Canada

Risk assessment

Fiscal adjustments in the United States will affect growth in 2013

Healthy domestic demand has not fully made up for the export slowdown and the ending of fiscal stimulus measures. Growth therefore slowed in 2012 and is expected to be stagnant in 2013. As the Canadian and American economies are closely linked, the expected 1.7% growth in 2013 is based on a moderate slowdown in the United States.

Domestic demand will be the main driver of activity

Regarding spending, Canadians will be as cautious as they were in the last months of 2012 and will reduce theirs savings (2.8% of disposable income in 2013) to compensate for the modest increase in real wages. Other factors will encourage households to limit spending, particularly the still sluggish state of the job market and the high level of debt, which is expected to have reached 166% of disposable income by the end of 2012. However, a property crisis is unlikely: price corrections are concentrated in Toronto and Vancouver, while everywhere else prices are stabilising and a set of measures was implemented last July to limit the use of mortgage loans. Lending has accordingly slowed and building starts have been declining for several months. Businesses will also be cautious, particularly mining firms which have announced their intention to reduce or postpone their investments due to the decrease in raw materials prices. Nevertheless, many factors will help sustain business spending: the extension of American Federal Reserve’s quantitative easing 3, which is expected to result in an increase in raw materials prices, lower federal and local corporation taxes, weak corporate bond rates, high profit levels (30% of GDP) and more competitive prices for imported products thanks to the strength of the Canadian dollar. In this context, the government has postponed by a year (until 2016-2017) a return to fiscal balance. Public debt, half of which is contracted by the federal government and the other half by the provinces and local governments should fall slightly.

Exports sustained by a slight rise in energy commodity prices

Though the Canadian dollar has been less volatile since 2001 (around parity with the US dollar), it remains historically high. Exports will therefore be undermined again this year by the strength of the local currency, which reduces the price-competitiveness of manufactured products and tourism. To a certain extent, they will also be hit by the modest expected growth in the United States (effects of the fiscal adjustment on American consumers’ disposable income). Demand from Japan (2.4% of exports) and China (3.7%) will only partly offset the decline in orders from Europe (the United Kingdom accounts for 4.2% of exports) addressed to the emerging economies, which will indirectly affect sales of energy commodities (24% of exports). But the probable rise in raw materials prices should help to support prices in the mining sector. Finally, with imports growing faster than exports, the current account balance, in surplus in the decade before the crisis, will post a widening deficit for the fourth consecutive year although the contribution of foreign trade to growth could again become positive this year.

Weakening of businesses devoted to the domestic market

Businesses in the buildings and public works sector and the sectors depending on it (timber, furniture) will be affected by the expected cooling in construction and infrastructure projects, but this slowdown could be offset by the recovery observed in the American housing sector. Machinery and capital goods businesses are expected to benefit from the firm American productive investment.  Moreover, the favourable outlook for 2013 in the North American automotives industry will strengthen the sector’s exports to the Canada’s big neighbour. However, the probable closing of the General Motors factory in Ontario will affect the industry. Finally, household caution is likely to impact on the retail and leisure sectors. Company insolvencies declined over the twelve months to November 2012 (-11%) and are expected to be well below the pre-crisis level. This situation is only partially reflected in the evolution of Coface’s index of payment incidents: it remains slightly below the global average, but is trending upwards.

Payment incident index

Insolvency trends

MEANS OF PAYMENT AND COLLECTION METHODS

A heritage of Canada’s colonial past, its dual legal system comprises that used by nine of the ten provinces making up the Federal state, which is inspired by British “common law” and that used by Quebec whose legal traditions are based on the codified principles of the Code Napoleon.

Lower Canada’s civil code, dating to 1^st August 1866, was completely revised and implemented on 1^st January 1994 as the Quebec Civil Code.

Under the British North America Act of 29 March 1867, Canada was the first British colony to exercise executive and legislative powers as a federal state.

The Confederation of Canada came into effect as a dominion on 1^st July 1867.

A single law governs bills of exchange, promissory notes and cheques throughout Canada; however this law is frequently interpreted according to common law precedents in the nine provinces or according to the civil code in Quebec.

As such, sellers are well advised to accept such payment methods unless where long-term commercial relations, based on mutual trust, have been established with buyers.

Centralised accounts, which greatly simplify the settlement process by centralising settlement procedures between locally based buyers and sellers, are also used within Canada.

SWIFT bank transfers are the most commonly used payment method for international transactions. The majority of Canadian banks are connected to the SWIFT network, offering a rapid, reliable and cost-effective means of payment, notwithstanding the fact that payment is dependent upon the client being in good faith insofar as only the issuer takes the decision to order payment.

A real time electronic fund transfer system in operation since February 1999 – the Large Value Transfer System, or LVTS – facilitates electronic transfers of Canadian dollars countrywide and can also handle the Canadian portion of international operations.

The letter of credit (L/C) is also frequently used.

Canada’s Constitution Act of 1867, amended in April 1982, divides judicial authority between the federal and provincial Governments.

Thus, each province is responsible for administering justice, organising provincial courts and enacting the civil procedure rules applicable in its territory. Though the names of courts vary between provinces, the same legal system applies throughout the country, bar Quebec.

Within each province, provincial courts hear most disputes of all kinds concerning small claims, and superior courts hear large claims – for example, the Quebec superior court hears civil and commercial disputes exceeding 70,000 Canadian dollar (CAD) and jury trials of criminal cases. Canadian superior courts comprise two distinct divisions: a court of first instance and a court of appeal.

At federal level, the Supreme Court of Canada, in Ottawa, and only with “leave” of the Court itself (leave is granted if the case raises an important question of law), hears appeals against decisions handed down by the provincial appeal courts, or by the Canadian Federal Court (stating in appeal division), which has special jurisdiction in matters concerning maritime law, immigration, customs and excise, intellectual property, disputes between provinces, and so on.

The right of final recourse before the Privy Council, in London, was abolished in December 1949.

The collection process begins with the issuance of a final notice, or “seven day letter”, reminding the debtor of his obligation to pay together with any contractually agreed interest penalties.

Ordinary legal action – even if the vocabulary used to describe it may vary within the country – proceeds in three phases.

Firstly, the “writ of summons” whereby the plaintiff files his claim against the defendant with the court, then the “examination for discovery”, which outlines the claim against the defendant and takes into account the evidence to be submitted by each party to the court and, finally, the “trial proper” during which the judge hears the adverse parties and their respective witnesses, who are subject to examination and cross-examination by their respective legal counsels, to clarify the facts of the case before making a ruling.

In most cases, except when the judge decides otherwise, each party is required to bear the full cost of the fees of his own attorney whatever the outcome of the proceedings. As for court costs, the rule stipulates that the winning party may demand payment by the losing party based on a statement of expenses duly approved by the court clerk.

The Quebec civil code reform, in effect since 1^st January 2003, is intended to speed up and foster, by devolving a broader role on the court, smoother court proceedings.

The change precisely concerns institution of a standard “originating petition” (requête introductive d’instance), with the payment of judicial costs joined, introducing a 180-day time limit by which the proceedings must be scheduled for “investigation and hearings” (pour enquête et audition), delivery of a judgement on the content within a timeframe of six months after the case was heard and encouragement of the parties to submit to a conciliation stage during legal proceedings, with the judge presiding over an “amicable settlement conference” (conférence de règlement à l’amiable).