US Customs: How to Limit the Impact of Tariff Barriers?

An article by Gerry de Luca and Olivier Djoufo.

Here are the strategies you can adopt to minimize the effects of the U.S. tariff increase on your business.

Canadian companies are facing a major challenge: Donald Trump has just struck hard by imposing tariffs that directly threaten their competitiveness. Since his return to the presidency in 2025, his aggressive trade policy has been aimed at protecting American industry, even if it means upsetting decades of harmonious trade relations between our two countries.

This situation is not simply a war of numbers. Canada and the United States are engaged in an economic tug-of-war, with concrete repercussions for businesses on both sides of the border. The tariff measures and countermeasures that have been piling up since the beginning of the year are creating an unprecedented climate of uncertainty for Canadian entrepreneurs.

Here is a chronology of key events:

• January 20, 2025: The Trump administration issues a memorandum entitled America First Trade Policy, reaffirming its commitment to protecting American industries through increased tariff measures.
• February 1, 2025: The U.S. announces 25% tariffs on a wide range of Canadian imports, with the exception of energy products (taxed at 10%), citing national security concerns.
• February 2, 2025: Canada responds by imposing 25% tariff countermeasures on several American products, including beverages, clothing and appliances.
• February 3, 2025: The U.S. announces a 30-day reprieve before tariffs come into effect, postponing their application until March 4, 2025, to allow time for discussions. Canada also announces a 30-day reprieve on its tariff countermeasures.
• March 4, 2025: The U.S. officially applies the 25% tariff on Canadian products, while Canada implements its retaliatory measures.
• March 5, 2025: The U.S. grants an additional one-month reprieve to the auto industry, pushing back the application of tariffs by one month.
• March 6, 2025 : The U.S. suspends until April 2 the application of 25% tariffs on certain Canadian and Mexican goods under the Canada-U.S.-Mexico Agreement (CUMA). Canada maintains the counter-tariffs initially imposed, but postpones the implementation of its second salvo of counter-tariffs.

These protectionist measures, which impose a 25% tariff on Canadian products exported to the U.S., as well as correlative tariffs applied by Canada on U.S. products exported to Canada, will significantly increase operating costs and affect the competitiveness of Canadian businesses.

To minimize these impacts, it is crucial for companies to reassess their commercial and tax strategy. Among the available solutions, transfer pricing optimization, partial or total relocation of manufacturing activities to the USA, and creation of a distribution subsidiary are strategic options that deserve particular attention.

Here, we discuss the basics of tariffs, as well as some strategies for minimizing their impact in today’s uncertain environment.

1- Rates: The basic rules

U.S. tariffs on products from Canada are generally collected at the time of import by U.S. Customs and Border Protection.

When Canadian goods enter the U.S., the importer or his customs broker must submit a customs declaration detailing the nature of the goods, their value and their origin.

Products are classified according to the Harmonized Tariff Schedule of the United States, which determines the applicable duty rate. The importer (or his agent) pays the duties directly to the U.S. authorities before the goods are released.

A similar process exists for Canadian tariffs on products from the United States.

2- Business reorganization strategy

Setting up manufacturing operations in the United States

Companies heavily affected by tariffs may consider establishing a manufacturing presence in the United States. By locating in the U.S., companies can potentially avoid or reduce the imposition of import tariffs. Indeed, no tariffs will affect goods sold in the United States if they are produced in the United States.

A U.S. manufacturing presence can also improve delivery times and strengthen relationships with U.S. customers, while giving companies access to U.S. tax incentives.

Setting up a distribution subsidiary in the United States

Another approach is to set up a distribution subsidiary in the U.S. to circumvent certain tariff barriers. Rather than shipping products directly from Canada to U.S. customers, a U.S. entity would be set up to purchase goods from Canada and then resell them to end customers in the USA.

In this way, the Canadian company will supply its U.S. subsidiary, which will resell the products in the U.S. at a profit. As a result, the declared customs value of the goods will be adjusted to reflect the distributor’s operations in the U.S., meaning that the selling price of the products to the U.S. subsidiary will be lower than that invoiced to end customers, enabling the distributor to generate a profit and reduce the value subject to tariffs when exporting the goods to the U.S.

However, for this strategy to be valid, it is essential that there be a genuine transfer of economic functions to the subsidiary. It is not enough to create a legal entity with no real activity; the subsidiary must carry out substantial operations to justify the downward adjustment of the price of goods sold to it by the Canadian company.

For example, a Canadian company selling furniture directly to U.S. customers for $1,000 each would see a tariff of $250 applied to each unit by U.S. Customs. To optimize its structure, the company could set up a distribution subsidiary in the U.S. to handle inventory management and customer relations.

Under this new business model, the Canadian company would sell this furniture to its subsidiary for $850 per unit, justifying the lower price by transferring functions and risks to its new U.S. subsidiary (assuming the whole is supported by a transfer pricing study). As a result, the customs value declared in the U.S. would fall to $850, thus reducing the objective cost of the customs tariff, since the 25% tariff would now apply to a lower amount.

3- Adjusting transfer pricing policies

Repricing of goods sold to a company in the same corporate group

The 25% tariffs introduced by the Trump administration, along with the 25% reciprocal tariff measures implemented by Canada, offer an opportunity to review a company’s transfer pricing model.

Transfer prices are the amounts applied to transactions between companies belonging to the same group and located in different countries. In accordance with the arm’s length principle, these prices must reflect those which would be charged between independent companies. They are governed by tax regulations to ensure a fair distribution of profits and to protect each country’s tax base.

A reorganization of a company’s transfer pricing policies is justified in today’s context, as tariffs have a concrete economic impact, and independent companies would take this into account in their transactions.

Transfer pricing can be used to reduce customs value, particularly in the case of a distribution subsidiary, as mentioned above. Lower prices can be justified by relocating certain economic functions of a company to the United States. These functions, previously performed by the Canadian entity, are now taken over by the American company and generate value, resulting in a different distribution of value creation between the two countries.

It is essential that any changes to transfer pricing policies are based on real and justifiable operational changes. This means that adjustments must not be limited to simple administrative or accounting restructuring, but reflect an actual reorganization of functions, assets and risks within the company.

For example, a Canadian company sells electronic equipment to its American subsidiary for $1,000 each. If it transfers key functions, such as inventory management and after-sales service, to this subsidiary, it can justify lowering the selling price to $850 (assuming this new price is supported by a transfer pricing analysis), since the subsidiary now assumes more economic responsibilities and risks. This reduction reduces the value for duty declared in the U.S., resulting in lower customs duties, as the 25% tariff now applies to $850 rather than $1,000, while still complying with the arm’s length principle.

It is important to mention that transfer pricing analyses often include profitability ranges that are acceptable to both tax jurisdictions. Within this profitability range, the price can be adjusted so that the U.S. entity is positioned at the top of the acceptable profit range. When a Canadian company sets up a subsidiary in the U.S., it can adjust its transfer prices to maximize profitability while respecting the tax rules of both countries, by positioning the U.S. entity at the top of the acceptable profitability range.

Transfer pricing documentation

It is also essential for companies to keep detailed documentation of their transfer pricing in order to justify adjustments to their operations and pricing policies. This documentation must demonstrate that any price changes are based on valid economic reasons, such as a change in the allocation of functions, assets and risks.

Companies that reduce their transfer prices without solid justification expose themselves to tax adjustments, which can lead to an increase in taxable income as well as significant penalties. What’s more, proper documentation can play a key role during customs inspections, providing support for the customs value of goods whose valuation has been adjusted.

Possibility of separating certain components of the cost of goods

Rather than including all costs in the taxable value of goods at customs, a company can structure its transactions in such a way as to separate out amounts corresponding to services, royalties or intellectual property costs linked to the goods sold. This distinction prevents these intangible elements from being subject to customs duties, thereby reducing the overall tax burden on imports.

For example, a Canadian company selling machines to its U.S. subsidiary for $10,000 each, and including in this price both the value of the machine and the costs associated with an integrated patented technology, could restructure the transaction by separately invoicing the machine at $9,000 and the royalties for the use of the technology at $1,000, thereby reducing the value of the goods subject to customs duties.

A similar strategy can be applied when related services are included in the price of goods sold to a U.S. company. By invoicing the services separately from the goods, it is possible to reduce the value of the goods for customs purposes.

However, such an overhaul of the invoicing method and the breakdown of price components must be carefully evaluated to ensure its effectiveness, since under US rules, certain amounts can be added to the customs value, even if they are not directly part of the invoiced value of the goods. It is also important to consider tax consequences, such as the imposition of withholding taxes on certain types of royalties. It is therefore essential to carry out an in-depth analysis with tax and customs tariff experts, in order to develop an appropriate strategy.

4- Other strategies and considerations

Renegotiating contracts linked to tariff costs

Canadian companies need to assess the extent to which the tariff increase can be absorbed by their consumers, analyze the impact of the new tariffs on the cost of their raw materials, and review their contracts with customers and suppliers to include appropriate tariff clauses.

It is strongly recommended to examine in detail the responsibilities related to the payment of customs duties, and to identify who is ultimately responsible for the payment of these duties when importing or exporting products with the United States.

This analysis will help to better identify financial obligations and develop appropriate negotiation strategies with U.S. business partners and customers. Indeed, companies need to anticipate potential tariff cost-sharing requests with their customers and partners, and be prepared to respond appropriately.

Take advantage of drawback programs

Canadian companies can benefit from drawback programs, which allow them to recover part of the customs duties paid on imports into Canada if the goods are re-exported from Canada. An effective drawback strategy can improve cost management and enhance competitiveness on the international market.

Reduce dependence on US exports, optimize supply chains and modify trade flows

Companies should explore new markets to diversify their exports and reduce their dependence on the United States. The European Union, Asia and other emerging markets offer growth opportunities that could offset losses due to US tariffs.

Companies can identify alternative suppliers outside the U.S. to circumvent tariffs. By diversifying their sources of supply, they can reduce their exposure to the additional costs imposed by tariff barriers.

5- The importance of an initial diagnosis

Before considering solutions for adapting to the new tariffs, it is essential to carry out an in-depth initial diagnosis of the impact of these tariffs on the company’s operations. This diagnosis will enable a precise assessment of the economic consequences of tariff changes, particularly on profitability, supply chain and cost structure. It is essential to understand how these new tariffs affect product competitiveness, inventory management, profit margins and cash flow.

A detailed analysis will determine whether a reorganization is necessary, and to what extent adjustments need to be made to minimize tax risks while optimizing cost management in line with corporate objectives.

A proactive approach wins!

Faced with the tariffs imposed by the Trump administration, Canadian companies need to adopt a proactive and strategic approach to minimize their financial and fiscal impact.

A Canadian company might consider setting up a distribution company or manufacturing operation in the U.S. to reduce the impact of these tariffs.

However, there are a number of key factors to consider when setting up a U.S. entity, including:

• Investment vehicles;
• Canada vs. United States tax rates;
• Import withholding when repatriating funds;
• Financing;
• Transfer pricing;
• Customs tariffs;
• U.S. sales tax;
• Hiring American employees and international mobility.

These aspects are discussed in greater detail in our publication on expanding a Canadian company into the United States.

The professionals at Demers Beaulne are available to meet with you to answer any questions you may have about U.S. tariffs, including U.S. expansion.

More questions? We have the answer.