Canada must improve tax competitiveness during COVID recovery
As Canadians turn their focus towards economic recovery, it’s important for policymakers to fix problems that existed before the pandemic. For starters, the Trudeau government must address the country’s diminished tax competitiveness, which affects our ability to attract and retain entrepreneurs, investors, businessowners and professionals.
Both the federal and provincial governments have increased certain personal income tax rates over the last decade. In 2015, the Trudeau government raised the marginal income tax rate (again, on entrepreneurs, professionals and businessowners) from 29 per cent to 33 per cent. And since 2010, seven out of 10 provincial governments also increased their tax rates on the same group.
Specifically, Alberta increased its top combined (federal/provincial) personal income tax rate the most (9.0 percentage points), followed by New Brunswick (7.3 percentage points) and Ontario (7.1 percentage points). Out of 61 jurisdictions in Canada and the United States (including Washington, D.C.), the 10 Canadian province are among the top 12 least competitive tax jurisdictions for the top personal income tax rate (combined federal and provincial/state). Put differently, 49 U.S. jurisdictions now have a lower top personal income tax rate than every Canadian province.
Moreover, Canada’s top personal income taxes are now among the highest among advanced economies. In 2017, Canada had the seventh-highest top combined tax rate among 34 OECD countries. As a result, Canada is at a disadvantage in attracting people who drive innovation, investment and job creation—all things the Canadian economy needs more of during the recovery.
While not the sole factor, after-tax income is a critical consideration for people such as top scientists, engineers and other high-skilled professionals to consider when deciding where to work. High tax rates, which reduce the expected financial rewards from successful professional activities, will discourage talented individuals from moving to Canada or remaining here.
Canada’s relatively high tax rate on capital gains is another area of concern. Capital gains taxes are applied when individuals or businesses sell assets for more than the original purchase price. Canada's capital gains taxes are higher than many of its OECD peers, and many countries including Switzerland, New Zealand and Hong Kong have no capital gains taxes at all. Higher capital gains taxes discourage entrepreneurship, investment and savings in Canada.
Indeed, Canada’s ranking in the 2021 International Tax Competitiveness Index has declined and we now rank 20th among 37 advanced countries. Not surprisingly, the report notes that Canada has above average taxes on capital gains and high personal income taxes relative to other advanced economies. In contrast, countries such as New Zealand, Australia and Switzerland all have more competitive tax systems due to their relatively low taxes on individual income, capital gains and businesses.
If Canada is serious about becoming a top destination for entrepreneurs, investors and high-skilled workers, policymakers must establish an environment that provides strong economic incentives. Improving tax competitiveness can help Canada encourage entrepreneurship, investment and job creation, and help our chances for a strong sustained recovery.