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Low duty minimums cause pain for online retailers

London, Ont.-based Internet reseller Farishta Zarify, 31, says she faces another year of having her business profits squeezed, a situation she blames on import duties.

Off Runway Gown

London, Ont.-based Internet reseller Farishta Zarify, 31, says she faces another year of having her business profits squeezed, a situation she blames on import duties.

The self-employed owner of eBay shop Off Runway Gown, which resells hard-to-find evening gowns at a discount to retail prices, must import the products first to ensure they meet quality control standards.

"I have to bring it in and inspect it to make sure it's authentic," Ms. Zarify said.

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To import the gown, Ms. Zarify must pay costs including an average of $40 shipping, the exchange rate difference and duties. Ms. Zarify said last year she spent around $6,000 on duties, which amounted to 20% of the money she spent buying dresses.

Canada has one of the world's lowest import duty thresholds, known as de minimis, at $20. This means that any package that exceeds $20 can be considered for duties and taxes, a policy unchanged since 1985. To put that into perspective, the U.S. has a threshold 10 times that amount. A letter by a group of U.S. senators to Gary Doer, Canada's ambassador to the U.S., in February said the low de minimis was an "unnecessary trade barrier between our two countries, particularly for low-value, low-risk shipments."

The de minimis threshold is used by many countries because costs associated with the tax and duty collection on shipments can surpass the revenues collected. This has been the case with the European Union, which has a de minimis threshold of €22 ($33 Canadian), according to a report by the Université de Lausanne in Switzerland.

"It really hampers small firms trying to do business over the Internet," said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, a Washington, D.C.-based non-profit research institution.

Shipment above the de minimis level "requires a complicated customs declaration … adds a lot of cost to the shipment (time required, customs duties) and discourages low value trade," Mr. Hufbauer added in an e-mail.

Trade is potentially impacted by how consumers on either side of the border measure which items can get dinged for duties. Mr. Hufbauer said Canada's low de minimis "sharply restricts online purchases by Canadian households from U.S. retailers," and that the U.S.'s own de minimis of $200 is not high enough to encourage purchases of higher valued items, such as furniture, from Canadian retailers.

Both the Canadian and Ontario chambers of commerce said that the low de minimis level is taking up too many resources at the border and is slowing down the process. For domestic manufacturers, according to the Ontario chamber, that means clogging the manufacturing supply chain.

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"Ontario manufacturers are forced to suffer through an onerous and time consuming process to import small value pieces of machinery that might be essential to their operations," said Karl Baldauf, vice-president of policy and government relations at the Ontario Chamber of Commerce.

Perrin Beatty, president and chief executive officer of the Canadian Chamber of Commerce, said the country is "literally spending dollars to collect dimes," while "important trade facilitation programs and enforcement issues are not pursued as aggressively because of resource constraints." Mr. Beatty added that these resource constraints are making it more difficult to fight illegal imports, contraband and counterfeit goods that are hurting Canadian businesses. Meanwhile Ebay has been lobbying Ottawa to have the policy changed.

However, a low de minimis could potentially tilt the balance between Canadian and competing foreign businesses, according to the Retail Council of Canada. That's because a package that's under the de minimis threshold can also scoot past the provincial sales tax that Canadian retailers pay, hurting both local businesses and government coffers.

"In order to offer a Canadian product in Canada, businesses are required to collect taxes by the CRA," said Karl Littler, vice-president of government relations and strategic issues at the Retail Council of Canada. "It's one thing to travel, but to be able to cross-border shop from the comfort of your living room and take advantage of a more favourable tax environment from an off-shore seller strikes us as obviously problematic."

On top of that, the Retail Council of Canada said that raising Canada's de minimis level to the U.S. level would increase cross-border orders, making Canadian retailers more vulnerable to foreign competition, while affecting domestic jobs and growth. That is not to mention the government forgoing those taxes and duties.

The Conference Board of Canada last year found that while raising the de minimis threshold to $200 would cost the federal government between $193-million and $237-million in lost tax revenue, it would add an estimated $5-billion benefit to the economy.

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A February 2013 Senate report found that there was an "administrative burden" that domestic consumers and businesses face when importing low-value shipments. The report recommended the federal government consider the costs and benefits of increasing the threshold in order to narrow the price discrepancies for certain goods between the U.S. and Canada, at a time when the currencies were closer to parity.

In June, the U.S. House of Representatives passed an amendment in the Trade Facilitation and Trade Enforcement Act to raise that country's de minimis from $200 to $800, but it is yet to be law.

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