Taking into account tax variables such as personal taxes and property taxes, Canada’s ranking in corporate tax competitiveness has been slipping – it's ranked 24th out of 38 major industrial countries in 2023, according to the Tax Foundation, a U.S.-based research think tank.Sean Kilpatrick/The Canadian Press
Theo Argitis is managing director at Compass Rose Group and former Ottawa bureau chief for Bloomberg News.
Jack Mintz is the President’s Fellow of the School of Public Policy at the University of Calgary.
In recent years, Canada’s status as a competitive destination for business investment has been increasingly questioned. Business spending has stagnated, and capital flight has reached record levels, resulting in falling per capita incomes.
In this environment, the role of Canada’s corporate tax policies in potentially exacerbating the problem and stalling investment has never been more crucial.
Canada once had a sharply lower effective tax on investment compared to other Organisation for Economic Co-operation and Development (OECD) countries and – most importantly – the United States, which is the world’s largest economy and our biggest trading partner.
However, recent trends indicate our competitive edge has virtually disappeared. With the adoption of the Tax Cuts and Jobs Act in 2017 during Donald Trump’s presidency, the U.S. reduced its federal corporate income tax by 14 percentage points to 21 per cent from Jan. 1, 2018. Instead of a 13-point disadvantage compared to Canada, the U.S. average federal-state corporate tax rate of 25.7 per cent is now about a half percentage point below the average federal-provincial Canadian corporate tax rate.
While Canada still maintains an edge on one key measure of tax competitiveness – the marginal effective tax rate (METR) on capital – this advantage is also threatened.
The METR offers a more comprehensive view of the tax burden on new investment, factoring in not just statutory rates but also deductions, credits, and other taxes, such as sales tax and transfer taxes, that influence the real cost of capital investment. Some taxes are not included, such as municipal property and corporate capital gains taxes. While a commonly known metric, METR needs to be estimated with the use of economic modeling using a variety of assumptions and data measurements.
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According to research by Philip Bazel and Jack Mintz, Canada’s METR dropped from 20.7 per cent in 2016 to 15.6 per cent in 2020, largely due to temporary accelerated depreciation measures introduced in 2018. These measures allowed new purchases to be written off more quickly over five years, with phase-out already starting in 2024. This reduction made Canada’s METR more competitive, placing it well below the OECD weighted average of 23.4 per cent and the 25.3-per-cent average of the Group of Seven countries (the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom).
However, this competitive position is temporary. Once the accelerated depreciation measures phase out by 2028, Canada’s METR is projected to rise to 19.5 per cent. To be sure, the U.S. METR, which had been lower due to “bonus depreciation,” is also expected to increase unless Congress renews it as it has done in the past. Regardless, the anticipated rise underscores the transient nature of our current tax competitiveness.
Taking into account some other tax variables such as personal taxes and property taxes, Canada’s ranking in corporate tax competitiveness has been slipping – 24th of 38 major industrial countries in 2023, according to the Tax Foundation, a U.S.-based research think tank, while the U.S. ranks 22nd. A decade ago, Canada ranked 19th, compared to 33rd for the U.S.
Other recent tax measures adopted by the Canadian government are compounding these challenges. Higher capital gains taxes have raised concerns.
Even the carbon tax that is now $80 per tonne impacts competitiveness with higher energy prices. Although Canada also subsidizes clean-energy projects, the U.S. has eschewed carbon taxation in favour of its hefty subsidies.
New taxes on financial institutions, intended to increase revenue from highly profitable sectors, are likely putting pressure on the margins on loan volumes and raising borrowing costs, potentially stifling economic growth.
Similarly, the early adoption of the 15-per-cent global minimum tax (GMT), while aligning Canada with international tax reform efforts, threatens to erode our ability to offer competitive tax rates to our multinational corporations.
For Canadian multinationals, the aggressive implementation of the GMT in Canada means facing a higher tax burden than their international competitors, placing them at a distinct disadvantage that could potentially prompt some to relocate their headquarters to more favourable jurisdictions. Manulife, Canada’s largest insurance company, has already taken an $88-million charge for the first six months of this year and said it expects to see its effective tax rate increase by two to three percentage points as a result.
The implications of these developments are profound. Canada’s economic resilience and growth prospects hinge on our ability to attract and retain businesses that create jobs, foster innovation and contribute to our tax base.
To regain our competitive edge, Canada must prioritize tax policies that encourage investment.
Moreover, a broader fiscal policy that ensures sustainable government spending without imposing excessive tax burdens on businesses is essential. Maintaining Canada’s corporate tax competitiveness is not just about keeping up with the U.S. or other countries – it’s about ensuring that our economy remains vibrant, innovative and capable of providing opportunities for future generations.