Higher duty-free thresholds expected to boost cross-border shopping: report

OTTAWA – Cross-border shopping is costing the Canadian economy much more than believed and new rules raising duty-free limits will only make matters worse, says a new report by the Bank of Montreal.

The assessment of costs comes from the bank’s deputy chief economist, Doug Porter, in his latest price gap comparison between consumer goods in Canada and the United States.

Porter said Thursday that although the price gap has narrowed to 14 per cent on average from the 20 per cent he found in last spring’s survey, the cross-border shopping phenomenon appears to be intensifying.

He believes as much as 10 per cent of the portion of the value of Canadian retail sales that can be transported — items such as clothes, tires, appliances, sporting goods and electronics — is being lost to U.S. stores.

That is more than double official estimates, but Porter said many Canadians under-report or don’t report what they bring back.

“Even at a conservative estimate of five per cent, we are talking over $20 billion a year,” he said.

“If correct, that represents a real drain on domestic retail sales, employment and government revenues — a drain that looks (likely) to deepen.”

Porter said he believes the problem will get worse starting next month when new, higher duty-free thresholds for bringing back goods across the border go into effect.

Under changes announced in March’s budget, the duty-free threshold on stays longer than 24 hours rises to $200 from $50, while the limit on stays longer than 48 hours rises to $800 from the current two-tiered levels of $400 and $750, depending on the length of stay.

“A culmination of factors is likely to unleash a wave of Canadians cross-border shopping this summer in numbers not seen in two decades,” Porter said.

A spokesman for Finance Minister Jim Flaherty pointed out that the duty-free limits had not been adjusted for inflation for decades and that the changes would ease congestion at borders and allow agents to focus on security issues. The office added that the new limits match those applied to U.S. travellers returning from Canada.

A spokesperson for the Retail Council of Canada said the association has no independent data on how much is being lost to cross-border shopping, but said the problem is significant.

“It’s difficult to estimate how much cross-border shopping is done, but in talking to retailers generally we don’t think Mr. Porter is that far from the truth,” said Diane Brisebois, head of the council.

“It is a bigger problem … and this is going to continue to be challenging if the government doesn’t address the problem of import duties and if it doesn’t at least out some of the multinational suppliers who are charging Canadian retailers much higher prices versus U.S. retailers.”

In testimony to the Senate national finance committee last month, Brisebois blamed multinational distributors for much of price gap, saying the practice of “country pricing” discriminates against Canadian retailers.

She presented the committee with her own list showing that Canadian retailers often pay more to be able to carry name brands, in some cases as much as 30 and 40 per cent more than retailers in the U.S.

Other factors that have been cited for the gap include federal duties, less competition in Canada and higher transportation costs.

The Senate committee is expected to report later this year on the causes of the persistent price gap between the two countries, despite near parity in the value of the U.S. and Canadian dollars in most years since 2007.

The new survey of consumer goods by the Bank of Montreal suggests the gap has narrowed, in part because this week the Canadian dollar has been trading slightly below par, while during last spring’s survey the loonie was worth US$1.02.

But Porter said with few exceptions, prices have become more competitive in Canada over the past year.

Among the items sampled this time:

— Magazines were on average 17 per cent more expensive in Canada and running shoes as much as 37 per cent more.

— The survey also found significant discrepancies with a Toro lawn mower, 32 per cent more; a Pottery Barn backpack for kids, 26 per cent; a sample of seven cars, 11 per cent, and a Gap Kids T-shirt, 19 per cent more.

— At the lower end of the scale, a sample of four books were only seven per cent more costly in Canada, a Canon Rebel T3 camera, five per cent; Blu-Ray movies, eight per cent, and barbecues (four sampled) were on average priced slightly lower in Canada than in the U.S.

“There hasn’t been a big change, but the gap has narrowed somewhat,” he said.

Porter cautioned that with only 18 items sampled, his findings are not necessarily representative of the average price difference between the two countries.

But the dramatic appreciation of the Canadian dollar toward parity since 2007 has had a drastic impact on shopping patterns, tourism and trips from residents on both sides of the border, he points out.

Porter said there are now 2.7 Canadian visits to the U.S. for every visit the other way, whereas in the 1995 to 2005 period, the ratio was one-to-one.

“There has never been more Canadians heading south than now. On the flip side … overall visits by Americans (to Canada) are now running at the lowest level in more than 40 years,” he said.

Note to readers: This is a corrected story. An earlier version stated that the Senate banking committee was studying the price gap issue.