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Traffic backs up on the Canadian side of the Ambassador Bridge between Windsor, Ont., and Detroit.Jason Kryk

Canadians are spending far more on goods in the U.S. than federal data suggest, raising the stakes for domestic retailers trying to find ways to draw customers back into their stores.

As much as 8 to 10 per cent of consumer spending on a raft of products is flowing to retailers outside the border, according to estimates in a report being released today by BMO Nesbitt Burns. That compares to Statistics Canada data that say 4 per cent of retail spending is shifting outside the country.

What is more, the situation for domestic retailers is bound to get worse in the coming months: Cross border-shopping could hit a two-decade high as early as the summer, fuelled by a still-high Canadian dollar and new duty-free rules that raise the limits on what people can bring back home, BMO warns.

"The steady drain of Canadian shoppers heading south is weighing on retail sales in this country," Douglas Porter, deputy chief economist at BMO, said in his study, titled "Cross-border shopping: here comes the flood."

For retailers already facing an rocky economy and sluggish sales growth, the news is disconcerting. Merchants are struggling to make gains even as a growing array of savvy foreign rivals expand into Canada. By next year, Target Corp, a U.S. department store known for its cheap-chic merchandise, will arrive in the country after acquiring most Zellers stores, raising the ante for all players.

New provisions in the federal budget, which go into effect June 1, will quadruple the limit on how much shoppers can buy on a one-day U.S. trip without having to pay duties or taxes. It will go from $50 to $200.

"This is bad news for retailers," said David Wilkes, senior vice-president of the Retail Council of Canada.

"Doug's comment about 'here comes the flood' – that's exactly what we've been experiencing," Mr. Wilkes said.

But the retailers themselves are partly to blame: The BMO study took a basket of goods and found that prices are on average 14 per cent higher here than in the United States. Running shoes are 37 per cent more expensive; Nike and iPod sensors are 31 per cent higher; and a Pottery Barn children's backpack is 26 per cent more expensive.

The price gap has now dropped from the 20 per cent price differential that BMO found last year, partly because of a slightly softer Canadian dollar and Canadian core inflation in the past year. As well, the enormous price spread on one specific item – gas barbeques – all but vanished this year as prices dropped in Canada.

Mr. Wilkes said retailers are scrambling to lower their prices and differentiate their offerings from those across the border. But, he added, "at some point the differences in cost structure have to be reflected in the prices on the shelf."

Retailers have complained that suppliers are key culprits in higher prices, charging Canadian merchants more than their U.S. counterparts for everything from identical widescreen TVs, bottles of hair conditioner and even painkillers. Last month, the retail council told a Senate committee studying price disparities that because Canada's population is so small in comparison, large multinational vendors can enforce a special Canadian price for brand name products that can be 10 to 50 per cent higher than in the United States.

The council also blames price disparities on higher tariffs for imported goods and controlled prices of such items as eggs, chicken and dairy products. It has urged Finance Minister Jim Flaherty, who asked the Senate committee to look into the pricing disparities, to make changes. He is now awaiting the committee's report.

Still, retailers have to take some responsibility for their situation because they fail to set themselves apart enough from their U.S. counterparts, said Jack Steckel, who sits on the board of directors of the Pro Hockey Life chain and helped found the Golf Town retailer.

"A lot of the problem is due to people buying online, with the parity on the dollar, and selection available online – it's huge," Mr. Steckel said. "It has a tremendous impact."

Some retailers, such as the fashion chain Aritzia, combat cross-border shopping by stocking mostly their own lines in Canada, ensuring their customers can't make direct price comparisons. Aritzia, with 40 stores in Canada, also has opened 11 outlets in the United States.

Still, Brian Hill, chief executive officer, said some producers of high-end jeans charge him 10 to 30 per cent more than his U.S. counterparts by forcing him to go through a distributor here rather than purchasing products directly from a U.S. manufacturer. The process also adds a month or two to the time it takes to ship goods to his stores in Canada. "It makes no sense."

The Bank of Canada has estimated that cross-border shopping accounts for less than 2 per cent of consumer spending, and thus isn't a big macroeconomic issue.

But Mr. Porter said that if people truthfully declared all the goods they bought among products that can be "moved across borders" – excluding spending on utilities, child care and other services – cross-border shopping accounts for up to 10 per cent of spending.

"If correct, that represents a real drain on domestic retail sales, employment and government revenues; a drain that looks to deepen," he said.

The findings suggest governments are missing out on what could be billions of dollars in additional retail taxes.