Navigating Complexity: Strategies for Canadian Businesses Amid US Tariffs

Practical steps to help businesses weather the tariff trade war

To tariff or not to tariff… with the announcements and updates on this subject constantly changing, we wanted to provide our clients with practical guidance that cuts through the noise and helps keep the focus on what can be controlled.  

As the Trump Administration started imposing significant tariffs on Canada and the rest of the world, our partners, Stéphane Marcassa and Michael Black, hosted a riveting and insightful webinar to provide business owners with information and practical strategies to help navigate the uncertainty.

What is a tariff?
A custom tariff is a duty that applies to goods at the time of importation.

Who pays the tariff?
The legal liability generally resides with the importer of record, who typically pays the duty to the border agency of a country.

How is a tariff calculated?
The tariff is calculated on the percentage of the value of the import. The classification code of the product and the country of origin are essential to determine the rate at which the tariff will apply.

How does this impact competitiveness?

• For importers, it can drive up the cost to make or sell products.
• For exporters, it can make your product less price competitive or more expensive, and/or impact your margins.

Do tariffs replace custom duties?
No, tariffs apply on top of regular custom duties, they do not replace them. Each tariff may also be stacked on top of the other. F

What steps should you consider right now?

1. Get your custom compliance in order. Many businesses have been operating under no or very low custom duties in the past so this may not have been an area of focus. Now that there are massive tariffs in place, you should review and validate your custom filings and identify areas of risk or opportunities. It’s anticipated that audits will be on the rise.
2. Review your current agreements and terms and conditions with your clients and suppliers to determine who is liable to pay the tariff. Generally, the importer of records is the one responsible for paying. Business owners should look at any contractual clauses that may outline costs that can be passed on or shared among the parties. It’s important here to review this with your lawyer.
3. Assess potential relief. There are limited exceptions or reliefs available on the US side. However, Canada provides more exceptions and the duties relief and duty drawback programs in Canada may be available. There is also a possibility of a remission order.
4. There are several new initiatives and programs that can provide financial assistance for your business. Monitor the assistance and tax measures from the federal and provincial governments as there may be some that can apply to your business.

What strategies can you implement to address tariffs?

There are some immediate, tangible activities you can implement to soften the impact of tariffs on your business. While there is no one-size-fits-all solution, consider these actionable steps, as they may help you weather this storm long-term.

• Make sure you understand your current cashflow and have an accurate forecast, as this will directly impact your sales and costs. The impact could be a decrease in sales, or an increase in input costs, or anything in between.
  If you’re importing or exporting, there will likely be an impact on most aspects of your business from your suppliers and from your customers.
• Have an accurate budget with different scenarios mapped out, i.e., what happens if I lose 5% of my sales? What happens if my costs go up by 15%? What happens if there’s a supply chain disruption that will impact my delivery timelines? Understanding what that looks like is the starting point. If you don’t know where you are today, it’s hard to map out where you need to go into the future.
• Once you have an accurate budget, it’s important to go through it, line-by-line, to determine which products might be impacted and where they come from, i.e., what is their importer of record, etc. Every company should be able to go through their budget and understand what’s going to happen based on these tariffs.

These are just some of the things to consider as you go through your cashflow, forecast, and budget and start to quantify the impact on your bottom line.

What questions should you consider in this exercise?  

• How price sensitive are your customers if you need to pass through price increases? And how reliant are you on these customers?
• What percentage of your customers are in the US?
• What percentage of your direct or indirect costs are going to be impacted by tariffs? How is that going to feed through to your bottom line and ultimately, to your cash flows?
• Look at your contracts, what is your ability to adjust any of the terms?
• Can your customers get something more local instead?
• How confident are you in your customs compliance and ability to execute on a duty drawback program?

Don’t forget generally good business practices that are tariff agnostic:

• Monitor, understand, and maximize your cash flow. How can you optimize your AR? Incentivizing payments, automating receivables, etc.
• Control expenses, monitor your inventory levels, create cash reserves. Aim for more favourable terms and try to leverage early payment discounts, if available. These are all good practices and maybe now is the time to evaluate how you can optimize in these areas.
• Evaluate your cost model. Do you have a high value product or price-sensitive customers? Can you then absorb the change in prices? Can you introduce tiered pricing (lower price for higher volume of purchases)?
• Know your worst-case scenario – do you know what this is, and do you have a plan in place to manage through it? Remember, everyone is trying to navigate this, share the burden and communicate with others to try to get through this together.

When it comes to tax planning, specifically: 

• Review your current structure and your supply chain.
• Assess if there are ways to minimize the tariff – transfer pricing can optimize your tax and tariff efficiency.
• Evaluate if there are ways to change your structure as it relates to your operations in the US.

For short-term planning:
Once you understand your tariff impact and have taken immediate actions to mitigate tariffs and optimize your cashflow in the current state business, then understand and assess your options to mitigate over the medium-term.

• Pricing strategy options – absorbing the cost, passing costs on to customers, or offering tiered, value-based, or dynamic pricing.
• Revenue diversification options – find new markets or customers or diversify product offerings.
• Supplier options – identify and qualify alternative suppliers or explore nearshoring or reshoring alternatives.
• Contract terms and renegotiations – strengthen supplier agreements, build strategic partnerships, and monitor trade and policy developments.

Looking long-term:
The current situation is very unfortunate, but businesses should take advantage (where possible) to strengthen their current position and long-term resiliency. Long-term strategies should be anchored in specific goals and objectives, both at the corporate and shareholder levels.

This may also be the time to determine your competitive position in a more fragmented and diversified trading world and understand:

• What must the business produce to achieve long-term goals and objectives?
• What is the role of the US market in your business?
• What is the potential for your products / services in other markets?
• How can you diversify your revenue streams to offset the impact of tariffs?
• What are your capabilities and ability to operate in different markets?
• Expanding operations to a new market – including the US – is a material change to your business and should be comprehensively evaluated before making any decisions.
• What are other areas to improve your business efficiency and / or margin profile?

Control what you can, try to anticipate what you can’t:  

• Understand your cashflow and the impact potential.
• Get your customs compliance in order, review your agreements, understand your obligations, understand your customer and supplier obligations, determine who’s liable to pay.
• Try to create a cash reserve for possible future turbulence.
• If adjusting supplier or customer relationships or reshoring opportunities, make sure you plan and get the proper advice to understand the implications of what to do before you act.
• Don’t become a firefighter, find time to think of the long-term plan – and don’t make a decision now that may impact your business or be irrelevant 18 months for now.

Remember, everyone is in this together. Keep good communication if you do need to prioritize payments. It’s important to maintain your relationships and communicate effectively. Knowing that every business is likely trying similar solutions to these problems can change the way you approach conversations.

Looking beyond the next four years, it’s recommended that business owners look to strengthen their enterprise to be agile for whatever may come and to mitigate potential risks that any future administration may hold. As this landscape is ever evolving, it’s best to speak with your advisor to find solutions that fit for your business. If you need more personalized advice, reach out to our team, we’re here to help you navigate this complex trade landscape.

*The CRA will defer GST/HST remittances from April 2 – June 30 and wave all payments due for that period. And EDC (Export Development Canada) has launched the Trade Impact Program that will deploy $5 billion over two years in financing and insurance solutions to help exporters reach new markets for Canadian products.