Canada

High interest rates bite

Activity slowed in 2023 as the impact of the Bank of Canada's aggressive rate hike campaign kicked in and should remain weak in 2024 as financial conditions are likely to remain restrictive. Households, whose debt represents around 182% of disposable income, are particularly sensitive to interest rate rises, and are likely to continue to limit their discretionary expenditures. As a result, the contribution of consumption (55% of GDP), already sluggish, is likely to remain lackluster. Population growth, driven mainly by immigration, is expected to remain strong, providing some support for demand. However, this demographic dynamism is accompanied by challenges, particularly in terms of housing. High interest rates should limit the contribution of business investment spending. While inflation should continue to moderate and is expected to return to the Bank of Canada's target range (1-3%) in 2024, the later should begin a rate-cutting cycle later this year. Household and business spending could therefore strengthen in the second half of the year, as pressures on their finances ease, even moderately. Monetary easing would also support residential investment, which has weakened over the past two years. Public spending should make a positive contribution, with most levels of government showing little inclination to reduce it. Relatively favorable terms of trade and commodity exports will mitigate the slowdown in activity.

Fiscal policy remains relatively tight

The federal budget deficit is expected to narrow only gradually in fiscal year 2024-25. Revenue growth is expected to be adversely affected by sluggish economic activity. Nevertheless, the federal authorities intend to reduce the deficit over the coming fiscal years in order to respect a fiscal anchor set at 1% of GDP by 2026-27. New spending will mainly involve commitments to boost housing supply, as well as support measures for the clean economy. Interest expense should continue to rise, reaching 1.8% of GDP by 2024/25. While the general government gross debt ratio is very high, notably after deducting the assets held by the Canada Pension Plan and the Quebec Pension Plan, the net debt ratio (47% of GDP) remains lower than that of its G7 peers. Moreover, it should stay on a downward trajectory.

Moderate energy prices in 2023 contributed to a widening current account deficit. In 2024, the current account deficit is expected to remain moderate. Spending by Canadian travelers abroad will again contribute to a deficit in the services account. The trade balance could record a slight surplus, with exports buoyed by sales of commodities, while imports growth will remain moderated by slow domestic demand. The surplus on investment income could moderate after a strong recovery in 2023. The deficit on the transfer account will remain marginal. Non-residents' purchases of Canadian financial assets should amply finance the deficit. Foreign debt, largely held by the financial sector (over 60%), is still high (close to 130% of GDP).

Trudeau’s government is struggling in opinion polls

Justin Trudeau (Liberal Party), Prime Minister since November 2015, was voted in to a second term of office following the snap federal elections of September 2021. The elections resulted in the formation of a minority government (158 seats out of 338), with the balance of power broadly unchanged from the previous legislature (2019-2021). While no minority government has served a full term, a "confidence and support agreement" signed with the New Democratic Party (NDP, 25 seats) in March 2022 could ensure that Justin Trudeau's government remains in place until October 2025. The likelihood that it will remain in place until then was strengthened after the Liberals delivered on certain NDP proposals, notably by introducing a national dental plan for low-income families. In this context, it is also unlikely that Mr. Trudeau will call an early election, with polls indicating that his popularity has taken a hit as a result of inflation and growing concerns about housing affordability. The government is expected to announce some measures in this area, but fiscal room for maneuver is likely to remain limited. The main opposition party with 117 seats, the Conservative Party led by Pierre Poilièvre, has made strong progress in the polls since mid-2023, allowing them to contemplate winning an absolute majority in 2025. However, the first-past-the-post electoral system means that small changes in popularity dynamics can result in a significant shift in the balance of power.

Sources of friction between the federal and provincial levels of government remain strong. The federal government has, for example, clashed with the Conservative governments of Alberta and Saskatchewan, which argue that federal climate policies have a negative impact on the oil and gas industry. There are also regular disagreements with the French-speaking province of Quebec.

Despite some divergences, the partnership with the US remains a strong axis of Canadian diplomatic relations. In contrast, relations with China have been strained in recent years. The investigation into possible Chinese interference in Canadian elections could further strain them in 2024. Government allegations that India was behind the assassination of a Sikh leader in British Columbia, which India has denied, have soured the bilateral relationship, and could jeopardize efforts to deepen diplomatic and economic ties between the two countries.

Despite some divergences, the partnership with the US remains a strong axis of Canadian diplomatic relations. In contrast, relations with China have been strained in recent years. The investigation into possible Chinese interference in Canadian elections could further strain them in 2024. Government allegations that India was behind the assassination of a Sikh leader in British Columbia, which India has denied, have soured the bilateral relationship, and could jeopardize efforts to deepen diplomatic and economic ties between the two countries.

Payment

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’s good faith insofar as only the issuer takes the decision to order payment.

The Large Value Transfer System (LVTS) –introduced by the Canadian Payments Association in February 1999 – is a real time electronic fund transfer system that 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.

Debt Collection

Canada’s Constitution Act of 1867, amended in April 1982, divides judicial authority between the federal and provincial Governments. Therefore, each province is responsible for administering justice, organizing 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 CAD 70,000 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 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 PROCEEDINGS

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.

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Enforcement of a Legal Decision

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 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).

Insolvency Proceedings

The two primary pieces of insolvency related legislation in Canada are the Companies' Creditors Arrangement Act (the CCAA) and the Bankruptcy and Insolvency Act (the BIA). The BIA is the principal federal legislation in Canada applicable to bankruptcies and insolvencies. It governs both voluntary and involuntary bankruptcy liquidations as well as debtor reorganisations. The CCAA is specialized companion legislation designed to assist larger corporations to reorganise their affairs through a debtor-in-possession process.

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Last updated: January 2024