Finance department 'perpetuating a fraud' on iPod tax: border services e-mails

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Canadian border officials privately warned that Finance Minister Jim Flaherty's department wasn't telling the truth about a controversial move in last year's budget that came to be known as the iPod tax.

One manager at the Canada Border Services Agency went as far as saying that Finance's public statements were "perpetuating a fraud."

Last year's budget announced that as of Jan. 1, 2015, Ottawa will be removing tariff breaks for 72 countries, including China, South Korea and India. The government argues the break – known as the General Preferential Tariff – is meant to help developing nations, and these countries no longer need the help. The change is expected to bring in $330-million a year in new revenue through higher tariffs.

But when economics professor Mike Moffatt wrote on The Globe and Mail website April 4, 2013, that the move is effectively an iPod tax – a politically-charged term Conservatives had used against the NDP in a separate context – Mr. Flaherty's office strongly rejected the premise and claimed the professor was wrong.

Newly released documents obtained by Mr. Moffatt under access-to-information law reveal that while Mr. Flaherty's office was criticizing the professor's arguments, officials at the CBSA were criticizing Finance and supporting Mr. Moffatt.

Finance's position was that iPods are exempt from the tariff if they are imported under tariff code 9948.00, but border officials suggested that was misleading because that section imposes specific requirements that consumers sign certificates claiming the iPod will be used with a computer.

"From my perspective the message should be that if the end user doesn't have it joined to a computer it don't qualify [for a tariff exemption]," writes the CBSA's Byron Fitzgerald, who is currently the agency's manager of litigation, in an April 8 e-mail. "Suggesting end use certificates is perpetuating a fraud because the vast majority of folks don't use them with computers."

Mr. Moffatt's arguments had the internal support of Anne Kline, CBSA's director general of the Trade Programs Directorate, who wrote several e-mails expressing concern with what Finance was telling the public.

"Mr. Moffatt is actually quite bang-on in his interpretation of the tariff provisions," she wrote in an April 5, 2013 e-mail.

"I remain concerned that readers are being led to believe that TI 9948.00 applies and it really does not," she wrote in another e-mail, in reference to the section Finance said can be used to import an iPod tariff free.

In a statement Tuesday, Mr. Flaherty's office stood by its claim that there is no iPod tax. Spokesperson Marie Prentice points to a June 28 customs notice by CBSA that waives the requirement for a certificate from the consumer of a good imported under item 9948.00.

"iPods have been coming into Canada tariff free for many years," wrote Ms. Prentice. "Our government will ensure this continues so that there are no tariffs on iPods or other listening devices imported into Canada. While internal e-mail exchanges between CBSA bureaucrats do not constitute government policy, what does constitute government policy are the Customs Notices issued by CBSA."

Mr. Moffatt, who is an assistant professor in the Business, Economics and Public Policy group at the University of Western Ontario's Richard Ivey School of Business, said in an interview the June customs notice does not clear up the issue because it did not remove the requirement that goods imported under that rule must be attached to a computer. He predicts further clarification will be coming – possibly in the 2014 budget – to ensure there is no iPod tax.

"Until that comes out, then yes, there's still an iPod tax," he said. "If you were an importer, I think you'd have to treat this as the iPod tax still exists. Otherwise you are setting yourself up for a fairly nasty retroactive tax bill."