Low Canadian Dollar Is a Tax Windfall for the Canadian Government

In my role with I.E.Canada, I am often asked what my thoughts are on the state of the Canadian dollar versus other international currencies.

When our Canadian dollar was above par, I was asked what the impact of our high dollar was on our exporters. The assumption was that a high Canadian dollar (against the US dollar) would make Canadian exports non-price competitive on the world market, unless there was something special or specific about the product. There was great concern at that time that having a very high Canadian dollar was going to negatively impact our economy and that Canadians would lose jobs because of it.

While it was not very long ago that I was talking about an at par dollar, more recently I’ve been asked what impact the rapidly tumbling Canadian dollar will have on our exporters (BNN – January 20). On the flip side to the thought that exporters are hurt by a high dollar, it is assumed that exporters would benefit from a low Canadian dollar. It is true that when our Canadian dollar is below par (compared to the US dollar) it gives Canadian exporters a price advantage when selling their goods on the world stage, but it’s a double-edged sword.

Most Canadian exporters and manufacturers must import parts and components in order to produce a product for export. With the Canadian dollar falling as rapidly as it has recently, a Canadian exporter’s purchasing ability using Canadian dollars on the world market to buy the required parts and components is hurt. The fact that they have to use more Canadian dollars to buy the parts and components does not automatically mean that they can increase their selling price on their exports. Often, export sales are based on long-standing contracts, with pricing set long before the dollar started its downward slide. That means that as the cost of materials goes up, and the selling price remains the same, profit margins are squeezed, which is not a good news story for exporters.

The other thing that you often don’t hear mentioned is the fact that as the Canadian dollar falls relative to other international currencies, it becomes a tax windfall for the Canadian government on dutiable imports. Most Canadian importers buy in global markets using US dollars. While not mandatory, the US dollar is the de facto currency of choice for most global purchases.

As any Canadian importer knows, at time of entry into Canada the value of the imported goods must be converted from whatever currency they were purchased in into Canadian dollars in order to calculate any duties and taxes owing. As the dollar falls, the values declared to CBSA on imported goods rises and, if goods are dutiable, that results in more duty being paid to the Canadian government, along with a higher amount of GST also being paid. That extra duty is a permanent gain for the Canadian government and a permanent hard cost that cannot be recovered by the Canadian importer.

As far as I know, no one has asked how that additional duty will be spent by the government. I don’t actually know how much additional duty we are talking about, but in passing somebody mentioned the number $1 billion to me – but I believe that’s just speculation.

While the value of international currencies are cyclical and we’ve all seen the Canadian dollar rise and fall before, what is unique about recent events is how fast the dollar fell from parity down to where it is today, at approximately $.70 US. Canadian supply chains, whether they be import or export supply chains, have a hard time adapting to such volatile change in such a short period of time. That’s what’s different about what’s happening right now compared to past decades when the Canadian dollar would slowly sink into the $.70 US range.

What Canadians need is stability – boring, monotonous stability. We need our dollar to sit comfortably below the US dollar and to fluctuate only mildly over sustained periods of time in order to give Canadian business leaders and foreign investors looking at Canada the confidence that they need in order to grow their businesses in Canada.

I don’t know if I’m an eternal optimist or just biased when it comes to international trade, but I do think that there are cracks of blue skies that are potentially on the horizon for Canadian importers and exporters. If agreements such as CETA and the TPP actually become ratified over the next couple of years, I believe those agreements will give Canadian importers and exporters alike opportunities to grow, and diversify, and with that will come Canadian jobs and a stable Canadian dollar.

My fingers are crossed that politicians, whether American, European or Canadian, don’t blow the above opportunities for Canada’s economy.

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