As a Canadian small business that sells goods to customers in the United States, accurately determining the country of origin for your products is crucial. This can be especially tricky if your products are made with components from various countries. One of the most important concepts to grasp in this situation is the concept of "Substantial Transformation." The following information aims to help you understand what Substantial Transformation means and how it can assist you in determining the correct country of origin for each of your products. The information provided in this article is for general informational purposes only, and has been interpreted to the best of our ability using the available information.
Chit Chats does not provide professional advice. Any reliance you place on such information is therefore strictly at your own risk. Before taking any actions based upon the information provided, or If you are in doubt about your product's origin claim, consult with a trade expert.
Know your responsibilities
You, the shipper, are responsible for correctly determining and declaring the country of origin to the U.S. Customs and Border Protection (CBP). However, CBP has the final authority and may verify and determine a correct, final origin if it believes the declared origin to be different.
Maintaining thorough documentation (e.g., bills of materials, manufacturing processes, certificates of origin) to support your origin claims is highly recommended.
What is Substantial Transformation?
Substantial transformation refers to a significant change in a product's form, appearance, nature, or character that occurs during processing or manufacturing in a specific country. This is crucial because it directly impacts how your product is classified for tariffs imposed by the U.S. Customs and Border Protection Agency (CBP) and trade agreements, such as the USMCA (formerly NAFTA).
How CBP Determines Origin
U.S. Customs and Border Protection (CBP) determines the country of origin for imported goods based on their own rules. It’s important to note that substantial transformation is determined by CBP on a case-by-case basis, considering a "totality of the circumstances." Since there is no single, universally applicable formula, we have developed this guide to assist you.
How to tell if your product underwent Substantial Transformation in Canada
If the product you are shipping includes components from other countries, apply the principles of substantial transformation to determine if the processing in Canada resulted in a fundamentally new product.
Did its Form or Character change?
A product’s form would be considered substantially transformed in Canada if it underwent a fundamental change in its form or appearance due to processing or manufacturing in Canada. This means the original components, even if they were imported from other countries, lost their individual identities and became an integral part of a new and different article when they were reworked in Canada.
An example is melting metals down and incorporating gemstones to create a necklace.
Did its Use or Purpose change?
Another way to identify substantial transformation is if the purpose of the item changed after you reworked it. The finished product must be a new and distinct article with a different use compared to its original component(s). An example is repurposing old pallets into furniture or transforming a t-shirt into a bag.
Did the tariff classification or HTC code change?
If you are still unsure, check the tariff classification of the product before and after the modifications. Did the Harmonized Tariff Schedule (HTS) classification change after you reworked the item? If your finished product falls under a different HTS heading or subheading than its individual components, this can be a strong indicator of substantial transformation. An example of a product whose HTS code didn’t change is a t-shirt imported from China with a decal, design or branding applied to it in Canada. The HTS code remains the same and the article is still a t-shirt.
Two Things that Do Not Qualify as Substantial Transformation
1. Superficial Changes: Cosmetic modifications, repackaging, or relabeling alone do not constitute substantial transformation.
2. Simple Assembly: Minimal assembly that does not alter the essential character of the components is usually insufficient. An example is screwing together pre-made parts, assembling a kit.
Below are some examples to help you find out if your product underwent Substantial Transformation or not in Canada:
By understanding and applying the concept of substantial transformation, you can more confidently determine the country of origin for your products, ensuring compliance with customs regulations and potentially benefiting from preferential tariff treatments.