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CCFTA Rules of Origin Regulations (SOR/97-340)

Regulations are current to 2020-09-09

SCHEDULE VIReasonable Allocation of Costs

Definitions and Interpretation

  • 1 For purposes of this Schedule,

    business segment

    business segment means a distinguishable component of an enterprise the activities of which represent a line of business significant to the enterprise as a whole or are directed to a particular class of customer significant to the enterprise as a whole, where the activities, assets and results of operations of that component are distinguishable from other activities, assets and results of operation of the enterprise; (unité d’exploitation)

    costs

    costs means any costs that are included in total cost and that need to be allocated pursuant to subsections 5(8), 6(11) and 7(6) of these Regulations, subsection 4(7) of Schedule II and subsections 5(7) and 10(2) of Schedule VII; (coûts)

    discontinued operations

    discontinued operations means the operations of a business segment that has been sold, abandoned, shut down or otherwise disposed of, or that is the subject of a formal plan of disposal; (activités abandonnées)

    disposal date

    disposal date means the effective date of sale if the disposal is by sale, or the date that operations cease if the disposal is by other means; (date de cession ou de fermeture)

    formal plan of disposal

    formal plan of disposal means an approved plan for the disposal of a business segment that includes at least the following information:

    • (a) the major assets to be disposed of,

    • (b) the expected method of disposal,

    • (c) the period expected for completion of the disposal,

    • (d) details of an active program to find a buyer, if the disposal is to be by sale,

    • (e) the estimated results of operations of the segment from the measurement date to the expected disposal date, and

    • (f) the expected proceeds or salvage value; (plan de cession ou de fermeture bien arrêté)

    indirect overhead

    indirect overhead means period costs and other costs; (frais généraux indirects)

    internal management purpose

    internal management purpose means any purpose relating to tax reporting, financial reporting, financial planning, decision-making, pricing, cost recovery, cost control management or performance measurement; (fins de gestion interne)

    measurement date

    measurement date means the date on which the management of an enterprise adopts a formal plan of disposal or, where there is no formal plan of disposal, the disposal date; (date de mesure)

    overhead

    overhead means costs, other than direct material costs and direct labour costs. (frais généraux)

    • 2 (1) In this Schedule, reference to “producer” shall, for purposes of subsection 4(7) of Schedule II, be read as a reference to “buyer”.

    • (2) In this Schedule, reference to “good” shall,

      • (a) for purposes of subsection 6(15) of these Regulations, be read as a reference to “identical goods or similar goods, or any combination thereof”;

      • (b) for purposes of subsection 7(6) of these Regulations, be read as a reference to “intermediate material”;

      • (c) for purposes of section 10 of these Regulations, be read as a reference to “category of vehicles that is chosen pursuant to subsection 10(1) of these Regulations”;

      • (d) for purposes of section 11 of these Regulations, be read as a reference to “category of goods chosen pursuant to subsection 11(1) of these Regulations”;

      • (e) for purposes of subsection 4(7) of Schedule II, be read as a reference to “packaging materials and containers or the elements”; and

      • (f) for purposes of subsection 5(7) of Schedule VIII, be read as a reference to “elements”.

Methods to Reasonably Allocate Costs

    • 3 (1) Where a producer of a good is using, for an internal management purpose, a cost allocation method to allocate to the good direct material costs, or part thereof, and that method reasonably reflects the direct material used in the production of the good based on the criterion of benefit, cause or ability to bear, that method shall be used to reasonably allocate the costs to the good.

    • (2) Where a producer of a good is using, for an internal management purpose, a cost allocation method to allocate to the good direct labour costs, or part thereof, and that method reasonably reflects the direct labour used in the production of the good based on the criterion of benefit, cause or ability to bear, that method shall be used to reasonably allocate the costs to the good.

    • (3) Where a producer of a good is using, for an internal management purpose, a cost allocation method to allocate to the good overhead, or part thereof, and that method is based on the criterion of benefit, cause or ability to bear, that method shall be used to reasonably allocate the costs to the good.

  • 4 Where costs are not reasonably allocated to a good under section 3, those costs are reasonably allocated to the good if they are allocated,

    • (a) with respect to direct material costs, on the basis of any method that reasonably reflects the direct material used in the production of the good based on the criterion of benefit, cause or ability to bear;

    • (b) with respect to direct labour costs, on the basis of any method that reasonably reflects the direct labour used in the production of the good based on the criterion of benefit, cause or ability to bear; and

    • (c) with respect to overhead, on the basis of any of the following methods:

      • (i) the method set out in Appendix A, Appendix B or Appendix C,

      • (ii) a method based on a combination of the methods set out in Appendices A and B or Appendices A and C, and

      • (iii) a cost allocation method based on the criterion of benefit, cause or ability to bear.

  • 5 Any cost allocation method referred to in section 3 or 4 that is used by a producer for the purposes of these Regulations shall be used throughout the producer’s fiscal year.

Costs Not Reasonably Allocated

  • 6 The allocation to a good of any of the following is considered not to be reasonably allocated to the good:

    • (a) costs of a service provided by a producer of a good to another person where the service is not related to the good;

    • (b) gains or losses resulting from the disposition of a discontinued operation;

    • (c) cumulative effects of accounting changes reported in accordance with a specific requirement of the applicable Generally Accepted Accounting Principles; and

    • (d) gains or losses resulting from the sale of a capital asset of the producer.

  • 7 Any costs allocated under section 3 on the basis of a cost allocation method that is used for an internal management purpose that is solely for the purpose of qualifying a good as an originating good are considered not to be reasonably allocated.

APPENDIX ACost Ratio Method

Calculation of Cost Ratio

For the overhead to be allocated, the producer may choose one or more allocation bases that reflect a relationship between the overhead and the good based on the criterion of benefit, cause or ability to bear.

With respect to each allocation base that is chosen by the producer for allocating overhead, a cost ratio is calculated for each good produced by the producer in accordance with the following formula:

CR =AB ÷ TAB

where

CR
is the cost ratio with respect to the good;
AB
is the allocation base for the good; and
TAB
is the total allocation base for all the goods produced by the producer.

Allocation to a Good of Costs included in Overhead

The costs with respect to which an allocation base is chosen are allocated to a good in accordance with the following formula:

CAG = CA × CR

where

CAG
is the costs allocated to the good;
CA
is the costs to be allocated; and
CR
is the cost ratio with respect to the good.

Excluded Costs

Under paragraph 6(11)(b) of these Regulations, where excluded costs are included in costs to be allocated to a good, the cost ratio used to allocate that cost to the good is used to determine the amount of excluded costs to be subtracted from the costs allocated to the good.

Allocation Bases for Costs

The following is a non-exhaustive list of allocation bases that may be used by the producer to calculate cost ratios:

  • Direct Labour Hours
  • Direct Labour Costs
  • Units Produced
  • Machine-hours
  • Sales Dollars or Pesos
  • Floor Space

“Examples”

The following examples illustrate the application of the cost ratio method to costs included in overhead.

Example 1: Direct Labour Hours

A producer who produces Good A and Good B may allocate overhead on the basis of direct labour hours spent to produce Good A and Good B. A total of 8,000 direct labour hours have been spent to produce Good A and Good B: 5,000 hours with respect to Good A and 3,000 hours with respect to Good B. The amount of overhead to be allocated is $6,000,000.

Calculation of the Ratios:

Good A: 5,000 hours/8,000 hours = .625

Good B: 3,000 hours/8,000 hours = .375

Allocation of overhead to Good A and Good B:

Good A: $6,000,000 × .625 = $3,750,000

Good B: $6,000,000 × .375 = $2,250,000

Example 2: Direct Labour Costs

A producer who produces Good A and Good B may allocate overhead on the basis of direct labour costs incurred in the production of Good A and Good B. The total direct labour costs incurred in the production of Good A and Good B is $60,000: $50,000 with respect to Good A and $10,000 with respect to Good B. The amount of overhead to be allocated is $6,000,000.

Calculation of the Ratios:

Good A: $50,000/$60,000 = .833

Good B: $10,000/$60,000 = .167

Allocation of Overhead to Good A and Good B:

Good A: $6,000,000 × .833 = $4,998,000

Good B: $6,000,000 × .167 = $1,002,000

Example 3: Units Produced

A producer of Good A and Good B may allocate overhead on the basis of units produced. The total units of Good A and Good B produced is 150,000: 100,000 units of Good A and 50,000 units of Good B. The amount of overhead to be allocated is $6,000,000.

Calculation of the Ratios:

Good A: 100,000 units/150,000 units = .667

Good B: 50,000 units/150,000 units = .333

Allocation of Overhead to Good A and Good B:

Good A: $6,000,000 × .667 = $4,002,000

Good B: $6,000,000 × .333 = $1,998,000

Example 4: Machine-hours

A producer who produces Good A and Good B may allocate machine-related overhead on the basis of machine-hours utilized in the production of Good A and Good B. The total machine-hours utilized for the production of Good A and Good B is 3,000 hours: 1,200 hours with respect to Good A and 1,800 hours with respect to Good B. The amount of machine-related overhead to be allocated is $6,000,000.

Calculation of the Ratios:

Good A: 1,200 machine-hours/3,000 machine-hours = .40

Good B: 1,800 machine-hours/3,000 machine-hours = .60

Allocation of Machine-Related Overhead to Good A and Good B:

Good A: $6,000,000 × .40 = $2,400,000

Good B: $6,000,000 × .60 = $3,600,000

Example 5: Sales Dollars or Pesos

A producer who produces Good A and Good B may allocate overhead on the basis of sales dollars. The producer sold 2,000 units of Good A at $4,000 and 200 units of Good B at $3,000. The amount of overhead to be allocated is $6,000,000.

Total Sales Dollars for Good A and Good B:

Good A: $4,000 × 2,000 = $8,000,000

Good B: $3,000 × 200 = $600,000

Total Sales Dollars: $8,000,000 + $600,000 = $8,600,000

Calculation of the Ratios:

Good A: $8,000,000/$8,600,000 = .93

Good B: $600,000/$8,600,000 = .07

Allocation of Overhead to Good A and Good B:

Good A: $6,000,000 × .93 = $5,580,000

Good B: $6,000,000 × .07 = $420,000

Example 6: Floor Space

A producer who produces Good A and Good B may allocate overhead relating to utilities (heat, water and electricity) on the basis of floor space used in the production and storage of Good A and Good B. The total floor space used in the production and storage of Good A and Good B is 100,000 square feet: 40,000 square feet with respect to Good A and 60,000 square feet with respect to Good B. The amount of overhead to be allocated is $6,000,000.

Calculation of the Ratios:

Good A: 40,000 square feet/100,000 square feet = .40

Good B: 60,000 square feet/100,000 square feet = .60

Allocation of Overhead (Utilities) to Good A and Good B:

Good A: $6,000,000 × .40 = $2,400,000

Good B: $6,000,000 × .60 = $3,600,000

APPENDIX BDirect Labour and Direct Material Ratio Method

Calculation of Direct Labour and Direct Material Ratio

For each good produced by the producer, a direct labour and direct material ratio is calculated in accordance with the following formula:

DLDMR =(DLC + DMC) ÷ (TDLC + TDMC)

where

DLDMR
is the direct labour and direct material ratio for the good;
DLC
is the direct labour costs of the good;
DMC
is the direct material costs of the good;
TDLC
is the total direct labour costs of all goods produced by the producer; and
TDMC
is the total direct material costs of all goods produced by the producer.

Allocation of Overhead to a Good

Overhead is allocated to a good in accordance with the following formula:

OAG = O × DLDMR

where

OAG
is the overhead allocated to the good;
O
is the overhead to be allocated; and
DLDMR
is the direct labour and direct material ratio for the good.

Excluded Costs

Under paragraph 6(11)(b) of these Regulations, where excluded costs are included in overhead to be allocated to a good, the direct labour and direct material ratio used to allocate overhead to the good is used to determine the amount of excluded costs to be subtracted from the overhead allocated to the good.

“Examples”

Example 1

The following example illustrates the application of the direct labour and direct material ratio method used by a producer of a good to allocate overhead where the producer chooses to calculate the net cost of the good in accordance with paragraph 6(11)(a) of these Regulations.

A producer produces Good A and Good B. Overhead (O) minus excluded costs (EC) is $30 and the other relevant costs are set out in the following table:

Good AGood BTotal
Direct labour costs (DLC)$  5$  5$10
Direct material costs (DMC)  10    5  15
Totals$15$10$25

Overhead Allocated to Good A

OAG (Good A) = O ($30) × DLDMR ($15/$25)

OAG (Good A) = $18.00

Overhead Allocated to Good B

OAG (Good B) = O ($30) × DLDMR ($10/$25)

OAG (Good B) = $12.00

Example 2

The following example illustrates the application of the direct labour and direct material ratio method used by a producer of a good to allocate overhead where the producer chooses to calculate the net cost of the good in accordance with paragraph 6(11)(b) of these Regulations and where excluded costs are included in overhead.

A producer produces Good A and Good B. Overhead (O) is $50 (including excluded costs (EC) of $20). The other relevant costs are set out in the table to Example 1.

Overhead Allocated to Good A

OAG (Good A) = [O ($50) × DLDMR ($15/$25)] - [EC ($20) × DLDMR ($15/$25)]

OAG (Good A) = $18.00

Overhead Allocated to Good B

OAG (Good B) = [O ($50) × DLDMR ($10/$25)] - [EC ($20) × DLDMR ($10/$25)]

OAG (Good B) = $12.00

APPENDIX CDirect Cost Ratio Method

Direct Overhead

Direct overhead is allocated to a good on the basis of a method based on the criterion of benefit, cause or ability to bear.

Indirect Overhead

Indirect overhead is allocated on the basis of a direct cost ratio.

Calculation of Direct Cost Ratio

For each good produced by the producer, a direct cost ratio is calculated in accordance with the following formula:

DCR = (DLC + DMC + DO) ÷ (TDLC + TDMC + TDO)

where

DCR
is the direct cost ratio for the good;
DLC
is the direct labour costs of the good;
DMC
is the direct material costs of the good;
DO
is the direct overhead of the good;
TDLC
is the total direct labour costs of all goods produced by the producer;
TDMC
is the total direct material costs of all goods produced by the producer; and
TDO
is the total direct overhead of all goods produced by the producer.

Allocation of Indirect Overhead to a Good

Indirect overhead is allocated to a good in accordance with the following formula:

IOAG = IO × DCR

where

IOAG
is the indirect overhead allocated to the good;
IO
is the indirect overhead of all goods produced by the producer; and
DCR
is the direct cost ratio of the good.

Excluded Costs

Under paragraph 6(11)(b) of these Regulations, where excluded costs are included in

  • (a) direct overhead to be allocated to a good, those excluded costs are subtracted from the direct overhead allocated to the good; and

  • (b) indirect overhead to be allocated to a good, the direct cost ratio used to allocate indirect overhead to the good is used to determine the amount of excluded costs to be subtracted from the indirect overhead allocated to the good.

“Examples”

Example 1

The following example illustrates the application of the direct cost ratio method used by a producer of a good to allocate indirect overhead where the producer chooses to calculate the net cost of the good in accordance with paragraph 6(11)(a) of these Regulations.

A producer produces Good A and Good B. Indirect overhead (IO) minus excluded costs (EC) is $30. The other relevant costs are set out in the following table:

Good AGood BTotal
Direct labour costs (DLC)$  5$  5$10
Direct material costs (DMC)  10   5  15
Direct overhead (DO)   8   2  10
Totals$23$12$35

Indirect Overhead Allocated to Good A

IOAG (Good A) = IO ($30) × DCR ($23/$35)

IOAG (Good A) = $19.71

Indirect Overhead Allocated to Good B

IOAG (Good B) = IO ($30) × DCR ($12/$35)

IOAG (Good B) = $10.29

Example 2

The following example illustrates the application of the direct cost ratio method used by a producer of a good to allocate indirect overhead where the producer has chosen to calculate the net cost of the good in accordance with paragraph 6(11)(b) of these Regulations and where excluded costs are included in indirect overhead.

A producer produces Good A and Good B. The indirect overhead (IO) is $50 (including excluded costs (EC) of $20). The other relevant costs are set out in the table to Example 1.

Indirect Overhead Allocated to Good A

IOAG (Good A) = [IO ($50) × DCR ($23/$35)] - [EC ($20) × DCR ($23/$35)]

IOAG (Good A) = $19.72

Indirect Overhead Allocated to Good B

IOAG (Good B) = [IO ($50) × DCR ($12/$35)] - [EC ($20) × DCR ($12/$35)]

IOAG (Good B) = $10.28

  • SOR/2004-298, s. 222(E)
 
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