On April 9, 2025, new Canadian tariff countermeasures came into effect in response to the United States' imposition of tariffs on imports of Canadian automobiles and parts (effective April 3, 2025). Details on these US auto and parts tariffs are provided in our client alert Trump escalates trade war with 25% tariff on automobiles and certain parts (March 28, 2025).
Canada's countermeasures are imposed by way of the United States Surtax Order (Motor Vehicles 2025) (the "Auto Surtax Order"), and are likewise focused on automotive imports. According to the Department of Finance, the Auto Surtax Order will remain in place until the United States eliminates its tariffs against the Canadian auto sector.
The Retaliatory Surtax on US Automobiles
At a high level, the Auto Surtax Order imposes a 25% surtax on new and used fully assembled motor vehicles that originate in the United States, and are imported into Canada for either commercial or personal purposes. This surtax generally applies whether or not the motor vehicle qualifies for the United States preferential tariff treatment duty rate under the USMCA (the "US Preferential Rate"). Specifically, the Auto Surtax Order provides as follows:
- Motor vehicles that originate in the United States and are not entitled to the US Preferential Rate are subject to a surtax in the amount of 25% of the vehicle's total value for duty.
- For motor vehicles that originate in the United States and are entitled to the US Preferential Rate, the value of all components originating in Canada or Mexico will be excluded from the value for duty for the purposes of calculating the 25% surtax (the "Surtax VFD").
- The Auto Surtax Order assumes the value of components originating in Canada or Mexico to be 15% of the vehicle's total value for duty. In other words, the Surtax VFD for motor vehicles that are entitled to the US Preferential Rate will be calculated as 85% of their total value for duty; 15% of the value for duty will be excluded from the Surtax VFD (the "Exclusion Amount").
- Whether a given motor vehicle originates in the United States is determined in accordance with Canada's Determination of Country of Origin for the Purpose of Marking Goods (CUSMA Countries) Regulations.
In Customs Notice 25-15 (the "Notice"), the Canada Border Services Agency ("CBSA") makes it clear that importers seeking to justify an Exclusion Amount higher than 15% will be required to obtain evidence of the value of Mexico and Canada-originating components and present it to the CBSA upon request. According to the Notice (though this is not specified in the Auto Surtax Order itself), this evidence may take the form of certificates of origin, records substantiating compliance with Regional Value Content, core parts, steel/aluminum and Labour Value Content, and documentation of any Canadian or Mexican parts used in the vehicle.
Excluded Goods
In recognition of the highly integrated Canada-US auto supply chain, the Canadian government chose not to impose a retaliatory surtax on auto parts imported from the United States. Furthermore, the surtax will not apply to motor vehicles that were in transit to Canada on April 9, when the Auto Surtax Order came into force.
The full list of tariff codes for the vehicles that are subject to the surtax can be found here; some notable vehicles not subject to the surtax include, but are not limited to, vehicles specifically designed for travelling on snow, golf cars and similar vehicles; and motor vehicles with only spark-ignition internal combustion piston engine of a cylinder capacity not exceeding 1,000 cc.
Proposed Relief Measures
In a news release issued on April 8, 2025, the Minister of Finance indicated that a remission framework would be implemented for auto producers that will be designed to incentivize production and investment in Canada. To date, no details as to the proposed structure of this remission framework have been released.
Current Status of US Tariffs and Canadian Retaliation
The United States' tariff measures against goods imported from Canada have been a moving target over the past several weeks, with President Trump vacillating on the imposition of blanket and more targeted tariffs. At present, despite the 90 day reprieve announced yesterday on most of President Trump's country-specific "reciprocal tariffs", Canada remains subject to blanket tariffs of 25% on all Canadian exports to the US that do not claim, and qualify for, preferential treatment under the USMCA. Additionally, tariffs remain on US imports of steel and aluminum, as well as the tariffs imposed by the US on vehicles and automotive parts described above.
To date, Canada has imposed retaliatory surtaxes on so-called Phase 1 goods, including meat, dairy, orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, and pulp and paper. The Phase 1 surtaxes also included further goods that may be subject to certain special non-commercial import conditions or prohibitions under Chapters 98 and 99 of the Customs Tariff. Canada has also implemented "dollar-for-dollar" retaliatory measures on the US steel and aluminum import tariffs effective March 13, 2025, imposing a 25% retaliatory tariff on a list of steel products worth $12.6 billion, aluminum products worth $3 billion, as well as additional imported U.S. goods worth $14.2 billion,.
Our team has summarized the previous volleys in President Trump's trade war and Canada's retaliatory measures here.
What Businesses Should Do
Given the significant uncertainty in the Canadian-U.S. trading relationship, there are a number of steps businesses should be taking to assess and mitigate their exposure to the ongoing trade and tariff war.
- Businesses should asses their supply chains and consider their
response to incoming tariffs. For example, the non-Canadian and
non-Mexican components of US-made vehicles that qualify under the
USMCA are subject to the new retaliatory surtax. Businesses should
work with their supply chains to identify the origin and value of
the vehicle's components to ensure they are minimizing the
amount of the retaliatory surtax owing upon importation. More
broadly, the key elements of your customs declaration, including
the origin, value for duty and tariff classification, will be
critical to assessing the impact of both the US tariffs and
Canadian retaliatory measures across all products crossing the
US-Canada border.
- Businesses should ensure they keep accurate records for
auditing purposes. The United States' March 26 executive order imposing tariffs on
certain vehicles stated that should the declared value of non-U.S.
content of an automobile be inaccurate due to an overstatement of
US content, the 25% tariff shall apply to the full value of the
automobile, regardless of the actual US content of the automobile.
Furthermore, the 25% tariff will be applied retroactively (from
April 3, 2025, to the date of the "inaccurate"
overstatement) and prospectively to the full value of all
automobiles of the same model imported by the same importer.
Canada has not yet suggested a similar punitive measure, but retroactive assessments of surtaxes as well as penalties are possible.
- Businesses should review their agreements with cross-border
trading partners to determine which party will be responsible for
the additional costs of the tariffs and retaliatory surtaxes. This
will become an increasingly important element of cross-border
partnership due diligence and should be taken into account when
negotiating new contracts or updating prior contracts with
cross-border trading partners. In particular, businesses should
ensure that their incoterms are not inadvertently creating tariff
liability.
There may be opportunities to proactively negotiate terms with trading partners to ensure there is clarity and mutual agreement between the parties as to how the tariffs will be addressed going forward.
- Although the announcements of the past few days have provided some clarity, this remains a complex set of issues. Be sure to consult with your trade and tax advisors about risk, as well as how to best structure your supply chain to minimize the impact of tariffs and retaliatory measures.
Finally, over the longer term, consider diversifying your supply chain and customer base, including by leveraging Canada's trade and investment agreements with other countries, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or the Canada-European Union Comprehensive Economic and Trade Agreement (CETA).
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