T-4570-77 
The Queen (Plaintiff) 
v. 
Kay Silver Inc. (Defendant) 
Trial Division, Walsh J.—Montreal, November 
24; Ottawa, November 28, 1980. 
Customs and excise — Action for unpaid duties and a 
penalty from defendant — Defendant purchased imported 
goods through agent to which it paid a 10% commission — 
Defendant also paid an 80% financing charge to its creditor, 
which retained title in goods until debt was fully paid 
Creditor paid agent directly for amount of purchase plus 
commission, and billed defendant for this amount plus the 
financing charge — Whether or not defendant is liable for 
duty on financing charge and commission paid to creditor 
Whether defendant is liable for penalty claim — Action 
allowed in part — Customs Act, R.S.C. 1970, c. C-40, ss. 
41(1), 42(2), 192(1)(c), 248. 
Plaintiff claims unpaid duties and a penalty from defendant. 
Defendant admits that it owes duty on imported goods with 
respect to which it failed to declare that part of the goods 
contained appliqués; or with respect to which it failed to 
include in the value for duty, style and pattern charges paid by 
the defendant, or a commission paid by it. The defendant was 
the purchaser in Canada of imported merchandise. Camden 
Trading Company appeared to be the exporter, but was actual
ly an agent of defendant, receiving a commission of 10% of the 
purchase price for its services. C. Itoh & Co. (Canada) Ltd. 
(hereinafter referred to as Itoh) financed defendant's purchases 
abroad for a commission of 8 1 / 4 % on drawings against letters of 
credit. Itoh retained title in the merchandise until full payment 
of sums was made to it as security for defendant's indebtedness. 
Camden Trading Company invoiced Itoh for the amount of the 
purchase and its 10%. Itoh then billed defendant for the 
amount paid to Camden Trading Company, plus its 8 1 / 4 % 
commission. Section 42(2) of the Customs Act provides that 
there shall be added to the value for duty the amount of 
consideration of any special arrangement between the exporter 
and importer. A Customs Memorandum indicates that pay
ments made to agents for performing their normal services are 
not a dutiable charge, even though such agent may be the 
exporter for customs purposes. The questions are whether or 
not the defendant is liable for duty on commissions of 8 1 / 4 % and 
inspection fees of 10% paid to Itoh, and whether or not the 
defendant is liable for the penalty claim. 
Held, the plaintiff succeeds in part. Section 42(2) is intended 
to deal with special arrangements having the effect of reducing 
the true value for duty of goods for export. Commissions paid 
to a purchasing agent for services rendered are part of an 
importer's legitimate cost of doing business. The financing 
charges add nothing to the value for duty of the goods. Itoh, 
although retaining ownership of the goods until the payment of 
the sums due, and although it was invoiced directly by Camden 
Trading Company, cannot be said to be the purchaser or 
importer when the true nature of the agreement is analyzed. 
Since the amount for inspection fees and financing services 
cannot be properly included in value for duty and should not be 
claimed, no question of penalty arises with respect to this 
amount. Section 248(1) provides that the burden of proof lies 
upon the person whose duty it was to comply with the Act. In 
order to result in forfeiture under section 192, there must exist 
an intention to deprive the Crown of some duty. The intention 
required in section 192 would normally be implied by the fact 
that the declaration as to value was not a true one, if no 
evidence were led by the defendant which would tend to 
contradict any improper conduct or intention. Nothing in the 
evidence indicates any fraudulent intent on the part of defend
ant or its agents. However, once underevaluation for duty 
purposes has been established, the defendant would be obliged 
to adduce some credible evidence of good faith and of lack of 
blameworthy conduct on its part. A penalty equal to the sum of 
the additional duties is imposed. 
R. v. Singer Manufacturing Co. [1968] I Ex.C.R. 129, 
referred to. R. v. Mondev Corp. Ltd., T-866-72, March 20, 
1974, followed. 
ACTION. 
COUNSEL: 
Françoise 011ivier and Gaspard Côté for 
plaintiff. 
Sidney Cutler for defendant. 
SOLICITORS: 
Deputy Attorney General of Canada for 
plaintiff. 
Gliserman, Ackman, Cutler & Boidman, 
Montreal, for defendant. 
The following are the reasons for judgment 
rendered in English by 
WALSH J.: This action in which plaintiff claims 
from defendant the sum of $14,196.21 for duties 
not paid and a similar sum by way of penalty was 
tried on the basis of an agreed statement of facts 
and issues and exhibits produced by the parties, 
without any evidence being heard, as the issue is 
primarily a legal one arising out of the interpreta
tion of sections 41(1) and 42(2), and of the penalty 
section 192(1)(c) of the Customs Act'. 
R.S.C. 1970, c. C-40. 
The agreed admissions (translated and para
phrased by me) were as follows: 
1. Defendant admits allegations in subparagraphs 
a), b) and c) of paragraph 6 of plaintiff's declara
tion and therefore that it owes duty in the amount 
of $1,152.12 by virtue of subparagraph a), $58.83 
by virtue of subparagraph b), and $2,715.29 with 
respect to subparagraph c). (Subparagraph a) was 
based on defendant's failure to declare that part of 
the goods imported contained appliqués. Subpara-
graph b) refers to a failure to include in the value 
for duty of part of the goods imported, style and 
pattern charges paid for by defendant. Subpara-
graph c) refers to failure to include in the value for 
duty part of the goods imported a commission of 
10% paid to World Knits of New York by 
defendant.) 
2. Defendant admits that the mathematical calcu
lation of $10,270.27 for the amount claimed by 
subparagraph d) of paragraph 6 which is based on 
commissions of 8'/4% and inspection fees of 10% 
paid to C. Itoh & Co. (Canada) Ltd. by defendant 
is correct, but denies owing the said amount. 
3. Defendant denies being liable for the penalty 
claim in the amount of $14,196.21. 
4. It was agreed that all the documents on the list 
of documents would be produced by consent and 
this was done with the exception of the document 
listed under No. 6 being copy of the contract 
between Kay Silver Inc. and C. Itoh & Co. 
(Canada) Ltd. of the 19th September, 1975, which 
plaintiff was unable to locate but did not require to 
complete the proof. 
The parties also made the following agreements 
on the facts. 
1. The purchaser in Canada of the merchandise 
was defendant Kay Silver Inc. 
2. The customs invoices (M.A.) were issued 
abroad by Camden Trading Company, the appar
ent exporter. 
3. The real status of Camden Trading Company 
was not that of supplier of merchandise but of 
agent of defendant in accordance with the contract 
between the parties by which defendant undertook 
to pay Camden Trading Company a commission of 
10% for its services. 
4. C. Itoh & Co. (Canada) Ltd. by contract with 
Kay Silver Inc. undertook to finance the purchases 
of this latter Company abroad by means of letters 
of credit issued in favour of Camden Trading 
Company in Hong Kong. 
5. C. Itoh & Co. (Canada) Ltd. as a money lender 
retained title in the merchandise imported by Kay 
Silver Inc. until full payment of sums due to it. 
6. The customs invoices show as purchasers either 
Kay Silver Inc. or C. Itoh & Co. (Canada) Ltd. 
7. The commission of 10% charged by Camden 
Trading Company was reimbursed to this latter 
Company by C. Itoh & Co. (Canada) Ltd. 
8. C. Itoh & Co. (Canada) Ltd. billed Kay Silver 
Inc. its commission of 8'/4% under the heading of 
"Commission & Service Fee". 
9. The commercial invoices which were sent by C. 
Itoh & Co. (Canada) Ltd. to Kay Silver Inc. 
included the price of the merchandise, the commis
sion of 10% paid to Camden Trading Company, 
when applicable, and the commission of 8 1 / 4 % 
charged by C. Itoh & Co. (Canada) Ltd. 
During the course of the hearing plaintiff made 
a further admission of the allegation in paragraph 
13 of the defence which reads: 
That the said Berncam as well as the Defendant and all other 
subsidiary companies were having difficulties with their bank
ers, namely the Toronto-dominion Bank, in the year 1975 as 
the said bankers had withdrawn their financial support from 
the said Berncam and Defendant. 
Most of the exhibits produced deal with the 
work sheets of plaintiff determining how the calcu
lations of amounts allegedly owing and penalties 
were calculated and the procedure to demand pay- 
ment of these amounts, including the Ministerial 
decision of February 16, 1978 to the effect that on 
payment of the amount of $28,393.02 the balance 
of said forfeiture of the value of the goods found 
by the Minister to be $397,732.21 would be 
remitted. 
There is no dispute as to the amounts and it is 
unnecessary to go into these further. The impor
tant exhibits produced were a memorandum of 
agreement between C. Itoh & Co. (Canada) Ltd. 
and Kay Silver Inc. et al. and Berncam Interna
tional Industries Ltd., third party, dated December 
22, 1975, and the agreement between Camden 
Trading Ltd. and Kay Silver Inc. dated May 9, 
1975, and two exhibits produced by defendant, 
namely a letter from C. Itoh & Co. (Canada) Ltd. 
[hereinafter sometimes referred to as Itoh] to Mr. 
Lucien Mercier, of the Investigation Service, Cus
toms and Excise, dated July 5, 1977, and a copy of 
Memorandum D46-26 of Revenue Canada Cus
toms and Excise dealing with dutiable status of 
commissions. 
As appears from the Itoh letter to Mr. Lucien 
Mercier of July 5, 1977 and the admissions made 
at trial, in the spring of 1975 The Toronto-Domin
ion Bank called its loans to the Berncam Group of 
Companies with which defendant is associated, as 
a result of which the Group lost its credit rating 
and had difficulty in financing its operations. Itoh 
agreed to arrange letters of credit in favour of the 
Berncam Group's agents in Hong Kong so that 
orders placed by its subsidiary companies includ
ing the defendant could be manufactured. The 
Berncam Group was to be responsible for the 
development, purchase, delivery, examination of 
the merchandise and importing of same including 
all costs including customs duties. Advances by 
Itoh by letters of credit were limited to f.o.b. Hong 
Kong values plus inspection charges where appli
cable. In the letter Itoh states that it was not 
involved in any way in the determination of the 
value or the making of the arrangements with the 
country of origin. In return for this financing 
service Itoh was to receive a commission of 8.25% 
on the drawings against the letters of credit, its 
advances to be repaid within 90 days from the bill 
of lading date for each drawing. The letter points 
out that the value of the goods at the time of 
import was not enhanced by this commission 
which was purely a finance charge for setting up 
the letters of credit, including the standby cost of 
the credit for the period of manufacture and the 90 
day term from bill of lading date, plus a margin 
for administration and overhead. In order to pro
vide more security the Berncam Companies 
assigned to Itoh accounts receivable from the sale 
of the garments imported under the said letters of 
credit and it was provided that title to the gar
ments would remain with Itoh until all indebted
ness had been paid. Itoh was advised by its counsel 
that its position while the garments were in transit 
prior to sale and shipment by the Berncam Com
panies to their clients would have been unaccept
able, which is why it was provided that title would 
remain with Itoh until payment in full. 
This letter does appear to confirm the contents 
of the memorandum of agreement entered into on 
December 22, 1975, between Itoh and the Bern-
cam Group of Companies including the defendant 
herein Kay Silver Inc. Plaintiff relies on paragraph 
1 of the agreement which reads as follows: 
The Guarantor* and the companies agree that goods and 
garments imported under letters of credit granted by Itoh shall 
be separate from other inventory of the Companies and recog
nize that ownership in and title to such goods and garments 
shall not pass to the Guarantor or any of the Companies 
purchasing and shall remain with Itoh until full payment for 
the said goods and garments has been made subject to the risk 
passing to the buyer upon acceptance of a shipment by a 
common carrier which acceptance shall be deemed to constitute 
good delivery. 
The agreement between Kay Silver Inc. and 
Camden Trading Ltd. of May 9, 1975, provided 
that Camden Trading Ltd. would purchase gar
ments on behalf of Kay Silver Inc. in Hong Kong, 
inspect same, including the packing, and release 
payment to the manufacturers when conditions of 
the orders placed had been complied with. 
Camden Trading Ltd. would also perform follow-
up procedures but any changes of terms in pur
chase orders must be confirmed by Kay Silver Inc. 
For this service Camden Trading Ltd. was to 
* Guarantor in the agreement was Berncam International 
Industries Ltd. 
receive from Kay Silver Inc. 10% of the purchase 
price for the merchandise purchased in Hong 
Kong. It is admitted in the admissions produced 
that Camden Trading Company was not a supplier 
of merchandise but only an agent of defendant 
Kay Silver Inc., and the terms of this agreement 
bear that out. 
It is also evident that Itoh was not actually 
purchasing the merchandise or importing it on its 
own account for resale to defendant or any of the 
Berncam Companies. If this had been the case the 
mark-up would surely have been more than 8 1 / 4 % 
financing charge which it made for its financing 
service. 
What seems to have caused the problem is that 
Camden Trading Ltd. instead of acting through its 
principal Kay Silver Inc. adopted the practice of 
invoicing C. Itoh & Co. (Canada) Ltd. for the 
amount of the merchandise plus its 10% fee and 
Itoh would then in turn bill Kay Silver Inc. the 
amount of this invoice which it had paid to 
Camden Trading Ltd. adding its 8 1 / 4 % commission. 
Why Camden Trading Ltd. adopted this practice 
instead of billing its principal Kay Silver Inc. 
which in turn would have forwarded the billing to 
Itoh for payment, since Itoh was providing the 
funds, is unexplained, since there is nothing in any 
of the agreements to indicate any relationship 
whatsoever between Camden Trading Ltd. and C. 
Itoh & Co. (Canada) Ltd. Camden Trading Ltd. 
must have learned that Itoh was providing the 
funds however and simply billed it direct. 
Sections 41(1) and 42(2) of the Customs Act 
read respectively as follows: 
41. (I) Notwithstanding anything in this Act, where the 
value for duty as determined under sections 36 to 40 is less than 
the amount for which the goods were sold to the purchaser in 
Canada, exclusive of all charges thereon after their shipment 
from the country of export, the value for duty shall be the 
amount for which the goods were sold, less the amount, if any, 
by which the fair market value of the goods has decreased 
between the time of purchase and the time of exportation. 
42.... 
(2) There shall be added to the value for duty as determined 
under sections 36 to 41 the amount of consideration or money 
value of any special arrangement between the exporter and the 
importer, or between any persons interested therein, because of 
the exportation or intended exportation of such goods, or the 
right to territorial limits for the sale or use thereof. 
The Customs Memorandum D46-26 reads in 
part as follows: 
The normal functions of a buying agent are to facilitate the 
buying, documentation, inspection, shipping and payment of 
goods out of funds provided by the purchaser. Payments made 
by purchasers in Canada to their agents for performing the 
normal services of a buying agent are not considered to be a 
dutiable charge, even though such agent may be the exporter of 
record for Customs purposes. 
However, should an agent take title to the goods and become 
a principal in the transaction, any additional charge made to 
the purchaser in Canada is held to be part of the amount for 
which the goods were sold and may, therefore, be dutiable 
pursuant to the provisions of section 41(1). 
Reference was made by both parties to Tariff 
Board Appeal No. 1060, Woodward Stores Lim
ited v. The Deputy Minister of National Revenue 
for Customs and Excisez in which by virtue of an 
arrangement very similar to that in the present 
case Woodward Stores Limited of Vancouver 
bought merchandise in Japan, acting through an 
agent Amerex who provided services very similar 
to those provided by Camden Trading Company in 
the present case. The issue before the Board was 
the proper construction to be placed on section 
42(2) of the Customs Act (supra). Amerex was 
the exporter and prepared the export documents, 
but reference was made to the decision of Jackett 
P., as he then was, in The Queen v. Singer Manu
facturing Company' in which he stated at pages 
135-136: 
... if a person carrying on business in Canada orders goods 
from a United States manufacturer to be sent to him at his 
place of business in Canada, the United States manufacturer is 
the exporter and the Canadian business man is the importer, 
regardless of whether or not the goods are sent under a contract 
of carriage which places possession, legal title and risk in the 
purchaser at some point in the United States. Not only do I 
think that that is the ordinary use of such terms when the 
person carrying on business in Canada is a Canadian who never 
leaves Canada and makes all the arrangements by mail; but I 
think a person carrying on business in Canada is none the less 
an importer into Canada (and his supplier is an exporter) even 
though he makes all arrangements in respect of the despatch of 
the goods by a United States manufacturer to his Canadian 
establishment through an office of his own in the United States. 
z The Canada Gazette, Part I, April 26, 1975, page 1574. 
3 [1968] 1 Ex.C.R. 129. 
The essential feature in my view is that the exporter must be 
the person in the foreign country who sends the goods into 
Canada and the importer must be the person to whom they are 
sent in Canada. 
In its decision the Board stated at page 1580: 
In the Board's view, the transaction described in this appeal 
is clearly one between a Canadian purchaser, the appellant and 
a Japanese vendor, Sakai Export Bicycle Co. Ltd. There can be 
no doubt that this purchaser-vendor relationship existed from 
the moment the appellant's buyer, Mr. Campbell, agreed to the 
purchase of the goods in issue until they were paid for and 
shipped from Japan. Moreover, it is clear that both parties fully 
understood the role of Amerex in the transaction as an agent 
hired by the appellant to facilitate the buying, documentation, 
inspection, shipping and payment of the goods. 
This simple transaction would not have come before the 
Board had it not been for the appearance of Amerex on 
documents as the buyer, for account of Woodward's, of the 
goods from Sakai, the issuer of invoices to the appellant, the 
drawer of a bill of exchange, the shipper on a bill of lading and 
the exporter of the goods on the Canadian Customs M-A form. 
By these actions Amerex became the exporter of record for 
purposes of the Customs Act. 
The Board found that section 42(2) is not appli
cable as the agreement between Woodward's and 
Amerex was not "a special arrangement" within 
the meaning of that section which is intended to 
deal with special arrangements having the effect of 
reducing the true value for duty of goods for 
export. The arrangement was found to be a normal 
one. At page 1581 the Board stated: 
Commissions paid to a purchasing agent for services ren
dered are part of an importer's legitimate cost of doing busi
ness; just as the travelling expenses of buyers or the mainte
nance of buying offices abroad are legitimate costs of 
importing. Nothing in sections 36 to 44 suggests that an 
importer's buying costs should be included in calculating value 
for duty. 
The Board concluded at page 1581: 
In the opinion of the Board the arrangement between the 
appellant and Amerex appears to have been a normal arrange
ment for handling the imported goods in issue and the cost of 
this arrangement, in the form of a commission paid to Amerex, 
appears to be a normal buying cost. The appearance of Ame-
rex' name on export documents makes it the exporter for 
Customs purposes, but in no way changes its role as an agent. 
No evidence was submitted to show that the services of Amerex 
were anything else but the services of an agent acting on behalf 
of an importer .... 
I may add that this decision, with which I agree, 
is fully in line with the Memorandum D46-26 
(supra) of Customs and Excise dealing with 
buying commissions (supra). 
The financing charges of C. Itoh & Co. 
(Canada) Ltd. fall into the same category and add 
nothing to the value for duty of the goods. C. Itoh 
& Co. (Canada) Ltd. although retaining owner
ship of the goods until the payment of the sums 
due by Kay Silver Inc. in order to secure the 
amounts advanced by letters of credit and the 
commission of Camden Trading Company for its 
services, and although it was invoiced direct by 
Camden Trading Company, cannot be said to be 
the purchaser or importer when the true nature of 
the agreement is analyzed. 
I now turn to the question of penalty. Since I 
have found that the amount of $10,270.27 claimed 
as the result of calculations made pursuant to 
subparagraph d) of paragraph 6 for the inspection 
fees of 10% of Camden Trading Company and 
financing services of 8 1 / 4 % of C. Itoh & Co. 
(Canada) Ltd. cannot be properly included in 
value for duty and should not be claimed, no 
question of penalty arises with respect to this 
amount. However the general issue of when a 
penalty can properly be claimed pursuant to sec
tion 192(1)(c) of the Customs Act, and whether it 
is applicable with respect to the other amounts of 
additional duty which defendant now admits to be 
owing pursuant to subparagraphs a), b) and c) of 
paragraph 6 of the declaration remains to be 
considered. 
The said section 192(1) (c) reads as follows: 
192. (I) If any person 
(c) in any way attempts to defraud the revenue by avoiding 
the payment of the duty or any part of the duty on any goods 
of whatever value; 
such goods if found shall be seized and forfeited, or if not found 
but the value thereof has been ascertained, the person so 
offending shall forfeit the value thereof as ascertained, such 
forfeiture to be without power of remission in cases of offences 
under paragraph (a). 
It is to be noted that this is in a section of the Act 
headed "Smuggling". Paragraphs (a) and (b) deal 
with smuggling or clandestinely introducing goods 
into Canada or attempting to pass through the 
custom-house any false, forged or fraudulent 
invoice. Paragraph (c) refers to "attempts to 
defraud the revenue". All this would infer the 
existence of what in criminal law is referred to as 
"mens rea". Section 248(1) of the Act however 
provides that the burden of proof lies upon the 
owner or claimant of the goods or the person 
whose duty it was to comply with this Act, so that 
the jurisprudence has been strict in its interpreta
tion of these sections of the Act. In the unreported 
case of The Queen v. Mondev Corporation Lim
ited, No. T-866-72 a judgment dated March 20, 
1974, Addy J. made a very thorough review of the 
jurisprudence in the matter although the penalty 
involved was only $35.76 for an indebtedness of 
$60.76 admitted by the defendant on a total claim 
for $21,283.87. In that case paragraph (b) of 
subsection 192(1) was involved dealing with 
making out a false invoice. At page 10 of his 
judgment Addy J. states: 
All of these words imply something fraudulent, something 
furtive or an intention to deprive the Crown of revenue. From 
the fraudulent element contained in all of these expressions, it 
appears that Parliament intended the word "false" to include 
an element of blameworthy intention and did not intend the 
word to be merely synonymous of "incorrect" or "erroneous". 
It would seem therefore that, in order to result in forfeiture 
under section 192, there must exist an intention on the part of a 
person to deprive the Crown of some duty. Altogether apart 
from section 248 of the Act, which relates to onus, the intention 
required in section 192 would normally be implied by the mere 
fact that the declaration as to value was not a true one, if no 
evidence were led by the defendant which would tend to 
contradict or negate any wilful or improper conduct or inten
tion on the part of the person importing the goods. 
In the present case while there was no actual 
evidence as to why the declarations made by 
defendant's agents with respect to subparagraphs 
a), b) and c) of paragraph 6 of plaintiff's declara
tion in failing to declare that part of the goods 
contained appliqués, thereby avoiding duty of 
$1,152.12, in failing to include in the value for 
duty of part of the goods, style and pattern 
charges, paid by defendant, thereby avoiding duty 
of $58.83 and in failing to include in the value for 
duty of part of the goods a commission of 10% 
paid to World Knits of New York, U.S.A. thereby 
avoiding duties of $2,715.29, it appears highly 
improbable that in declarations involving total 
amounts of $261,264.17 the omission of an expla- 
nation of comparatively minor inaccuracies lead
ing to claims for relatively small additional 
amounts of duty were improperly made with intent 
to reduce the duties. While plaintiff contends that 
these omissions, which defendant now admits, indi
cate that false invoices were made at least with 
respect to some of the merchandise, and that this 
taints all the declarations as it constitutes an 
attempt to avoid payment of part of the duties, I 
cannot conclude that these omissions by defend
ant's agents in a few of the declarations (of which 
there were a great many) is indicative of a general 
intent to defraud, rather than merely being clerical 
inaccuracies made in good faith. Nothing in the 
evidence indicates any fraudulent intent on the 
part of defendant or its agents. However in the 
case before him Addy J. concluded at page 11: 
In the case at bar, although innocent intent and clerical error 
were pleaded in the statement of defence, there was no evidence 
of any kind adduced at trial as to what the clerical error was or 
where or how it occurred, or to establish good faith or lack of 
intention to undervalue, on the part of the defendant; the mere 
statement that there was a clerical error, without more, is not 
sufficient. Even if proof of good faith or of an innocent intent 
would exempt a person from the operation of section 192, it 
seems clear to me that, once undervaluation for duty purposes 
has been established, the defendant would be obliged to adduce 
some credible evidence of good faith and of lack of blame
worthy conduct on its part. 
He therefore upheld the penalty. 
I reach the same conclusion with respect to the 
three amounts which defendant now admits owing, 
totalling $3,926.24, so a penalty of a similar 
amount can therefore be properly imposed on the 
basis of the policy adopted by the Minister in 
remitting the claim for forfeiture but imposing a 
penalty equal to the sum of the additional duties. 
On this basis judgment will be rendered in 
favour of plaintiff for $7,852.48 with costs of an 
action for that amount. 
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