted foreign retailers.
"You should really be levelling the playing field here," van Vugt said.