Case:

Smells Good Candles is your client and they import candles, body lotions, and home decoration items. In the last fiscal year the Value for Duty of their imports was $2.5 million. Smells Good Candles is a related party to their US supplier. The Canadian company pays a percentage of expenses that are incurred by the Exporter for services provided in the US. There is an agreement between the Canadian company and it's supplier for management fees, a copy of the agreement has been requested by the CBSA audit team and it has been provided along with a description of how the company establishes the price paid or payable, copy of all financial statements, including the balance sheet, statement of earnings, and a chart of accounts. The CBSA auditor was given a walk-through of the company's posting and payments, General Ledger postings between both the Importer and Exporter. For payments that were made for a service provided by the Exporter a description of how the fees were allocated and why they chose that allocation method. The Exporter also had to explain how the service that was provided for the fee was a benefit to the Canadian Company. A high percentage of the value declared was associated to management fees, CBSA requested more information on the management fees. Normally, the larger portion of payments to the exporter should be for the value of the good rather than a management fee - also, the company was not able to demonstrate that services provided to the Canadian Importer were in line with normal fees for legal, payroll, or IT services. CBSA has disallowed most of the mangement fees, and your client is now facing significant increase in duty and taxes owing as well as penalties and interest charges.

Question:

1. What are all the critical issues to be addressed?