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15 May 2009
A recent Federal Court of Canada decision illustrates a possible strategy available to an importer to delay the implementation of a Canada Border Services Agency ruling that will have significant negative implications for the importer's business. In particular, on January 20 2009 the court granted a stay of a revocation of an existing tariff classification ruling and thereby allowed the status quo to continue indefinitely until such time as a challenge to the replacement, negative ruling has been completed.
In Danone Canada Inc v Attorney General of Canada the court clarified that importers faced with the revocation of a tariff classification ruling by the Canada Border Services Agency may be able to postpone the application of the new ruling in certain circumstances.
It is likely that the particular facts of the case influenced the court's decision to grant the relief claimed. Danone Canada Inc, a company based in Boucherville, Quebec, considered expanding its facility to produce another product in Canada called DanActive.
In 2006 Danone Canada Inc of Boucherville, Quebec began to consider marketing in Canada a product called DanActive. DanActive contains a patented series of bacterial cultures which is claimed to have been scientifically proven to boost human immune systems when ingested regularly. Danone Canada Inc decided to undertake a four-year test-marketing plan, during which time it would spend heavily to market the product in Canada and source the product from a manufacturing facility located in the United States. If the product proved successful, Danone Canada Inc planned to expand its facility to manufacture the product in Canada.
The problem with such an approach is that, depending on the tariff classification of the product, it could be prohibitively expensive to import the product due to the existence of the tariff rate quota system applicable to certain imported dairy products, which impose high tariffs on imports that are not imported by a tariff rate quota holder. Given the foregoing, before embarking on its four-year test-marketing plan, Danone Canada Inc approached the Canada Border Services Agency for a tariff classification ruling. The company also took the proactive step of meeting with the Dairy Farmers of Canada and the Quebec dairy industry to reveal its test-marketing plan and to explain that if the plan were successful, Danone Canada Inc would require substantial amounts of milk produced in Canada in order to manufacture the product at Boucherville, Quebec.
On November 17 2006 the Canada Border Services Agency issued Advance Ruling 219663 (the 2006 ruling), finding that DanActive would be classified under Tariff Item 2202.90.49.00, which is a "beverage containing milk". Under this classification, the tariff rate quotas do not apply, and furthermore the 11% most-favoured-nation tariff (applicable in 2006) would not apply as the product would qualify for duty-free entry as an originated good under the North American Free Trade Agreement.
Danone Canada Inc relied on the 2006 ruling to begin importing and selling the DanActive product in 2007. The company also apparently spent millions of dollars on advertising the product. The company claimed that it was on track to break even in 2008 and forecasted a profit in 2009.
In the meantime, in May 2008 the Canada Border Services Agency informed Danone Canada Inc that the 2006 ruling was under review and requested certain information from the company. On October 27 2008 the Canada Border Services Agency sent Danone Canada Inc notice of Advance Ruling 232911 (the 2008 ruling). This notice informed Danone Canada Inc that the Canada Border Services Agency was revoking the 2006 ruling and replacing it with one classifying DanActive as a 'yoghurt' under Tariff Heading 0403.10. The 2008 ruling was to become effective on January 27 2009.
The new classification would have been disastrous to the company's business because it imposes a tariff rate quota of 330 tonnes. Companies that hold a portion of this tariff rate quota may import yoghurt from the United States duty free; otherwise, the goods are subject to a duty of 237.5%.
Danone Canada Inc faced two main problems with the 2008 ruling. Firstly, the company had no tariff rate quota, as it relied on the 2006 ruling under which no such tariff rate quota was necessary. Secondly, the portion of the quota that Danone Canada Inc might be able to obtain would be too low, as it would need to import more than its quota to satisfy the demand for the product in Canada. In summary, it appeared that unless Danone Canada Inc could successfully appeal the 2008 ruling, thereby leaving the 2006 ruling in place, the cost to import DanActive would be prohibitive and the company would have to cease marketing the product in Canada. Thus, the considerable sums of money already expended in Canada would not be recovered and furthermore there would be insufficient funds to build the facility in Canada to manufacture the product.
An importer that is faced with a negative ruling on tariff classification has a right to appeal the ruling. In this connection, the Customs Act provides a comprehensive statutory scheme of review. The courts have ruled that as a result of such comprehensive statutory review framework under the Customs Act, there is no authority for an importer to apply for judicial review of the ruling at the Federal Court. Instead, the importer must follow the procedures in the Customs Act.
An advance tariff classification ruling is issued pursuant to Section 43.1 of the Customs Act. A ruling issued under this section may be appealed to the Canada Border Services Agency pursuant to Section 60(2) of the act. Where an appeal is filed, the president of the Canada Border Services Agency, as represented by an appeals officer, under Paragraph 60(4)(b) of the act, must affirm, revise or reverse the advance ruling. Section 62 directs that such a decision made by an appeals officer under Section 60 of the act be appealed only to the Canadian International Trade Tribunal. Finally, Section 68 directs that decisions of the Canadian International Trade Tribunal be appealed only to the Federal Court of Appeal on a question of law.
This process (appeal to the Canada Border Services Agency, then the Canadian International Trade Tribunal and then the Federal Court of Appeal) takes months and more likely several years. However, in the meantime, the importer is required to abide by any ruling in effect - in this case the 2008 ruling. Since this would not make economic sense, Danone Canada Inc sought another remedy to avoid the application of the 2008 ruling. In particular, the company asked the Federal Court to exercise its jurisdiction to grant interlocutory relief - namely, to order a stay or postponement of the 2008 ruling and to retain in force the 2006 ruling until such time as the statutory appeal of the 2008 ruling has been completed.
Justice Shore issued a well-reasoned decision and considered first whether the Federal Court had jurisdiction over the matter at issue. The judge concluded, after a review of the applicable laws and various bodies involved in the review process, that the Federal Court did not have jurisdiction to review judicially the 2008 ruling (ie, the court could not consider the merits of whether the 2008 ruling was correct). However, the judge ruled that the Federal Court did have jurisdiction to issue an interlocutory injunction pending a decision by the entities with jurisdiction over the merits.
The court then considered whether it should grant an interim stay of the 2008 ruling. In doing so, the court addressed:
Following its consideration of these questions, the court concluded that the facts supported the grant of the stay, and ultimately granted the stay of the 2008 ruling until the issue is fully disposed of at every level of all jurisdictions concerned. The court confirmed that the 2006 ruling is to remain in effect prior to any final disposition of the matter.
The decision in Danone Canada Inc represents a further option available to an importer faced with the prospect of receiving a negative tariff classification ruling that could have significant negative implications for its business. While following the statutory appeal framework, an importer may seek to postpone the implementation of the ruling and maintain the status quo until such time as the appeal is completed through every level of jurisdiction concerned. The remedy achieved by Danone Canada Inc is by no means automatically available in each case. However, in an appropriate fact situation such as existed in Danone Canada Inc, the Federal Court may exercise its jurisdiction to grant interlocutory relief to the importer and thereby restrain the Canada Border Services Agency from enforcing its ruling against the importer.
For further information on this topic please contact Greg Kanargelidis at Blake Cassels & Graydon LLP by telephone (+1 416 863 24 00) or by fax (+1 416 863 2653) or by email (email@example.com).
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