If your business is technology and you like low corporate taxes, cheap land and talented but inexpensive labour, Canada is the place for you, according to a new study.
A recent 10-month investigation by management consulting firm KPMG LLP comparing start-up and operations costs across North America, Europe and Japan has concluded that Canada is the G7’s least costly place to do business. After examining 27 factors such as labour, taxes and utility fees as applied to 12 specific business operations in 86 industrialized cities, Canada also offered the best deal in the specific areas of advanced software and software content development, R&D and corporate services.
The IT sector is one of the areas where the Canadian cost advantage is greatest, especially when compared with the United States, said Stuart MacKay, the Vancouver-based co-author of the study, and a former KPMG partner.
“What it told me that I didn’t know before was how great the differences in cost levels between Canada and the United States have become. I’m surprised that the after-tax cost differential has reached 25 per cent. That’s a pretty big chunk of change,” MacKay said.
For example, in 1999, the year of KPMG’s last study, Mackay said it was 13 to 14 per cent cheaper to do advanced software development in Toronto than in a comparable American city. By 2001, he found that the same operation was now 20 per cent cheaper.
Since corporate taxes in the two countries are actually quite similar, MacKay said the difference results mainly from labour costs, especially for high-end talent.
“Labour is 80 per cent of the cost of a software-type operation typically, and it is surprising just how steep the increase in compensation level is in the United States as you go to higher-value job positions. At the lower end of the scale for unskilled and semi-skilled work the differential is not that great. But what you find as you move up the scale to the more skilled and senior positions is that the curve is much steeper for the United States than anywhere else,” he said.
The study also found that among all 86 cities, Edmonton was the least expensive place to set up shop, with Montreal and Toronto placing second and first among cities with populations over 2 million.
MacKay said these results follow some general tendencies in cost levels where smaller communities and less economically vibrant places tend to be more affordable.
“(In Canada) the lowest costs tend to be in the Atlantic provinces and Quebec, and the highest costs tend to be in Ontario and British Columbia. Even within Alberta, for example, Calgary has been booming in recent years and has a higher cost index than Edmonton. To some extent these differences are driven by differences in tax policies and labour rates,” he said.
Although hesitant about making sweeping predictions – “In 1997 I said the Canadian dollar would be up to 72 cents in the next year, so now I’m more careful,” he joked – MacKay did suggest that inflated salaries for IT workers in the U.S. might start to discourage new technology businesses.
“I think you’re going to see continuing pressure to move IT – especially high level support like IT design, Web design, Web content – away from the United States and into not just the other industrialized nations, but offshore,” he said.
Although the results of this study are very positive for the Canadian high-tech sector, MacKay said it’s still important to keep an eye on the global picture.
“Compared to the U.S. and the G7 we’re a low-cost place to do business, but in terms of the world economy we’re a medium-cost place to do business. I think what we as Canadians have to promote is the combination of affordability and the advantages of having operations in a First World climate.”
KPMG Canada is at http://www.kpmg.ca/english/.
Details of Competitive Alternatives: Comparing Business Costs in North America, Europe and Japan, are online at http://www.competitivealternatives.com/main.htm.