GUIDELINES AND GENERAL INFORMATION

1. Prior to commencing operations, the duty free shop licensee is to submit to the local Chief Officer of Customs an outline of the inventory control system to be used in the shop. Although the specifics of the design are left to the discretion of the individual operator, departmental review and approval of the system is needed to ensure it satisfies Customs' reporting and control requirements.

REPORT OF INVENTORY

Receipt of Goods

2. The duty free shop licensee or authorized agent must notify Customs promptly upon receipt of any goods at the shop. This notification will normally be given verbally and Customs will maintain a control ledger to record the particulars of each shipment reported. Control numbers will be assigned at the time of report for cross-reference with the formal accounting documents which are to be submitted within five days of the goods having been reported as received.

3. The licensee will be held responsible for shortages if a shipment is unpacked prior to Customs being notified of its arrival. All goods are to remain in the holding area of the duty free shop warehouse until they have been formally accounted for and delivered into the inventory or released. Selective checks of the holding area will be conducted on a periodic basis to ensure all shipments have been reported and that goods are not moved out of the holding area without authorization.

4. All goods which will form part of the duty free shop inventory are to be documented and formally accounted for on a form B116, Canada Customs Duty Free Shop Accounting Document. Completion instructions and format examples of form B116 are provided in Memorandum D4-3-5, Duty Free Shop - Documentation Requirements.

Shortages in Shipments

5. When a shortage in a shipment is identified after its arrival has been reported to Customs, form B116 (IN) presented by the licensee to account for that shipment should still reflect the total invoiced quantity but with a notation on the form indicating the type and number of items found missing. All short-shipments will be subject to verification by Customs.

6. The licensee will have 60 days from the date of accounting to produce evidence that the short-shipment actually occurred (e.g., credit memo from supplier) or that the missing goods arrived at a later date. If adequate proof is not provided, the licensee will be held responsible and duty and taxes on the shortage will be assessed as applicable.

Damaged or Destroyed Goods

7. When goods are damaged, a form K11, Certificate of Damaged Goods, is to be prepared by the licensee and certified by Customs. If the damaged goods are detected at the time of arrival of a shipment, form K 11 is to be attached to form B116 (IN). If the goods are damaged after having been reported into inventory, form K 11 is to be used as supporting documentation for the form B116 (OUT) presented to move the goods out of inventory.

8. When goods have been destroyed or are to be destroyed under Customs supervision,  Identification of Goods Exported or Destroyed, is to be prepared by the licensee. All such goods are to be made available for inspection by Customs at the time form E 15 is submitted. Duty and taxes will not be assessed on goods which have been verified as destroyed. A copy of the form E 15 is to be attached to the form B116 (OUT) which must be submitted to adjust the inventory records.

Samples and Display Goods

9. Samples, perfume testers or other promotional items for use in the duty free shop must be duty and/or tax paid. These goods are to be reported to Customs on receipt, as per paragraph 2 of this Memorandum and, when applicable, a form B3, Canada Customs Coding Form, submitted to account for the goods. For further information regarding the use and completion of the form B3, Release of Imported Goods,   Coding of Customs Accounting Documents.

10. Goods which have been reported and accounted for as duty free shop inventory on a form B116 may not be used for display purposes except within the shop. Airport licensees can, however, display inventory in specified locations elsewhere in a terminal building at the discretion of the local Chief Officer of Customs.

OFF-SITE OUTLETS

11. Although a licence to operate a duty free shop is issued for a specific location, a licensee may establish affiliated retail outlets in other locations for the purpose of promoting sales. Off-site outlets, however, can only be used for taking orders, while the actual delivery or pick-up of the duty free goods must take place at the duty free shop itself.

12. Customs is to be given prior notification by the licensee when an off-site retail outlet is to be established. In addition, unless an item is a "dummy" sample, all inventory at an off-site store is to be duty and/or tax paid. The procedures for reporting and accounting of inventory for these outlets is the same as set out in paragraph 9 of this Memorandum.

INVENTORY CONTROLS

13. The licensee is responsible for establishing and maintaining an inventory control system which is capable of producing, at reasonable notice, the following information:

14. The operating and administrative procedures in use at a duty free shop should reflect normal retail business practices with appropriate emphasis given to ensuring that the physical security of the inventory is not compromised. Such procedures would include, but are not limited to, the following:

Audits

15. Apart from any internal audits undertaken by a licensee, periodic audits to compare goods on hand with inventory records will also be conducted by Customs. The licensee is to make available all inventory and stock records which may be requested by the local Chief Officer of Customs for the purpose of such a physical verification. Access to these records is also to be accorded to Excise officers or to any other person authorized by the Minister to conduct such an audit.

16. Excise Branch officers will also conduct an audit within 10 months of the opening of a duty free shop and annually thereafter. The purpose of these audits is to verify the level of compliance to the Regulations and operational guidelines, i.e., adequacy of internal controls, security, revenue remittals, etc. The local Chief Officer of Customs will be notified of the results of such audits and initiate follow-up action as necessary, e.g., underpayment of licence fee.

17. In accordance with section 28 of the Customs Act, unsubstantiated inventory shortages identified during a physical audit will be assessed duty and taxes. When a deficiency can be justified, however, as in the case of goods having been destroyed, previously duty paid, etc., an inventory adjustment may be authorized and duty and taxes would be calculated only on the resulting net shortage. The assessment of duties/taxes on shortages will be based on the value of the goods as reported on their respective forms B116 (IN) (the most recent document if inventory is reported on "first in, first out" basis).

18. Voluntary disclosure of inventory shortages by the licensee will not attract penalty action. When Customs undertakes an audit, however, a point of finality is reached when the officer arrives at the shop and discrepancies in inventory may attract penalty action in addition to any duties/taxes which may be payable.

Adjustments

19. It is recognized that, as a retail operation, a duty free shop can experience a rapid turnover in inventory resulting in a greater likelihood that clerical or recording errors will occur. This being the case, a discrepancy detected during an audit could, at times, be attributable to this type of error rather than being an actual shortage or overage in inventory. When reasonable evidence can be provided that such an error has occurred, a licensee may therefore seek Customs approval to offset (in whole or in part) a shortage with a concurrent overage in inventory. Such an inventory adjustment will not, however, be authorized between domestic and imported goods.

20. Factors considered in assessing a request for an offset include the documentary or other physical evidence produced in support of the claim, the nature and value of the goods and their respective tariff treatments, and the type of internal controls in use at the shop. In general, the fewer the controls or the greater the discrepancy in the value, nature or tariff treatment of the goods, the more stringent would be the requirement to prove reasonableness. Procedural guidelines for submitting an inventory adjustment request are set out in Memorandum D4-3-5.