SUBJECT DEFENCE SUPPLIES AND DEFENCE PRODUCTION AND DEVELOPMENT SHARING ARRANGEMENTS BETWEEN CANADA AND THE UNITED STATES

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1 MEMORANDUM D8-9-3 Ottawa, May 10, 2001 SUBJECT DEFENCE SUPPLIES AND DEFENCE PRODUCTION AND DEVELOPMENT SHARING ARRANGEMENTS BETWEEN CANADA AND THE UNITED STATES This Memorandum outlines the conditions under which goods may qualify for duty-free entry under tariff item TABLE OF CONTENTS Guidelines and General Information 2 Goods and Services Tax (GST) 2 What Qualifies? 2 Who Qualifies? 3 Conditions 4 Documentation 4 Corrections to Declarations 5 Refunds 6 Audit and Verifications 7 Interest and Penalties 7 Additional Information 8 Appendix A Tariff Item Appendix B Defence Production and Development Sharing Remission Order Appendix C Exemption Certificate Appendix D Certificate for Defence Supplies Appendix E List of Regional Customs Offices Appendix F List of PWGSC Offices Page GUIDELINES AND GENERAL INFORMATION 1. Effective January 1, 1998, the Remission Order Respecting the Remission of Customs Duties on Defence Supplies has been revoked. The Remission Order Respecting the Remission and Refund of Customs Duties and Excise Taxes in Respect of the Canada-United States Defence Production and 1

2 Development Sharing Program has been revoked for the customs duty but has been maintained for the relief of excise taxes, other than the goods and services tax (GST), that would otherwise have been payable under this order. The relief of customs duty offered by these remission orders has been combined into tariff item For additional information, consult Memorandum D11-8-5, End-Use Program, which outlines the Canada Customs and Revenue Agency s (CCRA) general administrative policy concerning the importation of goods under end-use tariff items in Chapter 99 and other chapters of the Customs Tariff, effective January 1, Goods and Services Tax (GST) 3. Relief of the GST is not provided for under tariff item Any reference to duties in the following guidelines should read to exclude relief from the payment of the GST. What Qualifies? 4. It should be noted that tariff item contains two distinct and separate provisions: (a) Defence supplies are defined in the Defence Production Act. Defence supplies include only those specified goods which are, or will be, used directly or indirectly in the defence of Canada. Goods purchased for the day-to-day operations of the Department of National Defence are not eligible. Defence supplies are defined as: (1) arms, ammunition, implements of war, vehicles, mechanical and other equipment, watercraft, amphibious craft, aircraft, animals, articles, materials, substances, ships of all kinds, and things required or used for Canada s defence or for cooperative efforts for defence being carried on by Canada and an associated government; and (2) articles, materials, substances, and things of all kinds used for the production or supply of anything mentioned in the previous paragraph (a) or for the construction of defence projects; and (b) Articles and materials imported into Canada or imported articles and materials purchased in Canada by persons carrying on business in Canada who have been awarded contracts under the defence production and development sharing arrangements between Canada and the United States. The contracts are certified as eligible under the Defence Production and Development Sharing Program by the Canadian Commercial Corporation (CCC). Who Qualifies? 5. A prime contractor qualifies if he has a contract through Public Works and Government Services Canada (PWGSC) to provide defence supplies in Canada. A subcontractor is any person who can satisfy the CCRA that the imported goods are to be sold to a prime contractor. Both prime contractors and subcontractors must have certification. This means PWGSC certifies that the items purchased under a contract number are defence supplies as defined in the Defence Production Act. 6. Will qualify any person carrying on business in Canada who has been awarded contracts by the CCC, an agency of the United States Government, or a prime contractor or subcontractor producing or developing defence supplies or defense equipment in connection with those contracts awarded under defence production and development sharing arrangements between Canada and the United States. Conditions 7. A prime contractor claiming duty-free entry of defence supplies under tariff item must have a copy of the contract certified by the Minister of Public Works and Government Services that the goods on the contract are defence supplies. 2

3 8. The defence supplies, as defined in the Defence Production Act, are covered by a contract, the total value of which is $250,000 or more certified by the Minister of Public Works and Government Services. The value may include customs duties and GST even though the goods are imported duty free under tariff item Persons can claim duty-free entry of articles and materials that have been or are to be used solely and exclusively in the development and production of goods incorporated into goods that have been or are to be delivered to an agency of the United States Government in connection with a defence production and development sharing contract. Authority to import under tariff item may be obtained by applying directly to the CCC or through an officer of the Field Contract Administration Division of PWGSC. Documentation 10. Generally, importers meeting the conditions of tariff item may claim duty-free entry of the goods at the time of import by placing the correct tariff classification number of the goods within Chapters 1 to 97 of the Customs Tariff in the classification field and by placing 9982 in the tariff code field of the import accounting document (i.e., Form B3, Canada Customs Coding Form). 11. A prime contractor must be able to provide a copy of the contract from PWGSC with certification that the goods on the contract are defence supplies. 12. A subcontractor must provide an end-use certificate or letter of commitment from the prime contractor listing the contract number with PWGSC and granting the CCRA access to its records. Additionally, the subcontractor must satisfy the CCRA that the goods supplied to the prime contractor are for a contract which meets all the conditions of the tariff item A letter of commitment or end-use certificate (contained in Appendix C) will be required for each intermediate party not designated in the contract. 13. A contractor or subcontractor must be able to provide a copy of the contract from the CCC authorizing that the goods are to be used solely and exclusively in the development and production of goods or incorporated into goods that have been or are to be delivered to an agency of the Government of the United States with a defence production development sharing contract. Documentation must include a certificate (contained in Appendix D) signed by an authorized official of the importing firm. 14. It is the responsibility of the importer or owner of the goods to satisfy customs that the conditions and requirements set forth in the tariff item have been met, and that its record keeping is sufficient to establish compliance. 15. Additional information can be found in sections 40, 41, 42, and of the Customs Act and in Memorandum D , Maintenance of Records and Books in Canada by Importers. Corrections to Declarations 16. Diversions are transactions which occur after imported goods have been accounted for in the prescribed manner (i.e., section 32 of the Customs Act on Form B3), and involve the sale, lease, or disposition in any manner of all or part of the goods (including scrap) to a use or user not specified in tariff item Importers, contractors, and subcontractors should also establish a record keeping system to account for imported goods not used in compliance with tariff item Subsections 32.2(2) and 32.2(6) of the Customs Act place an obligation on the importer of record, owner, or other prescribed person of the imported goods, to report and correct declarations of tariff classification and pay any duties owing, if applicable, within 90 days of the date there is reason to believe the goods fail to comply with a condition imposed under a tariff item, in this case, The date of diversion is considered to be the date of the sales invoice, lease agreement, contract, work order, or other document that covers the removal of the goods to a non-qualifying use or user. If records 3

4 do not establish the date of diversion, the diversion is considered to have taken place at the time of importation of the goods. 20. Additional information can be found in Memorandum D11-6-6, Self-Adjustments to Declarations of Origin, Tariff Classification, Value for Duty, and Diversion of Goods. Refunds 21. If duties have been previously paid and an importer meets the conditions of tariff item , a refund may be claimed. All claims for refund (section 74 of the Customs Act) must be filed within four years of the date of release of the imported goods. All claims must be accompanied by documentation demonstrating that the conditions of the tariff item have been met. The Defence Production and Development Sharing Remission Order, P.C , dated November 3, 1970, as amended, may be used for qualified claims, for refund of excise taxes other than GST. Claims may be filed on Form K32, Drawback Claim. 22. The supplier is not entitled to claim a refund under tariff item if the contract already includes duty-paid provisions (the Department of National Defence pays the duty as per the contract and is entitled to the refund). In this case, a waiver is required from all other eligible claimants waiving their rights to the refund. The remission of customs duty for defence supplies is designed under a zero-sum application and is not meant to result in a windfall profit for the contractor. Audits and Verifications 23. CCRA officers may exercise the powers granted to them under sections 42 and of the Customs Act and perform compliance verification audits or reviews on goods imported under end-use tariff items such as This includes goods covered by stocking authorizations, percentage arrangements, and National Customs Rulings. 24. As a result of an audit or other verification exercise, goods found to have been declared under an incorrect tariff item will be subject to a re-determination or further re-determination of the tariff under paragraph 59(1)(a) or (b) of the Customs Act. Interest and Penalties 25. Interest at the specified rate will be charged on the 91st day after the date of diversion on any unpaid duties. 26. In addition to the regular amount of duties payable to the CCRA, every person who fails to correct a declaration of tariff classification in accordance with subsection 32.2(6) of the Customs Act shall be liable for the payment of a penalty according to the scale prescribed in section of the Act. Additional Information 27. Any company wishing to use tariff item or in need of further information should contact their local CCRA customs office for assistance. A list of regional customs offices can be found in Appendix E. 28. For more information on customs measures, visit our Web site at 4

5 29. For more information on the Defence Production and Development Sharing Program, contact the Canadian Commercial Corporation at the following address: Manager U.S. Operations Canadian Commercial Corporation Room 1100, 50 O Connor Street Ottawa ON K1A 0S6 30. For more information on contracts to provide defence supplies in Canada, visit the PWGSC Web site at 5

6 APPENDIX A TARIFF ITEM Defence supplies, as defined in the Defence Production Act, covered by a contract, the total value of which is $250,000 or more, certified by the Minister of Public Works and Government Services that the goods supplied under the contract are defence supplies; Articles and materials, imported by persons carrying on business in Canada whom the Canadian Commercial Corporation verifies as having been awarded contracts or sub-contracts under defence production and development sharing arrangements between the Governments of Canada and the United States, for use in the development or production of goods, or for incorporation into goods, all for agencies of the Government of the United States in connection with such contracts or sub-contracts. Note: Goods must be classified in Chapters 1 to 97 according to the Harmonized System of tariff classification contained in the Customs Tariff, placing the correct tariff classification number in the classification field and 9982 in the tariff code field of the import accounting documentation (i.e., Form B3, Canada Customs Coding Form). 6

7 APPENDIX B REMISSION ORDER ORDER RESPECTING THE REMISSION AND REFUND OF TAXES IMPOSED UNDER THE EXCISE TAX ACT, OTHER THAN THE TAX UNDER PART IX, IN RESPECT OF THE CANADA-UNITED STATES DEFENCE PRODUCTION AND DEVELOPMENT SHARING PROGRAM Short Title 1. This order may be cited as the Defence Production and Development Sharing Remission Order. Remission 2. Subject to sections 3 and 4, remission is hereby granted of the taxes paid or payable under the Excise Tax Act, other than the tax under Part IX, on articles and materials that (a) are imported into or purchased in Canada by persons carrying on business in Canada who have been awarded contracts under defence production and development sharing arrangements between the Government of Canada and the Government of the United States; and (b) have been or are to be used solely and exclusively in the development and production of goods or incorporated into goods that have been or are to be delivered to an agency of the Government of the United States in connection with a defence production and development sharing contract. 3. A person claiming a remission under this Order shall produce, together with the customs accounting document or refund claim for the articles or materials referred to in section 2, (a) verification by the Canadian Commercial Corporation that he has been awarded a contract referred to in paragraph 2(a); and (b) a certificate by the importer of the articles and materials, in such form as the Commissioner of Customs and Revenue may prescribe, certifying that the articles and materials have been or are to be used for the purposes described in paragraph 2(b). 4. The Minister of National Revenue may give such instructions and directions as he deems necessary for the purpose of carrying out the provisions of the Order. 7

8 APPENDIX C EXEMPTION CERTIFICATE I hereby certify that the articles and materials described on the accounting document, refund claim, or accompanying documents have been or are to be used solely and exclusively in the development and production of goods or incorporated into goods that are to be delivered to an agency of the Government of the United States of America under a contract awarded in accordance with the Canada-United States Defence Production and Development Sharing Program. United States Government Contract No. Name of Firm CCC or Sub-Contract No. and Name of Prime Contractor, if Applicable Authorized Signature Date 8

9 APPENDIX D CERTIFICATE FOR DEFENCE SUPPLIES I certify that the items purchased under contract number are defence supplies as defined in the Defence Production Act, pursuant to tariff item Approved by Authorized Officer Signature Date Title 9

10 APPENDIX E Atlantic Region 5th floor, CIBC Building 1809 Barrington Street Halifax NS B3J 3K8 Telephone: (902) Fax: (902) Quebec Region 8th floor, 400 Place d Youville Montréal QC H2Y 2C2 Telephone: Northern Ontario Region 3rd floor, 2265 St. Laurent Boulevard Ottawa ON K1G 4K3 Telephone: Southern Ontario Region Peace Bridge Plaza 60 Walnut Street Fort Erie ON L2A 5N7 Telephone: (905) Fax: (905) Greater Toronto Area Airport Road Mississauga ON L4V 1V2 Telephone: (905) Fax: (905) Windsor/St. Clair P.O. Box 1655 Windsor ON N9A 7G7 Telephone: (519) Fax: (519) rd floor, 1 Front Street West P.O. Box 10, Station A Toronto ON M5W 1A3 Telephone: (416) Fax: (416) Prairie Region Main floor, Federal Building 269 Main Street Winnipeg MB R3C 1B3 Telephone: (204) Fax: (204) LIST OF REGIONAL CUSTOMS OFFICES 10

11 Pacific Region Dunsmuir Street Vancouver BC V6B 5R4 Telephone: (604) Fax: (604)

12 APPENDIX F LIST OF PWGSC OFFICES Directors General Science, Informatics and Professional Services Sector (SIPSS) Floor 12C1 Place Du Portage Phase III 12C1, 11 Laurier Street Hull QC K1A 0S5 Aerospace Marine and Electronics Systems Sector (AMES) Floor 7C1 Place du Portage, Phase III 7C1, 11 Laurier Street Hull QC K1A 0S5 Industrial and Commercial Products and Standardization Services Sector (ICPSS) Place du Portage, Phase III 7A2, 11 Laurier Street Hull QC K1A 0S5 Regional Directors General of PWGSC Atlantic Region 1713 Bedford Row Halifax NS B3J 3C9 Quebec Region 7th floor Guy-Favreau Complex Room , 200 René-Lévesque Boulevard West Montréal QC H2Z 1X4 Ontario Region 10th floor Joseph Sheppard Building 4900 Yonge Street Toronto ON M2N 6A6 Western Region Regional Director General Edmonton AB T5J 4E2 Pacific Region Room 641, 800 Burrard Street Vancouver BC V6Z 2V8 12

13 REFERENCES ISSUING OFFICE Duty Deferral Trade Incentives Program Division Trade Policy and Interpretation Directorate LEGISLATIVE REFERENCES Customs Tariff, tariff item Financial Administration Act, section 23 C.R.C., c. 755 as amended by SI/88-18 Order in Council P.C , November 3, 1970, as amended HEADQUARTERS FILE SUPERSEDED MEMORANDA D N/A OTHER REFERENCES D7-4-1, D7-4-2, D8-6-1, D11-6-6, D11-8-5, D Services provided by the Canada Customs and Revenue Agency are available in both official languages. This Memorandum is issued under the authority of the Commissioner of Customs and Revenue. 13