Tax Insights: Canada preserves preferential tariff benefits with the United Kingdom (UK) by signing the UK-Canada Trade Continuity Agreement

In brief

On December 9, 2020, Minister for Small Business, Export Promotion and International Trade, Mary Ng, announced the signing of the UK-Canada Trade Continuity Agreement (TCA) and introduced legislation in the House of Commons to implement the TCA. These developments follow an “agreement in principle” that was announced by British Prime Minister Boris Johnson and Canadian Prime Minister Justin Trudeau on November 21, 2020, whereby both countries had agreed on a transitional trade agreement which would preserve the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) preferential tariff benefits on a bilateral basis between the two countries.

In detail

Background

In early 2020, Canada had agreed to extend tariff preferences for CETA-originating goods between Canada and the UK, until at least December 31, 2020. (For more information, see our Tax Insights “CETA continues to apply to trade in goods with the United Kingdom post-Brexit”.) The UK officially left the European Union (EU) on January 31, 2020, and is in a transition period where it must negotiate its trading relationship with the EU by the end of this year. If the TCA had not been signed, preferential tariff treatment for bilateral trade between Canada and the UK would have expired on December 31, 2020.

Overview

Key insights on the TCA (based on government press releases and a Global Affairs Canada [GAC] December 9, 2020 call with stakeholders) follow:

• The current level of tariff reductions on trade between Canada and the UK will be maintained, provided all requirements are met. That is, eligible Canadian-origin goods that qualify for benefits will continue to enjoy CETA-level tariff treatment benefits when exported to the UK, and tariff treatment for eligible UK-origin goods will remain at the CETA tariff preference rates when exported to Canada under the new TCA rates.
• With respect to the Rules of Origin, the TCA’s cumulation provisions will include CETA-origin goods, allowing Canadian and UK manufacturers to source EU-origin materials when qualifying as originating for the purposes of that chapter. Otherwise, GAC has advised that the Rules of Origin chapter in the TCA generally mirrors that in CETA. For businesses who are concerned with the administrative burden that comes with new origin rules compliance, this may be welcome news.
• GAC has advised that where origin quotas exist under CETA, those quotas will not be reproduced exactly in the TCA. For example, Canadian-origin motor vehicle exports to the UK have a quota of 60,000 under TCA, as compared with 100,000 under CETA.
• The TCA commits the UK and Canada to enter into a free trade agreement (FTA) within three years, although this timeframe can be extended by both countries. The TCA will remain in force until a Canada-UK FTA is concluded. Negotiations on a Canada-UK FTA are expected to begin in 2021.

When will the TCA enter into force and how long will it remain in force?

The TCA will enter into force in Canada only after both Canada and the UK have taken the necessary domestic procedures toward ratification and implementation of the agreement; any delay within the UK’s domestic process would delay the TCA’s entry into force in Canada.

Given the upcoming holidays and timing considerations on government procedural requirements to enact legislation, the January 1, 2021 implementation target date is ambitious and may not be realistic. That said, the Canadian government has advised that it is attempting to prevent a gap in benefits and, on the December 9, 2020 call with stakeholders, advised that more information will be forthcoming to address any gaps in preferential tariff benefits when UK benefits under CETA cease and until the TCA enters into force.

It is also unclear for how long the TCA will remain in force and when a new Canada‑UK FTA will be concluded. Although the TCA requires both countries to conclude an FTA within three years, that period can be extended if both countries agree. It is worth noting that the CETA took seven years to negotiate and that the UK is currently simultaneously negotiating FTAs with other potential trading partners.

Despite the lack of clarity surrounding the TCA’s implementation date and how long it will be in effect, the TCA does provide certainty for Canada-UK trade in the short- to medium-term. Exporters of Canadian-origin goods to the UK will continue to enjoy CETA-level preferential tariff benefits (including tariff elimination on 98% of Canadian-origin exports to the UK), and importers of UK-origin goods will also benefit from lower tariffs on UK-origin imports. Without the TCA, preferential tariff treatment would have expired on December 31, 2020.

How can PwC help

PwC can help your business:

• take advantage of benefits available under the TCA
• stay up-to-date on the latest developments on trade between the UK and Canada, and your company’s global trade operations
• navigate compliance requirements for exporting from, and importing to Canada, and minimize unnecessary non‑compliance penalties