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Canadian Retail Property Could Be Hurt By New North American Trade Accord

Deal with US, Mexico Raises Minimum Threshold Subject to Duty to $150 Canadian From $20
October 2, 2018
American online retailers could get a boost thanks to a provision in a new North American trade agreement that will raise the minimum threshold for cross-border purchases subject to duties to $150 from $20. Boston-based Wayfair operates a 770,000-square-foot-facility in Mississauga, Ontario.

Canadian retailers will probably face increased competition for online sales because of a change in a United States-Mexico-Canada trade agreement that will raise the minimum threshold for cross-border purchases subject to duties to $150 Canadian from $20, a move that could hurt the value of retail real estate in Canada.

Known as the de minimis threshold, the concession made from Canadian authorities in the deal reached Sunday to raise the limit of duty includes a caveat that will allow sales taxes on the portion of purchases above $40. In Ontario, Canada's largest province, the harmonized sales tax that blends federal and provincial rates is 13 percent as part of the overall deal.

"This could affect the retail property market," said Saul Gautieri, senior economist at BMO Capital Markets, in an interview. "A lot of online retailers are also bricks-and-mortar sellers, and they will see fewer American buyers of their product, and they'll lose some Canadian domestic business."

Also part of the deal, which faces approval by the U.S. Congress, is a change that America can now charge duty on purchases of more than $100 American dollars, down from US$800, which could impact some specialty retailers targeting U.S. audiences.

"Canadian retailers selling in the U.S. is not nearly as big as American retailers selling this way," said Atkinson.

Retail demand remains competitive for Toronto, Canada’s largest market, according to CoStar data. At the end of August, the vacancy rate in the greater Toronto area for retail was 2.9 percent, down 0.20 of a percentage point from a year ago. The average net asking rental rate during the period was down 2 percent on a year-over-year basis to $24.91 per square foot per annum.

In Calgary, at the end of August, the vacancy rate was 2.6 percent, down 0.20 of a percentage point from a year ago. The average net asking rental rate was off 3.5 percent during the period from a year ago down to $25.37 per square foot per annum.

The Retail Council of Canada has said only 22 percent of U.S. customers make purchases from a non-U.S. seller, while 67 percent of Canadians report online cross-border purchases.

"Once you calculate the tax, will there will be a big difference?" said Maureen Atkinson, a senior adviser with J.C. Williams Group, a global retail consulting firm, referring to the deal. "It seems like it would be complicated to start enforcing."

Lobbyists for American online sellers had been pushing for the Canadian de minimis to rise to $200 from $20, and the Retail Council had suggested that would give merchants south of the border on average a 12.3 percent competitive advantage.

"Retailers in Canada will face more competition from online sales," said Avery Shenfeld, chief economist with CIBC, in a note about the final $150 limit.

Gautieri said the combination of the lower U.S. threshold and higher Canadian threshold could be a "double whammy" for retailers in Canada.

"It will have an impact," he said. "Not only will Canadians be encouraged to shop stateside, but fewer Americans will be buying Canadian products. Canadian retailers are going to have to find ways to keep costs down and maintain market share. It could have been way worse. Americans had wanted the threshold to $800."

Even so, the effect will be limited, according to Karl Littler, senior vice president with the Retail Council of Canada. He said on a practical basis the only concession the Americans received was that goods will now be tax free and duty free when they cost up to $40, an increase from $20. He said the duty saved for goods valued between $40 and the new $150 limit is about 2 percent on average.

“After the currency conversation and shipping cost and having to wait for the item, people are not going to rush home from the mall to go online. It will have some incremental impact,” said Littler.

Garry Marr, Toronto Market Reporter  CoStar Group   
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