Free trade talks could finally see Canada raise de minimis levels for duty-free online shopping

One concession Canada seems likely to make in the current round of free trade discussions with the U.S. and Mexico is on the level of duties that Canadians must pay when shopping online — and it's one where Canadian consumers could end up be happy with the result. 

Known as the de minimis threshold, it's the level at which consumers have to pay duties and taxes on imported goods, whether through bringing items back on a trip or ordering them online and having them delivered by mail or courier.

In the United States, the level is set at $800 US, meaning consumers can buy up to that much from abroad without having to pay a duty on it. In this week's free trade blueprint, Mexico agreed to raise its threshold to $100, doubling it from $50.

In Canada, the de minimis threshold is $20, where it has been since 1985, and it's a prime candidate to be raised in the next little while as a concession to get a new pan-continental trade deal done.

"I'm pretty sure the Canadian government is aware of this and knows it's a long-standing problem," says Inu Manak, a specialist in trade issues and visiting scholar at the Cato Institute think-tank, which promotes free market principles. "It's likely they'll fold on something like that."

The issue has been divisive in trade negotiations for years. In 2016 the U.S. raised its threshold to $800 from $200, even as NAFTA partners kept theirs right where they were.

The American position has been that Canada's lower threshold unfairly protects Canada retailers by increasing costs and red tape for anyone wishing to buy things from the U.S.

Policy-makers and retailers in Canada warn, however, that raising the limit would harm domestic retailers, which would hurt the Canadian economy and cost hundreds of thousands of jobs.

Economist Brett House, with Scotiabank, is among those who thinks the time has come for Canada to raise its threshold, and he says if it's handled properly, it can be a win for all sides.

Among his criticisms of the current system is that enforcement is lax, which only adds to the uncertainty. "In practice ... we just don't collect most of them because it's too complicated and too costly for customs and Canada Post to collect this welter of different tariffs."

A recent report from the Auditor General of Canada found that more than half of all the customs-duty revenues the government collects come from three consumer goods categories: apparel, footwear, and vehicles and auto parts. The vast majority of items theoretically covered by the tariffs raise no revenue at all.

And the cost of the current system may be more than it's worth. A C.D. Howe report in 2016 found that Ottawa spends four times more on enforcing duties than it takes in from them. And the Canada Border Services Agency estimates that for postal shipments valued at less than $200, the government doesn't record any net revenue from charging duties.

Canada's position makes even less sense considering Ottawa recently overhauled the limits that Canadians can spend in person when they cross the border: up to $200 if they've been out of the country for 24 hours, and up to $800 if they've been away for at least two days.

There is a different set of rules for people who don't physically travel to buy things but rather choose to buy online— a cohort that's growing swiftly. A Canada Post report last year found that at least 80 per cent of Canadians now shop online.  

Manak says the current system is flawed because of the uncertainty involved for all sides. "A lot of what happens is at the discretion of customs officers, when they see the shipments, to decide what to do with it," she says.

"They don't necessarily look at everything [so] sometimes you'll get something without a tariff, and other times you'll have to pay the duties," she says.

House says a good compromise would be for Canada to raise its de minimis threshold to something around $200, but make sure that sales taxes are being enforced on absolutely everything that comes over the border.

Currently, many purchases of goods and services from the U.S. are not covered by provincial sales taxes or the federal GST, "and clearly that puts Canadian retailers at a disadvantage," he says.

Raising the threshold at which Canada can impose duties on imported products, while ensuring U.S. retailers can't sell to Canadians tax-free would level the playing field for Canadian retailers, give a boost to government revenues and make a more competitive marketplace for consumers, he argues.

"That feels like win-win-win all around," House says.

With more pressing issues such as dispute resolution protocols, the endless fight over supply management in dairy and other prickly files, Manak agrees that raising Canada's de minimis level by a modest amount is likely a good negotiation tactic that could get the other balls rolling in the right direction.

"This is going to be kind of an issue for Canada but maybe they can sneak it through," she says, "given that there's other bigger fish to fry."