Cross Border Pro

Tax Treaty Change Creates Opportunity

Changes in Canada's tax laws and the tax treaty with the United States have created opportunities for Canadian companies.  Starting January 1st Canadian companies can borrow from arms-length foreign lenders and not have to pay the 25% withholding tax. For non-arms length lenders the new rules will gradually eliminate the withholding by 2010. Previously, this was a barrier for Canadian companies to obtain financing outside of Canada. Foreign lenders are already taking on exchange rate risk and having the added burden of a 25% withholding made lending to Canadian companies an unattractive investment. This change in tax laws helps to globalize investments. Many U.S. investors are looking to Canada as an attractive investment opportunity as their own economy continues to struggle. With the global tightening of credit this might be a welcome opportunity for Canadian companies to find alternative financing options for their companies.

Importing Car to Canada

When we moved to Canada we imported our cars with us from the U.S. My brother-in-law was so intrigued by this that I later helped him import a used car to Canada from the U.S. At this time the savings was a few thousand dollars on a $15,000 car.  Now with the strength of the Canadian dollar the price difference has become ridiculous. I was looking (just for fun) at an Audi S4.  The list price in Canada is $71,000cdn.  The list price in the U.S. is $49,000usd.  A $22,000 price difference!!  Now if you factor in the exchange rate that price difference is getting close to $25,000.  The exchange rate almost makes it possible to buy the car at par and have the exchange rate pay your taxes.  It is amazing though that as much as I have looked at importing a car to Canada the hassle and time involved really makes me think twice.  I know that some manufacturers will cancel a warranty if the car is exported from the U.S.  And some manufacturers are offering incentives like no charge maintenance for four years that most likely would not transfer.  Still it is hard to ignore the price difference.  Many in Canada are really starting to question the Canadian pricing and why it does not come down.  One problem in the car business is all the leases in place with residual values in the contract. What happens if you have leased a car for four years and want to buy it for the residual value at the end of the lease and the car manufacturer has decreased prices by 10% on new models of the car you have.  Good luck negotiating that one.  Has anyone else had experience importing cars to Canada?

Tariffs drive imports into U.S. storage

A recent article in Business in Vancouver discussed the benefits of Canadian companies importing their U.S. bound products directly to the U.S. rather than first to their Canadian facility and then into the U.S. market. According to the article, Canada usually charges an 8% tariff on goods imported from China, while the U.S. does not charge tariffs on goods from China. So if a Canadian company is selling goods from China into the U.S. market they can avoid this additional cost by importing directly into the States.  They accomplish this by warehousing their goods just across the border in the U.S. One company set up specifically for this purpose is International Market Access run by Jim Pettinger.  From his 20,000sqft warehouse in Bellingham, Washington Mr. Pettinger services 130 companies based in British Columbia, Canada. International Market Access provides a knowledgeable service to Canadian companies looking to do business in the U.S.

Other options include leasing a small storage/warehouse space or for larger operations building or leasing a warehouse facility staffed with their own employees.  There are various pick-and-pack providers near the border that can also service the needs of Canadian companies.

Will Subprime Mortgage Fallout in U.S. Affect Canada?

The U.S. is currently experiencing significant fallout from years of subprime mortgage lending practices.  For years 100% loans have been readily available in the States.  This eventually evolved into so called "stated income" loans where little to no documentation of actual income was required.  And also variable rate loans where the first several years where at very low payments with payments adjusting in the second or third year.  Often the monthly payments in the first years of these loans did not even cover the interest so the loans were "negative" amortization.  You would actually owe more on the loan after a couple of years. 

This market seems to be collapsing on itself.  Several subprime lenders have declared bankruptcy with others going public about their troubled financials.  Canada has typically has a much more conservative approach to lending.  When we moved to Canada in 2004 I remember the lender discussing "high ratio" loans as those being less than a 25% down payment.  It has only been in the last year that I have starting hearing 100% loans advertised in Canada and even then not very heavily advertised.  I believe this historically conservative lending will be one factor to help the Canadian market maintain its currently active real estate market.

That being said, Canadians seem to watch very closely what is happening in the States.  Like it or not there is very much a physiological factor to the real estate market.  With Canadians hearing so much about the slow downs in the U.S. real estate market it seems to be affecting buying decisions in Canada.  Prices have been increasing in many Canadian markets at 20%+ per year for several years.  I believe some Canadian home buyers are spooked about how high prices have gotten and are looking at what is currently happening in the U.S. real estate market and this is affecting their buying decision.

Canadian Brookfield Asset Management Attempts Acquisition of U.S. The Mills Corp.

Canadian based Brookfield Asset Management had an accepted offer to buy the financially troubled U.S. based mall owner The Mills Corp.  This offer has been topped by Simon Property Group and Farallon Capital Management.  Brookfield now has three days to either top this offer or walk away from the deal.  This would have been a major U.S. acquisition by a Canadian company.  Mills owns 38 major shopping malls throughout the U.S. and Canada.

Foreign Investors Still Hot on U.S. Commercial Real Estate

A recent article in BusinessWeek discussed the continued interest in U.S. commercial real estate by foregin investors.  According to BusinessWeek approximately 5% of the $336 billion spent last year on commercial real estate was by foreign investors.  The top player is the Middle East.  However, Canada comes in a respectable 4th acquiring $2.57 billion worth of commercial real estate. The U.S. is still seen as a stable market with many opportunities.  One noted changing trend is foreign investors willingness to acquire value-added projects.  I believe this indicates foregin investors trust in the stability of the U.S. market. Taking on riskier projects indicates their belief that the market itself has less risk and justifies more risk at the property level.

Cross Border Business Study

Given it's geographic location near the Canadian border, Bellingham Washington has a significant number of Canadian businesses.  Some of these businesses are selling services and products directly to the local market in northern Washington State. Others are using the location as a U.S. distribution center that is still a close drive to their corporate headquaters just across the border in British Columbia. Some of these companies simply need a U.S. identity and maintain little else than a mailing address in Washington or maybe a small office. It is often quoted around Bellingham that taken as a whole, Canadian companies are the largest employer in the area. I have asked around and no one seems to know where this information comes from.

The Small Business Development Center has just announced that they are going to be studying the impact of Canadian owned companies in Whatcom County.  Interestingly they are also going to be studying the impact of U.S. owned companies in British Columbia.  This should be a fairly interesting study and hopefully it is made available to the public.

Canadian Companies Listed on U.S. Stock Exchanges

Often when I am searching on the internet for Canadian companies that operate in the U.S. I will come across a publicly traded company with a Headquarters listed as an address near the border in Washington that I know to be a mailbox type service.  Often, on further research I will discover a Canadian fax number or the corporate bio will state the company was originally founded in Canada.  I find in amusing that companies will go to the trouble to establish a U.S. presence with a U.S. address, telephone number, etc yet will often retain a Canadian fax number.

These days may be coming to an end for many of these Canadian companies. The Sarbanes-Oxley Act passed some time ago.  I believe it was in the wake of Enron and Worldcom.  Sarbanes-Oxley has been phasing in over the last several years and apparently small-cap companies are starting to be effected by this.  Sarbanes-Oxley has onerous reporting and auditing requirements in an attempt to prevent more corporate scandals.  For small companies the cost of these additional requirements can be difficult to handle.  The is also affecting Canadian companies that are publicly listed and is causing many to reconsider the benefits of U.S. listing compared to the increased reporting costs.  I think we will see fewer Canadian companies choosing to access the U.S. money market through public listing and will probably see some smaller Canadian companies deregister from the U.S. Security and Exchange Commision.

Passport Requirement Delayed

The U.S. House of Representatives has recently passed legislation that will delay the passport requirement at United States land borders until 2009.  The passport requirement for arrival by air will still go into effect January 2007.  This move seems to indicate that the U.S. understands the burden this requirement would have placed on other countries and also on U.S. border towns.  Government officials and business groups in U.S. border towns lobbied hard to get the passport requirement delayed over fears that restricting movement across the border would hinder tourism and dampen cross border commercial trade.

I think this is a good move as it will give all parties involved a change to come up with an efficient system that will both meet security requirements and ease movement across the border.

Compare Prices On The Cover

For Canadian shoppers - have you ever compared the printed prices on products when it lists both Canadian and U.S. prices?  Back not to long ago these price differences made sense when the exchange rate was 65 to 70 cents.  Now with the exchange rate hovering arount 90 cents these posted prices can be way out of wack.  Certain stores seem to be more prone to this price difference.  My wife likes to shop at Michaels for arts and crafts supplies.  The prices printed on the price tag can represent an exchange rate as high as 1.4 when the current exchange rate is closer to 1.11.  A recent article in Mcleans discusses this issue.  One of the reasons given is that companies are unwilling to adjust prices in the fear that the exchange rate will swing back suddenly.  Seems to me in this electronic age we live in companies should be able to provide more real time pricing taking into account the exchange rate.  Blaming the price gap on pre-printed price tags seems like a poor excuse for a money grab.  The problem too is that the Canadian economy has been doing so well that most consumers are to busy and have the disposable income not to care.