ARTICLE | February 10, 2025

One of the hot button issues in today’s news cycle is the possible imposition of tariffs on major US trading partners, that being Canada and Mexico. Generally, most imported goods from these countries would be hit with a 25% tariff rate (energy resources from Canada would see a smaller relative hit at only 10%). While these tariffs can have potential far reaching economic consequences for the US economy there are also considerations from a tax planning and strategy perspective that should be considered for companies that do business on both sides of the US-Canada border, especially when a Canadian manufacturing company has a related US based importing/selling company.

Value of the product

A tariff will be based on the declared value of a good being imported into the US. Thus, the lower the value of the product, the lower the import tariff will be on said product. A customs and duty specialist and/or a “transfer pricing” expert should be engaged to help determine a reasonable value to set on the product being imported.  Note that reduction of value of the product will reduce the sales price for the Canadian importer company, thereby reducing its gross margin and possibly increasing scrutiny by Canada Revenue Agency.  Consultation with Canadian tax counsel would be well advised if a Canadian company sells its product to a related US importing company, and the Canadian company wants to reduce the value of the product to reduce the impact of tariffs.

Impact on US Federal and State Tax Burden

If a US company is importing goods from a Canadian company, and the value of the goods now have a lower overall value to reduce the tariff burden, the cost basis in the inventory on the books of the US company will thus be lower. That means the profit margin when the US company sells the goods will be higher than before, possibly leading to unintended income tax burdens at both the federal and state income tax level.  The additional US and state income tax burden may dilute the benefit of tariff reduction.  We recommend that financial modeling be done to determine the ultimate impact.

Supply Chains and Production

The possibility of new tariffs may provide enough motivation for companies that rely heavily on imported goods to think about restructuring their overall supply chains to involve different importing countries or to possibly move production to countries with no current planned tariff implementation. These potential solutions could come with a very high investment cost and, in most cases, would probably take significant time to fully implement.

It is still a big unknown what the true impact will be of these tariffs, if and when they are put in place. Affected companies will have to decide if it’s worth trying to take measures to curb any negative impacts on their bottom line by spending the necessary resources or to just try and ‘wait it out’. In any case, we recommend  consulting with customs and duty specialists, transfer pricing experts, and your cross-border tax advisory team to set your business up for success in these uncertain times.