Canada

Amid a timid domestic rebound, tariff uncertainty looms large

After flirting with recession at the end of 2023, the economy is undergoing a mild rebound. In order to tame inflation, the Bank of Canada kept rates at 5% for nearly a year until May 2024, with strong depressive effects on investment. Robust population growth has shored up consumption, but this tailwind is expected to fade as migration policy turns more restrictive. Household debt is high (102% of GDP, the highest of the G7), which is putting the pinch on consumption as mortgage renegotiations increase in a higher interest-rate environment. The expectation is that as the BoC’s aggressive rate cuts transmit, capital investment and construction will kick back into gear throughout 2025.

However, this cautiously optimistic outlook is subject to a high dose of uncertainty related to the recent re-election of Donald Trump and the potential consequences for Canadian exports. The US president-elect ran on a platform of wide-sweeping tariffs on all trading partners, and 80% of Canadian exports go to the US. At the time of writing, it is uncertain how much Canada will be affected by US tariffs or when they will be implemented. US and Canadian energy and manufacturing are deeply interdependent (particularly the automotive industry) and Canada already benefited from preferential treatment during the first Trump administration, during which the USMCA free trade agreement was signed. With this treaty coming under review in 2026, the likelier outcome is that the US will try to obtain concessions in exchange for maintaining Canada’s carve-out. The likely target here will be trade with China, where the US will want Canada to follow suit on tariffs, apply stricter rules of origin, and liberalise access to dairy and poultry markets.

The global energy market has loosened amid stronger OPEC+ capacity and slower demand from China, which is dragging on the value of exports. The situation is expected to persist throughout 2025, although the ongoing conflict in the Middle East creates some upside risk. The expansion of the Trans Mountain pipeline should nonetheless support a sustained rise in volumes. A small positive contribution is expected from government expenditure.

Moderate fiscal and external imbalances

The federal budget deficit is expected to narrow slightly in the fiscal year 2025-26. 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 to respect a fiscal anchor set at 1% of GDP by 2026-27. A recent expansion of capital gains taxation for corporations will provide the bulk of the revenue effort. New spending will mainly involve commitments to boost housing supply, support measures for the clean economy, and strengthening the social safety net for indigenous communities. 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 (22.8% of GDP) remains lower than that of its G7 peers. Moreover, it should stay on a downward trajectory.

Moderate energy prices in 2024 contributed to a slight deepening of the current account deficit. In 2025, the current account deficit is expected to widen slightly, while remaining moderate. Spending by Canadian travellers abroad will again contribute to a deficit in the services account. The trade balance should yield a small deficit, with exports driven by sales of commodities, while import growth will remain moderated by slow domestic demand. The surplus on investment income is expected to moderate. The deficit on the transfer account will remain marginal. Non-residents' purchases of Canadian financial assets should amply finance the deficit. Foreign debt, which is largely held by the financial sector (60%), is still high (143% of GDP).

Conservative swing in view, deteriorating foreign relations

Justin Trudeau (Liberal Party, LP), Canada’s 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). Thus far, the Trudeau government has been able to govern thanks to a support agreement from the left New Democratic Party (NDP, 25 seats) which was revoked in September 2024. This has opened a window for the Conservative Party (CP,119 seats) to push for early elections through a no-confidence vote, possibly with support from the separatist Bloc Quebecois (33 seats). However, this would require some support from NDP lawmakers who may prefer to let the government’s term run its course to claw back votes from the LP. The CP, led by Pierre Poilièvre, has succeeded in attributing the cost-of-living crisis to the LP’s green agenda, and is well positioned to regain power for the first time in a decade.

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 & Gas industry. There are also regular disagreements with the French-speaking province of Quebec.

Donald Trump’s election brings significant uncertainty to US-Canada relations. Given closer ideological alignment, we can expect less friction should the Conservatives regain power, but disagreements on trade should persist. Relations with China and India have soured significantly. There is an ongoing investigation into possible Chinese election interference and in mid-2024, Canada followed the US in imposing tariffs on EVs, steel and aluminum. Government allegations that India was behind the assassination of a Sikh leader in British Columbia, which India has denied, have dented the bilateral relationship and could jeopardise 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.

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.

Last updated:November 2024