Importing inventory: duty, brokerage and the real cost of goods

Landed cost is what the goods cost by the time they are yours to sell: the supplier’s price converted to Canadian dollars, plus international freight and insurance, plus customs duty, plus the broker’s fee for clearing the shipment. All of it belongs to the goods, so all of it sits in inventory until the goods sell. The GST assessed at the border is the exception — an importer that is registered and bringing goods in for its own commercial use generally recovers that as an input tax credit, so it is cash flow rather than cost.

Two things follow from that. Your gross margin is worse than the purchase order suggested, usually by several points. And the difference is not a bookkeeping preference: costs of the goods left in operating expenses come off this year’s income; carried in inventory, they come off in the year the goods sell. What that does to the return is the year-end inventory question. Getting the per-unit number right is this one.

The duty rate comes from the classification, and the classification is a judgment

Nobody can tell you your duty rate from a description of your product. Duty is charged at a rate set by where the goods fall in the customs tariff, applied to a value the CBSA determines, and reduced or eliminated where the goods qualify as originating under a trade agreement and you hold the certification to prove it. That is three separate questions — classification · valuation · origin — each with its own record.

Classification is the one that surprises owners, because it is neither obvious nor free. Two items that do the same job for the same customer can sit under different tariff lines at different rates, and the line your supplier’s freight forwarder typed on the commercial invoice is a starting position, not a determination. The CBSA can review a classification after release and assess the difference, with interest, on shipments that cleared long before anyone asked.

Which is where we stop. Tariff classification, valuation methodology, origin certification and advance rulings are specialist customs work, and we refer them out — the same referral we make on SR&ED claim preparation and on transfer pricing.

The GST at the border is cash, not cost

GST is assessed when commercial goods enter Canada, on the value for duty plus the duty itself. It is paid by the importer of record — the party the CBSA holds responsible for the shipment — usually by a broker who advances it and bills you for it later.

If that importer of record is your corporation, you are registered, and the goods are going into your commercial activity, the border GST is generally recoverable as an input tax credit on the return for the period. It is a timing cost: money out at the border, money back on the next filing, which on a container and a quarterly filing frequency is a gap you have to fund. It never becomes cost, and it should never reach an inventory account.

Where this goes wrong is when the importer of record is somebody else. A supplier shipping delivered-duty-paid clears the goods under its own account through its own broker, so the border GST was paid by them and the credit is not yours — even though the price you paid quietly includes it. The same trap catches online sellers whose fulfilment partner clears the goods. Read the customs paperwork, not the supplier’s invoice: whoever is named as importer gets the credit.

A broker’s invoice has two halves and only one of them is a supply to you

The broker’s own fee is a service supplied to you. It carries GST/HST like any other professional fee, the tax on it is recoverable on the ordinary terms, and the fee itself is a cost of getting the goods here — so it lands in inventory with them.

The duty and the import GST on that same invoice are a different animal. The broker paid those on your behalf; they are disbursements, not the broker’s supply. Duty belongs in the cost of the goods. The import GST is claimed against your own customs accounting record — visible to importers in the CBSA’s CARM portal — and not against the brokerage bill. Books that claim border GST off the broker’s invoice tend to claim it twice or not at all, and the customs record is what a reviewer asks to see.

Two exchange rates apply to the same shipment, and neither is optional

The CBSA converts the supplier’s invoice into Canadian dollars at a rate tied to the date the goods were exported, to arrive at the value for duty. Your books convert the same invoice at an acceptable rate for the transaction, generally the rate in effect on the transaction date. Different bodies, different dates, and they will not match. Duty is computed on the CBSA’s number; the cost in your inventory rests on yours. Neither is wrong, and a customs document that disagrees with the purchase entry by a few dollars is not a sign that something broke.

Then you pay the supplier weeks later, and the rate has moved again. That difference is a foreign exchange gain or loss — generally on income account for ordinary trade payables — and it belongs on its own line, not inside the cost of the goods. Cost was fixed when the goods were acquired. Whichever conversion source you use, use it every time: a rate picked invoice by invoice reads as exactly what it is.

A worked example: 1,000 units at US$40

Illustrative, round numbers, December 31 year-end. Every figure here is invented, including both exchange rates and the duty rate — yours comes from your tariff classification, not from an example.

You order 1,000 units at US$40. The supplier invoices US$40,000, and your books convert at 1.35. Ocean freight and transit insurance to your warehouse cost C$4,000. The CBSA converts the same US$40,000 at 1.34 for value for duty, and the classification carries duty at 6%. Your broker charges C$250 to clear the shipment.

So the unit that reads as C$54.00 on the purchase order costs C$61.47 on the shelf, about 14% more. Price it at C$90 and the margin you thought was 40% is just under 32%.

Now run it to December 31 with 400 units unsold. Carried properly, closing inventory holds 400 × C$61.47, or C$24,586. Carried on the supplier invoice alone, with the freight, duty and brokerage expensed as each bill arrived, closing inventory is C$21,600, and C$2,986 of cost belonging to goods still on the shelf has already been deducted. This year’s profit is understated by that amount and next year’s is overstated by it. What the count then does with the number is a separate discipline — one that assumes the per-unit figure it multiplies is right.

Where the per-unit number actually goes wrong

Not in the total. In the split. A container holding three products at different values and different tariff rates carries one freight bill, one brokerage fee and several duty amounts, and spreading all of it evenly across the unit count is quick and wrong. Three defensible habits:

• Duty follows the specific goods that bore it. A blended duty rate across a mixed container misstates every item in it.
• Freight and insurance are generally spread by weight or volume rather than unit count, unless the units are genuinely alike.
• Brokerage attaches to the shipment, so it spreads across everything in it.

Two smaller items settle once and stay settled. Supplier rebates and volume credits reduce the cost of the goods they relate to once the amount is determinable, rather than landing in other income; storage after arrival is a judgment call — pick a treatment, write down why, and keep it.

What Cadence does

We build landed cost into the item cost rather than leaving duty, freight and brokerage in operating expenses, which for manufacturers, importers and distributors is the most common reason a gross margin looks wrong all year. The border GST gets traced from the customs record to the GST/HST return so the credit is claimed in the right period against the right document, and we check who is named as importer of record before assuming the credit is yours. Foreign-currency purchases get converted on a stated basis and kept on it, with settlement differences booked outside cost of goods sold. Classification, valuation and origin questions go to a customs specialist and we work alongside them. GST/HST returns are an add-on to the compliance package and included in the year-round packages; the year-end inventory work sits with the corporate return either way.