TORONTO — Low labour and facility costs coupled with favourable tax rates make Canada the most cost-competitive nation to do business among the G-7 countries, according to a new study released Tuesday.
Canada’s lead over other countries, however, has lessened with the rising value of the Canadian dollar versus the U.S. dollar in the last couple of years, the annual KPMG Study, Competitive Alternatives: KPMG’s guide to international business costs, found. The study uses an exchange rate of $US 0.852 to the Canadian dollar.
“Canada has retained its competitive advantage given the exchange rate,” said Mark MacDonald, who headed up the study and is director of public sector advisory for KPMG in Canada. MacDonald and Glenn Mair, the study’s co-author and director at MMK Consulting Inc., presented KPMG’s report to a live audience in Toronto and via a Webcast and teleconference Tuesday.
The report covered 128 cities in nine industrialized countries over an eight-month period, comparing 27 cost differentials, including labour, taxes and industrial facility, against the U.S., which was used as a benchmark. Singapore, a new entrant to this year’s report, had the greatest cost advantage over the U.S. at 22.3 per cent. Canada has a cost advantage of 5.5 per cent down from nine per cent two years ago due to a strong Canadian dollar, which has risen 13.6 per cent in the last couple of years. The highest cost countries include Germany and Japan with a cost advantage relative to the U.S. of 7.4 per cent and 6.9 per cent respectively.
A recent report from the Institute for Competitiveness and Prosperity, however, says governments need to shift taxation to encourage firms to invest in capital such as more modern machinery, equipment and software. The Institute, which is the research arm of Ontario’s Task Force on Competitiveness, also claims Canada has among the highest taxation of business investment in the world, an issue it says was not addressed in January’s federal election.
“If we lowered overall tax rates it would go part way to getting more investment,” said James Milway, the Institute’s executive director. “We find that compared to every other country in the world, we’re the highest, except for China.”
Milway said the results from the two studies are different because the Institute and KPMG use different methodologies for their research. The taxation portion of the Institute’s research was compiled by CD Howe president Jack Mintz, who is also a professor at the University of Toronto’s Rotman School of Business.
“Jack does more of a sector approach and he takes actual numbers from government agencies whereas they do a case study,” said Milway.
The study compared all of the cost differentials over several areas including manufacturing, research and development, software and corporate services. In terms of R&D operations, Canada and the U.K. offer favourable tax schemes with refundable R&D tax credits that can result in “negative” income tax or net government subsidies.
“In R&D we see competitiveness of structured tax incentives in Canada, the Netherlands and the U.K.,” said MacDonald.
KPMG ranked Canada the second least expensive place to do business behind Singapore. Quebec City, Saskatoon and Montreal rated the least expensive cities to do business in Canada with Vancouver and Toronto placing 29th and 53rd respectively out of 128 cities.
In the software industry, which KPMG defines in four categories: business enterprise, office, educational and entertainment, Canada ranked second least expensive with Montreal and Ottawa being the cheapest cities for advanced software development. Canada also ranked second for Web and multimedia with St. John’s and Halifax as the least expensive cities for content development.
“Canada rates very well when it comes to software design and Web sectors,” said KPMG’s MacDonald. “Canada is driven by the structure of our labour markets and our tax structures.”
While there are advantages to having a low cost index, Milway said Canada, especially cities like Toronto, should aim for increase their cost index to compete with American cities like Boston, which has a cost index of 107.8 per cent, and New York City, which has a cost indext of 112.6 — the highest of any city in Northeast U.S. and Canada region.
“I’ve talked to some economic development people who say, ‘We should tell the world how cheap we are,’” said Milway. “It’s like Yogi Berra said about the restaurant, ‘Nobody wants to go there it’s too crowded.’”
Milway added cities like New York and Boston are hotbeds of innovation and investment despite the fact the cost to do business there is high.
“That’s because it’s where people want to be.”