Canadian Revenue Agency (CRA) national headquarters in Ottawa on June 28.Sean Kilpatrick/The Canadian Press
Jake Fuss and Grady Munro are fiscal policy analysts at the Fraser Institute.
Every year, the U.S.-based Tax Foundation releases its International Tax Competitiveness Index, which ranks countries based on their tax system’s competitiveness – its attractiveness (to individuals and businesses) relative to other economies, with more competitive tax systems generally imposing lower tax rates.
Last year, Canada’s overall tax system ranked 15th out of 38 countries – ahead of the United States (21st) but behind countries such as New Zealand (third), Australia (10th) and Sweden (13th).
However, according to this year’s index (to be released on Oct. 21), Canada fell two spots to 17th overall, while other countries including the United States (18th) improved their competitiveness.
The decline is even worse when looking specifically at business and personal income taxes. In 2023, Canada ranked 24th out of 38 in both categories, yet we’ve fallen to 26th for business taxes and 31st for personal income taxes in 2024.
Why has the country’s tax competitiveness waned?
According to the Tax Federation, mainly owing to two tax changes by the Trudeau government this year: the phasing out of provisions that allow businesses larger writeoffs on capital investments, and the planned increase in the capital-gains tax.
Firstly, when businesses invest in capital (such as machinery or equipment) they are able to deduct (or “write-off”) part of these costs from their taxes. Therefore, reducing the amount that can be written-off in each year, as the government did this year when it phased out provisions from 2018, increases the effective tax rate on capital investments.
Higher tax rates reduce the return on investment, which means this tax change will likely lower the amount of incoming investment into the Canadian economy. Exactly the opposite of what Canada needs.
Secondly, prior to the Trudeau government’s proposed change this year, half of a capital gain – that is, income derived from selling an asset – was taxable. But in its April budget, the government increased that “inclusion rate” to two-thirds in many scenarios, effective June 25, although Parliament has yet to pass the enabling legislation for the changes.
This will also deter investment because capital-gains taxes directly reduce the investor returns and therefore reduce the incentive to invest, which harms economic growth. In fact, economist Jack Mintz estimates the Trudeau government’s capital-gains-tax increase will permanently reduce employment in Canada by 414,000 and gross domestic product (GDP) by nearly $90-billion.
Indeed, tax competitiveness is an important driver of economic growth and the well-being of Canadians because it influences Canada’s ability to attract high-skilled workers (e.g. doctors, engineers, scientists), entrepreneurs, businesses and investment critical to strong economic growth and living standards.
In recent years, Canada’s economy has been neither strong nor productive − productivity (defined as economic output per hour worked) has fallen in eight of the past nine quarters and living standards (measured by GDP per person) are in a five-year decline. Simply put, at a time when Canada’s economy is already faltering, our decline in tax competitiveness will only make our economic problems worse.
Canada’s lack of tax competitiveness is contributing to the dismal state of the economy. Instead of fixing the problem, the Trudeau government has made things worse. To improve our competitiveness, policy makers in Ottawa and across the country should enact broad-based tax reform.