The Supreme Court of Canada rendered its first decision on the Customs Tariff in Canada v.Igloo Vikski Inc. (2016 SCC 38).  The decision provides guidance on applying the General Rules for the Interpretation of the Harmonized System (“General Rules”), particularly in the context of how the General Rules inform one another.

The goods at issue were goalie catchers and blockers made of textiles and plastics bound together by stitching. CBSA classified the goods under tariff item 6216.00.00, “glove, mitten or mitt” (currently bearing an 18% MFN duty rate). The importer requested a classification re-determination, arguing that the proper classification is under tariff item 3926.20.92,“articles of plastics” (currently bearing a 6.5% MFN duty rate). The CITT agreed with the Crown, but the FCA allowed the importer’s appeal and concluded that the CITT’s decision was unreasonable because it had improperly applied the General Rules. The Crown appealed to the Supreme Court.

At issue was the proper application of General Rules 1 and 2(b). 

• Rule 1: According to Rule 1, the classification of goods must initially be determined with reference only to the headings in a Customs Tariff chapter, as well as any applicable Section or Chapter Notes.Where Rule 1 does not conclusively determine the classification of the good, the remaining rules are to be analyzed.
• Rule 2 (b): Rule 2(b) applies where a good consists of a mixture of more than one material, and states that a reference to goods of a given heading shall be taken to include goods consisting wholly or partly of such material.If, after considering Rule 2(b), the good is prima facie classifiable under only one heading, it is classified as such.
• Rule 3: If, however, the good is prima facie classifiable under more than one heading, then Rule 3 applies to determine the appropriate classification. Rule 3 essentially requires classification according to the material that gives the goods their essential character.

The SCC majority rejected the importer’s interpretation and allowed the Crown’s appeal.  The Court affirmed that the General Rules ought to be applied conjunctively.  Accordingly, Rule 1 continues to be relevant even in analyzing the remaining General Rules.  The SCC majority referenced Explanatory Note XII to Rule 2(b), which states that the Rule does not widen the heading so as to cover goods which cannot be regarded, as required under Rule 1, as answering the description in the heading.  Further, Rule 2 would have no purpose were it not applied in conjunction with Rule 1, since its function is to guide the application of Rule 1 when the good in question is incomplete or a composite of different materials.

As such, the SCC held that it was reasonable for the CITT to conclude that because the goods did not meet the description in heading 39.26 by applying Rule 1, Rule 2(b) could not be used to extend that heading to encompass the goods. 

By way of commentary, the SCC majority’s conclusion appears to be a reasonable interpretation of the General Rules and consistent with the policy underlying the Customs Tariff.  In particular, the decision considers the terms of the headings to be the central focus in determining classification, regardless of whether remaining General Rules might apply, which is appropriate in our view.

That being said, perhaps the most interesting aspect of this case is how Rule 1 was applied with respect to the importer’s proposed classification in the first instance.  It seems inappropriate to disqualify the goods from classification under heading 39.26 pursuant to Rule 1, seemingly only on the basis of the language that goods covered by that tariff “include” articles of apparel… made by sewing or sealing sheets of plastics.  SCC Justice Côte’s dissenting analysis on this point is preferred, which noted that this language does not limit what can be classified under 39.26; it merely describes what types of articles are included.  Although the majority decision was aware of this issue, it concluded that the contrary analysis by the CITT was not unreasonable.  This suggests that appeal courts will grant significant deference to the CITT, such that it will be difficult to have the CITT’s tariff classification decisions overturned on appeal.

Rob Kreklewetz and Bryan Horrigan

Millar Kreklewetz LLP, Toronto

A version of this article appeared in the December 2016 issue of Canadian Tax Highlights.