Canada’s high capital gains rates, corporate and digital service taxes could be driving investment away, according to an international report that ranks tax competitiveness among developed nations.
According to the International Tax Foundations’ 2024 International Tax Competitiveness Index, Canada’s tax competitiveness fell two ranks down to 17th out of 38 other Organization for Economic Co-operation and Development countries.
The study examined changes in each country’s tax systems and graded each based on its competitiveness and neutrality.
“A competitive tax code is one that keeps marginal tax rates low,” the report said. “If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can impede domestic investment and lead to tax avoidance.”
The report defines a neutral tax system as one that raises revenue but minimizes economic distortions in the market.
“This means that it doesn’t favour consumption over saving, as happens with investment taxes and wealth taxes,” the report said. “It also means few or no targeted tax breaks for specific activities carried out by businesses or individuals.”
When a tax system influences investors and businesses to make decisions they otherwise wouldn’t make without those taxes, it causes economic distortions.
A nation with low tax rates and minimal economic distortions will rank higher in the international tax competitiveness index.
Canada ranked 31 out of 38 OECD countries for individual taxes, 26 for corporate taxes, and 25 for property taxes.
However, the United States, Canada’s biggest trading partner, ranked 18th in the OECD for tax competitiveness, one rank below Canada, though the US improved by five ranks compared with its performance last year.
As noted in the report, Canada’s consumption taxes were low, ranking it eighth among OECD countries. It does not levy wealth, estate, or inheritance taxes and has “some of the best capital cost recovery provisions for machinery and industrial buildings in the OECD.”
However, Canada’s ranking suffered because of the Trudeau government’s capital gains regime, which was “well above the respective OECD averages.”
According to the report, Canada taxes capital gains at a rate of 35.7% and dividends at 39.3%, while the average in the OECD is 19.7% and 24%, respectively.
Canada’s corporate tax rate is also above the OECD average, at 26.2%, while the rate of the countries it competes against is 23.9%.
The group also listed Canada’s digital services tax as a weakness in the Canadian tax system, contributing to its worsening tax competitiveness ranking.
“Lower tax rates are better at growing the economy and attracting business and investment,” Franco Terrazzano, the federal director of the Canadian Taxpayers Federation, told True North in an interview. “The less complex a tax system, the less economic distortions it creates, the better.”
The CTF calls on Canadian politicians to “prioritize tax relief” in response to the Tax Foundation’s report and Canada’s worsening competitiveness due to its tax system.
“Canadians know that our economy is not firing on all cylinders, and that’s because politicians are taking too much money from families and businesses,” Terrazzano said. ”If politicians want to grow the economy, they should cut taxes to let families and businesses keep more money. We’ve seen out-of-control spending, higher taxes and corporate welfare from the Trudeau Government, but that’s the wrong way to grow the economy. “
He said a poor tax system with high tax rates will continue to drive away businesses and investments from an economy, which, in Canada’s case, will result in fewer jobs for Canadians.
“We need politicians to encourage success in Canada, but what Trudeau is doing with his capital gains tax hike is punishing doctors, entrepreneurs, and Canadians who are saving for their retirement,” he said. “This report should be a five-alarm siren to stop hiking taxes.”
Canada’s Department of Finance did not respond to True North’s requests to comment before the deadline provided.
