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Canada Ranks #1 and Moncton is right there with it.

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Canada is still the cheapest place to do business among G7 countries, even though the rising dollar has eroded some of its advantage over the United States, a KPMG study has found.

In 2006, the cost of setting up and running a business in Canada for 10 years is 5.5-per-cent lower than in the U.S., the report says, thanks to lower wages, electricity and facility costs. The meteoric ascent of the Canadian dollar has sparked concern that Canada's cost advantage is gone. Not so, says KPMG, which based its results on the dollar being valued at 85.2 cents.

"The Canadian dollar would have to rise in value by approximately 13 per cent, almost to par with the U.S., to bring Canadian cities to a breakeven position with the U.S. in terms of overall business costs," the report said. KPMG's bi-annual study measures 27 cost components, such as labour, taxes, utilities and real estate. In 2006, the study examined business operations in the G7 (Canada, France, Germany, Italy, Japan, the United Kingdom and the U.S.) and the Netherlands and Singapore.

Excluding Singapore, business cost differentials have narrowed since 2004, the study said, and most are within 8 per cent of the U.S., which is used as a benchmark. In 2004, Canada ranked first in cost-effectiveness among the Group of Seven industrialized countries.

According to the study, Canada has the lowest electricity costs of the countries studied, as well as the lowest land purchased and factory construction costs. Canada is one of three countries that offers the greatest research-and-development tax incentives, and has competitive combined salary, wage and benefit costs.

The advantage Canada enjoys stems from a "combination of lower labour costs, including lower employer costs for private medical coverage, lower real estate costs, and lower electricity costs...than in the United States, where deregulation has seen electric costs soar in many regions," said Mark MacDonald, a director at KPMG.

Various "federal and provincial tax cuts over the last decade have also made Canada's tax system more competitive with the U.S.," he added.

While Canada ranks #1 in the G7, within Canada the study shows that Moncton, New Brunswick has an even greater cost advantage over its neighbours. Only Sherbrooke, Que., scored better.

"Moncton is the number one low-cost city in the New England/Atlantic Canada region," says an analysis of the study done by the federal department of international trade.

Stuart MacKay, co-author of the study which was first published in 1996, said a number of lower-cost advantages added up to Moncton's favour. Low labour cost was the most important contributor, but other factors included low land and building costs and low taxes. In general, the same factors assist other east coast cities. Charlottetown and Halifax were close behind Moncton in cost-competitiveness.

MacKay said the higher Canadian dollar cut into Canada's overall cost advantage from the last study, but he was surprised that its impact was not stronger. "We knew that Canada was going to lose some of its competitive advantage because of the Canadian dollar increasing in value, but we were a little surprised that the loss was as small as it is.

"In 2004 we had a 75-cent dollar and we had a cost advantage over the U.S. of 9.5 per cent. In 2006, we are talking about an 85.7-cent dollar and the cost advantage is still 5.5 per cent. That 5.5 per cent translates to nine per cent when you look at a lower-cost jurisdiction such as Moncton."

March, 2006

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