Meaningful Tax Reform

Introduction

Canada is making a hard turn toward a growth agenda. New agencies for major projects, housing and defence procurement are up and running. Government spending is being tilted from consumption to investment. Regulatory streamlining and new approaches to public-private partnerships are under examination.

But one element is missing. A growth plan — especially one predicated on rebuilding confidence in Canada as an investment-friendly jurisdiction — requires reforms of the tax system as well. The federal government knows it. The provinces know it. The business community knows it.

The question is, can it truly be done? Or, more to the point, given today’s challenging economic and geopolitical environment, how can it best be done? An attitude has arisen in some quarters that meaningful tax reform is impossible — a mountain that simply can’t be scaled. This policy brief from the Future of Canada Centre challenges that proposition and sets out for policymakers some of the necessary conditions for success.

Canadian investment, productivity, and growth are falling behind. Over the past decade, inflation-adjusted Gross Domestic Product (GDP) — a measure of economic output that correlates with living standards — has essentially flattened on a per capita basis. 

Compared to our peers, we’re investing much less in the things that power long-term growth such as machinery and equipment and intellectual property. According to the OECD, business investment per worker in Canada declined by 15% between 2014 and 2023 alone, while it increased in the same period by 21% in the United States and 11% among all OECD countries.¹ In other words, Canadian firms invest a little more than half per employee of their U.S counterparts, and two-thirds the OECD average.²

Our workers are denied the best tools possible. It's no surprise then that Canada’s labour productivity growth has dropped further behind that of the United States,³ our biggest competitor for capital and talent.

After years of pro-investment policies, including tax changes under both the Biden and Trump administrations, the United States has become a magnet for the global capital that’s powering increases in productivity and living standards. The imposition of historically high tariffs is also giving many companies another reason to hold off on investing in Canada — or put their next investment dollar south of the border. While by no means the only factor, these kinds of decisions are sensitive to both the structure and level of taxation in different countries.

Yet curiously, while the new government’s first budget made modest investment-friendly changes to implement previously announced expensing measures, allowed immediate expensing for manufacturing and processing buildings, accelerated capital cost allowances for low carbon LNG facilities and improved the administration of the Scientific Research and Experimental Development tax incentive, it was silent on more meaningful tax reform key to its ‘Canada Strong’ agenda. 

The need for tax reform

Canadian business is concerned about the Federal government’s handling of taxation. A November 3-17, 2025 Deloitte survey of 382 public and private sector leaders found that only 14% rate the government’s handling of the tax burden on business positively while 61% rate it negatively. These views are notably more critical than their overall assessment of the government’s economic management, which 34% rate positively and 56% rate negatively.

Broad tax reform has been contemplated on numerous occasions by a wide range of professional, political, and civil society organizations. Most recently, the 2025 Liberal platform committed to launch an expert review of the corporate tax system focused on fairness, simplicity, and competitiveness; yet the government’s first budget did not advance that commitment. This marks a missed opportunity. Tinkering — e.g., implementing an accelerated write-off here or applying an administrative improvement there — is inadequate for the times. Rather, Canada needs a focused but broader reform process to deliver a more competitive tax system in support of the country’s ambitious agenda to expand trade networks, build national-interest projects, and strengthen defence spending. Canadians deserve a modern, efficient tax system fit for purpose.

Despite widespread pessimism, from the 1980s to the early 2000s Canada actually implemented significant tax reforms, including measures such as the introduction of the GST under Brian Mulroney, as well as the creation of the national child benefit and cuts to marginal personal and corporate tax rates under Jean Chretien and Paul Martin and continued under Stephen Harper. Bottom line: tax reform is difficult yet possible.

The existing design of our federal tax system leans heavily on revenue sources that discourage work, savings, and investment. Large numbers of credits and exemptions steer capital away from its most productive uses in search of preferential tax treatment. As of 2025, Canada had nearly 300 tax expenditures — among them the preferential tax rate for small business, the Film or Video Production Services Tax Credit, the Foreign Convention and Tour Incentive Program, and dozens of investment tax credits.⁴ Administrative complexity compounds the problem by diverting investor and businesses resources that should be focused on growth towards compliance. And while tax rates are only one factor, Canada’s top combined marginal income tax rates are among the highest across the OECD, marking a significant entry in the negative column when investors or highly skilled individuals are calculating where to set up shop. Canada’s tax policy is clearly misaligned with the stated priorities of the day, particularly the increasingly competitive pursuit of investment and talent. 

Taxes are obviously essential for funding government programs and priorities and influencing economic decision-making. Yet, as former Federal Reserve Chair Alan Greenspan once asserted, “whatever you tax you will get less of.”⁵ Every tax affects the choices people and corporations make. If the objective is to promote productivity, growth and investment, governments should seek to raise tax revenue in the manner that least interferes with these outcomes. Moreover, raising revenues from certain taxes is more efficient and less distortive than others. The estimated cost to the economy of raising one additional dollar of federal personal income taxes is $2.86 compared with $2.02 for corporate income taxes.⁶ Consumption taxes — like the Goods and Services Tax (GST) — are much more efficient than income taxes.⁷

This is partly where the problem lies. Canada relies heavily on taxing work, savings, and investment — the things we need more of — rather than more efficient sources of tax revenue. In 2024 alone, income taxes accounted for 67% of federal revenues, while only 10% came from the GST.⁸ This tax mix leaves Canada misaligned with its peers. For example, across all levels of government, personal income and consumption taxes account for 37% and 22% of total tax revenues respectively whereas the OECD averages are flipped at 24% and 32%.⁹ One exception in terms of tax mix is the United States, with personal income taxes accounting for 45% and consumption taxes for 16%, albeit at lower marginal rates and overall tax burdens.^{10, 11}

During a cost-of-living crisis, shifting the policy toward taxing consumption may seem out of touch. But let’s remember Greenspan’s adage. The Canadian system encourages consumption but discourages work, risk-taking, and investment. If government contemplated a shift towards taxing consumption, those who can least afford to pay more could be protected, as for example with the GST rebate. The point is that understanding the impact of our tax mix and optimizing for today’s circumstances are sensible and necessary goals. And, under the right plan and approach, doable.

A further challenge for Canada to address is that among our myriad tax expenditures, we don’t have a strong understanding of what’s working well and what isn’t. As early as 2015, the Auditor General of Canada found that Finance Canada “fell short on managing tax expenditures because these expenditures were not systematically evaluated and the information reported did not adequately support parliamentary oversight.”¹² Poorly planned tax policies can divert capital from productive investments into tax-advantaged sectors. Gathering the facts would be assignment #1 for any serious reform process. 

In some instances, we know what’s not working and are reluctant to address it. For example, the federal government’s stated objective for the small business tax rate is to help smaller firms invest and expand (e.g., by investing in the business and creating new jobs). However, research shows that the small business deduction actually imposes a cost on the economy.¹³ On average, Canadian small businesses are older than their American counterparts.¹⁴ Moreover, having two corporate tax rates necessitates two distinct dividend regimes, which leads to an increasingly complex set of rules to prevent abuse and enhance compliance. More pages get added to the tax code.

Tax experts have recommended everything from eliminating the small business tax rate or focusing it on younger firms to increasing the threshold for what qualifies as small business income or merely closing the gap by lowering the general corporate tax rate.¹⁵

The complexity of which we spoke earlier poses another significant challenge. The Income Tax Act has grown from 6 pages in 1917¹⁶ to 424 pages¹⁷ in 1970 to nearly 3,700 pages today¹⁸, complemented by over a thousand regulations¹⁹ Canada’s tax system funnels too many people from productive uses of their time into figuring out how to pay or even how to avoid paying. According to the Fraser Institute, Canadians spend $4.2 billion annually on personal tax compliance costs.²⁰

Uncertainty can also discourage investment, such as when changes to the capital gains inclusion rate are announced and then reversed, or when the regulations governing passive investments in private corporations are changed multiple times in relatively short order. Frequent policy shifts undermine the predictability that investors rely on and erodes confidence in Canada’s tax system. These shifts make it difficult to model what the return will be on a given investment. A review that addresses these issues comprehensively and puts them to bed for a significant period of time would be preferable to constant recalibration. 

Any tax review will have to delve into the sensitive matter of tax rates. Personal income tax rates are notably higher in Canada than in the United States. For example, Canada’s highest marginal federal personal income tax bracket kicks in at CAD$253,414.²¹ In Alberta, Canada’s lowest taxing province, individual income at that level faces a combined marginal federal and provincial rate of 47%.²² By contrast, in the United States’ highest tax jurisdiction, California, an individual earning at that income level (approximately USD$180,000²³) pays a much lower combined marginal federal and state tax rate of 33.3%.²⁴ Numerous other U.S. states have much lower state income taxes, or none at all as in Texas and Florida, where someone earning USD$180,000 pays only the federal rate of 24% on income at that level.²⁵ Altogether, Canada has the 5th highest marginal tax rate among 38 OECD countries²⁶ — an important factor in an era in which all countries, Canada included, are competing for the top talent that will drive growth and innovation.

To be clear, the outcome of any review doesn’t necessarily have to be lower tax rates. The federal government asserts, for example, that on the corporate tax side our marginal effective tax rate — understood as the total tax burden on new investments after deductions — is the most attractive in the G7, meaning “businesses can invest and grow more easily and Canada will remain an attractive destination for investment.”²⁷ Nevertheless, investment is lagging and there’s little evidence that ‘effective’ rates carry significant weight in business decision-making. Nominal advantages are no substitute for a well-understood, competitive tax system that genuinely supports growth.

Charting a new path

Retooling the tax system to support Canadian priorities on investment, talent and competitiveness — including Canada’s international tax competitiveness recognizing on-going developments in the new global minimum tax system — must be treated as an essential component of Canadian economic strategy. Without a growth-oriented tax framework, other efforts to invigorate our national position — from trade diversification to regulatory reform — will be diluted.  To compete for workers, dollars, and ideas, we need supportive tax policies that  make an unambiguous declaration to investors that Canada truly is open for business. 

Ireland provides a successful example. In 1997, its corporate income tax rate was 36%. By 2003, it had been brought down to 12.5%.²⁸ The Irish government simplified its tax code, capped the country’s top income tax rate at 40%, introduced a “patent box” to incentivize domestic innovation, initiated reforms to attract foreign investment, and invested in education to build a skilled workforce.²⁹ These efforts transformed Ireland into a high-productivity, investment-driven economy. Its citizens have gone from a below-average European standard of living to one 8% above that of the United Kingdom, and on par with Germany.³⁰

Estonia is another case in point. Since the 1990s, its economy has improved dramatically. This growth is due in part to its “distributed profits” model of corporate taxation, where taxes are only levied if profits are distributed to shareholders, and a simplified tax structure.³¹ In order to compete for talent with more deep-pocketed nations, Denmark offers a heavily discounted marginal tax rate “for highly qualified professionals from abroad,” such as researchers and executives. Under this expat taxation scheme, qualifying employees are effectively taxed at 32.84% for up to seven years versus the normal marginal rate of about 55%.³² These may not be the right solutions for Canada. The point is they flow from considered reforms that aligned the tax system and strategic priorities of the country in question. 

The question for Canada as it tilts towards a growth agenda is what set of tax reforms will best align with our strategic priorities?

As we’ve suggested above, this includes consideration of the tax mix, whether personal or corporate income, consumption, or other revenue sources. As well, there are the matters of Canada’s optimal tax levels, simplification of the tax system and its administration, and the efficiency and effectiveness of the myriad tax credits and other incentives. At the same time, there are a number of specific changes being promoted to encourage investment to consider, such as proposals to modify the  existing investment tax incentive for critical mineral developments to extend to brownfield sites, the extension of flow-through shares common in the resource sector to technology companies, or a proposal to combine the Lifetime Capital Gains Exemption with the previously proposed Canadian Entrepreneurs Incentive into a single capital gains incentive to support investment and new business formation.

The point isn’t to prefigure any outcome of a tax reform process, but rather to emphasize the need for a structured process to evaluate options and trade-offs in helping to realize pressing policy objectives. Identifying signature policies, as the Irish, Estonians and Danes have done for their particular circumstances may capture the attention of investors who may have lost enthusiasm for Canada.

Given the urgency of the moment facing  our country, the goal should be the speedy launch of an expert tax reform panel, as put forward in the Liberal platform, with a mandate to design solutions that can begin to be implemented by government within a 12 to 18 month window. This would offer enough time for meaningful input while allowing tax policy to catch up with other elements of Canada’s emerging growth agenda. Competitiveness, particularly getting investment dollars flowing, is the widely acknowledged imperative right now. Unlike the review foreseen in the Liberal platform, given that the major elements of the tax system interact in complex ways, the panel’s mandate should not be restricted to the corporate taxation alone.

Conclusion 

One thing is clear. The longer we delay meaningful tax reform, the higher the costs will be. A more sluggish economy will lead to weaker revenues. As growth falters, the federal government will have to borrow more, raise taxes, or cut essential services and investment while it tries to meet its ambitious defence and infrastructure-related ambitions. The burden would shift to future generations, which will inherit more debt and less opportunity. 

The international context magnifies these risks. Global capital is mobile. Competition for it has intensified. Jurisdictions that modernize their tax systems are setting new benchmarks for efficiency and investment attraction. If Canada fails to adapt, our standard of living will fall relative to others and we will be left less able to finance national priorities and less resilient to global shocks. Without decisive action, Canada will keep losing ground and climbing back will become harder. 

Following through on the commitment to conduct a review of Canada’s tax system is part and parcel of any competitiveness strategy. Piecemeal policies won’t do the trick. The ability to attract investment and boost growth and living standards depends on a coherent, multi-layered reform. We can no longer afford to treat tax reform as an afterthought; it is integral to any national retooling of the economy. In today’s circumstances, the cost of inaction amounts to far more than just a missed opportunity.