The depreciated US.S dollar has eroded Canada’s previous cost advantage and has challenged the country to become competitive in other ways, according to report released today by KPMG.

KPMG’s 2008 Competitive Alternatives study compares business costs in 136 cities in 10 counties in North America, Europe, and Asia Pacific.

Canada and the United States now lead the G7 countries for affordable business costs, the report says, while Germany and Japan remain the most expensive countries in which to do business.

Mexico, new to the 2008 study to allow a comparison among the North American Free Trade partners, is the least expensive place to do business, with costs approximately 20.5% below the U.S. baseline,

The results were determined using recent exchange rates, with the Canadian dollar valued at US$1, up 17.4% from 2006. “With the Canadian dollar at par, Canada is challenged to maintain the competitive edge it once held,” says Mark MacDonald, global director, Competitive Alternatives, KPMG.

“Canada has to present a clear value proposition to businesses in other areas. One example of this is the federal government’s recent cuts to corporate income tax rates, which are among the lowest for a wide range of operations among countries surveyed.”

Among major Canadian cities, Montreal and Halifax have the greatest cost advantage relative to comparable U.S. cities. In the past two years, business costs have risen most rapidly in British Columbia and Alberta, reflecting the western economic boom of recent years. Previously, Vancouver and Toronto were ranked as the most costly cities in Canada. Vancouver still holds the number one spot, but now it is followed by Calgary and Chilliwack, B.C., then Toronto.

“What stands out in the 2008 survey is how strong Canada ranks globally in terms of the non-cost factors that were considered,” says Glenn Mair, MMK Consulting, one of the study authors in association with KPMG. “Canada consistently ranks well when we consider environmental regulation, education attainment, housing affordability, labour force, and energy availability — all of which are important business location considerations.”

The study measured 27 significant cost components that are most likely to vary by location, including labour, taxes, real estate, and utilities, as they are applied to 17 business operations, over a 10-year planning horizon.

The six-month research program covered 136 cities in Australia, Canada, France, Germany, Italy, Japan, Mexico, Netherlands, the United Kingdom, and the United States.

For the first time, the study includes all three NAFTA countries and all 50 US states, in addition to its traditional G7 coverage.