Understanding rules of origin: An overview for Canadian exporters

With shifting tariffs and growing trade uncertainty, exporters are feeling more pressure than ever to ensure their goods meet rules of origin requirements. These rules can be complex and many businesses either miss out on benefits or face penalties because they don’t fully understand how the rules apply to their products.

To help clarify the basics, we spoke with Brian Staples, owner of Trade Facilitation Services (TFS), who’s helped countless exporters avoid costly mistakes. Here’s what you need to know to ask informed questions and identify key requirements in trade agreements to stay compliant. 

Rules of origin determine the country where a product was made. When goods cross borders, customs officials use these rules to access whether the products qualify for reduced tariffs or are subject to trade restrictions. There are two main types of rules of origin:

1. Non-preferential rules of origin

These are used for general trade purposes and don’t necessarily provide tariff benefits. They typically establish most favoured nation (MFN) treatment, which requires World Trade Organization (WTO) members to offer the same trade advantages to all other members. Non-preferential rules also support the application of anti-dumping duties, trade statistics, origin marking and other non-tariff measures.

There are no internationally standardized non-preferential rules of origin; each country sets its own. Recently, countries like the United States and Canada have used these rules to take stronger trade actions, such as applying additional tariffs or responding to trade disputes.

2. Preferential rules of origin

These rules apply to goods traded under specific trade agreements that offer benefits beyond MFN treatment. For Canada, key agreements include:

• Canada-United States-Mexico Agreement (CUSMA);
• Canada-European Union Comprehensive Economic and Trade Agreement (CETA), and;
• Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Canada’s most recent regional free trade agreement.

“Preferential rules of origin are very specific and binary,” says Staples. “Products either qualify for duty free treatment, or they don’t.” 

Wholly obtained products: These are goods entirely sourced or produced within the countries covered by a trade agreement. Examples include minerals, crops and animals.

But what happens when some parts or ingredients come from countries outside the agreement? In such cases, the imported components must undergo significant transformation during manufacturing to be considered as originating from the trade agreement countries.

Substantial transformation: This means the imported parts have been processed enough to be classified as a new product. This is assessed using three different assessments methods:

1. Tariff shift: The final product must fall under a different Harmonized System (HS) code than its imported parts. Each trade agreement defines specific rules for this change.

2. Regional value content (RVC): A certain percentage of the product’s value must originate from within the trade agreement zone.

3. Specific processes: Some agreements require that imported materials undergo a particular transformation—such as a chemical reaction—to qualify.

Tariff shift example:

Important: This is a simplified example. Origin rules vary by product and trade agreement. A change in HS code alone may not be sufficient to qualify. Always check the specific rule for your product in the relevant trade agreement or consult a trade expert such as a customs broker to confirm compliance.

A Canadian company makes chocolate bars from imported ingredients. Whether the final product qualifies as originating under a specific trade agreement depends on how the ingredients are transformed and how the final product is classified under the HS code. 

• Scenario 1: The company imports cocoa beans (HS code 1801), sugar (1701) and milk powder (0402), which are processed into chocolate bars (1806). Because the final product has a different HS code, and assuming the trade agreement allows this shift, the chocolate bars may qualify as originating.
• Scenario 2: The company imports premade chocolate mix (1806) and moulds it into chocolate bars (1806). Since there’s no change in the HS code, the product likely wouldn’t qualify.

Regional Value Content (RVC) example:

Important: RVC formulas and thresholds vary by trade agreement and product. This is a simplified example. Be sure to use the correct method and cost components as defined in the trade agreement or consult with a trade expert.

RVC measures how much of a product’s value comes from within the free trade area. For example, a Canadian company assembles bicycles using imported parts:

• Total value of the assembled bicycle: $200
• Value added in Canada (labour, assembly, overhead, etc.): $120

A basic RVC formula might look like this:

• (Value added in Canada ÷ total value of the product) × 100
• ($120 ÷ $200) × 100 = 60%

If the trade agreement requires at least 50% regional content, this bike would likely qualify.

Specified processes example

Some trade agreements include specific process rules. For example, under CETA, a chemical product may only qualify as originating if it undergoes a chemical reaction that changes its molecular structure. This ensures that the transformation is substantial—not merely cosmetic. These rules are especially common in industries such as pharmaceuticals and specialty chemicals.

Many free trade agreements (FTAs) require a certificate of origin as proof of compliance. Newer FTAs, like CUSMA and CPTPP, have shifted toward self-certification.

While this simplifies the process, it also places greater responsibility on exporters. You must ensure your declarations are accurate to avoid penalties.

Certification requirements vary between agreements. For example, certifying goods under CUSMA may involve different rules than certifying goods under CPTPP. A customs broker can help ensure you’re using the correct certification language. If you’re not currently working with one, you can find a list of authorized brokers published by the Canada Border Services Agency (CBSA). 

Understanding rules of origin helps you ask the right questions and unlock key advantages, including:

• Cost savings: Claiming reduced or zero tariffs under FTAs can significantly lower expenses. For example, under CUSMA, importing raw materials from the U.S. or Mexico at reduced tariffs can cut production costs.
• Improved market access: Duty-free exports enhance competitiveness in international markets.
• Reduced risks: Accurate compliance helps prevent fines, delays and reputational damage.

Since importers are liable for origin claims, it’s important to consider both import and export perspectives.

• Importers: “It’s essential to establish strong relationships with dependable, reputable suppliers,” says Staples. “Don’t rely solely on your supplier’s declaration of origin to claim duty-free status—it could be incorrect, whether by mistake or intentionally.” Even if your supplier is Canadian, their parts may not qualify if they import materials from outside the FTA area.
  To manage origin risk, clearly outline your origin requirements in contracts. For example, state how your goods are classified, the applicable rule of origin, and what documentation you require from your supplier.
• Exporters: Communicate clearly with your buyer. Staples advises asking buyers, “What are the origin requirements for my products in your country?”

“If you want your goods to go places, you have to know where they come from,” says Staples.

To comply with rules of origin, exporters need to understand and manage several key elements:

HS codes

The World Customs Organization (WCO) assigns all products a six-digit HS code. This code determines whether your product qualifies for reduced or zero tariffs under FTAs. Using the wrong HS code can result in additional to duties, fines or shipment delays.

Supply chain records

Accurate and detailed records are essential for verifying product origins and facilitating self-certification. Your records should include:

• HS codes for all raw materials and finished goods.
• Supplier documentation showing the origin of all components.

Important: To claim preferential tariff treatment, you typically need a certificate or declaration of origin that includes specific information. Requirements such as who can certify origin and what format to use depend on the specific trade agreement. Always consult the agreement or a trade expert before shipping.

Effective supply chain management helps you:

• Prove compliance with rules of origin;
• Streamline the self-certification process; and
• Avoid penalties from incorrect declarations.

Here are some helpful tools and organizations to support compliance:

• CBSA: Provides trade and tariff guidelines, including detailed information on HS codes and updates on Canada-U.S. trade relations.
• World Customs Organization (WCO): Provides global resources and guides and tools on rules of origin.
• HS code tools: Use online databases, like the WTO’s HS Code, to verify product classifications.
• Canada tariff finder: Find tariff rates for specific products and countries where Canada has an FTA.
• Canadian Society of Customs Brokers (CSCB): Connect with licensed customs brokers for expert guidance on origin and compliance questions.

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