High personal income taxes drag down Canada’s tax competitiveness, new study finds

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The U.S., Canada’s predominant trading partner and competitor, ranked 17th in the competitiveness rankings, two spots behind Canada. The U.S. placed eighth overall in corporate competitiveness, and 17th overall on personal taxes: 20th on taxation of wages and 26th on taxes of capital gains and dividends.

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The U.S. score was hampered by a very poor rating (37th) on cross-border tax rules, far behind Canada’s 28th place and ahead of only one country.

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The Canadian Taxpayers Federation said the new report should be a “wake-up call” for Ottawa to cut both income and business taxes, made even more important by the trade war with the U.S.

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“Canadian workers and businesses are fighting to survive tariffs and our governments are making it harder by imposing less competitive business and income taxes than the Americans,” said Franco Terrazzano, the federation’s federal director, in a release.

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But Canadian business leaders, according to a KPMG survey released late last week, believe that the Carney government is getting the message, with 71 per cent of respondents saying they’re confident the upcoming budget will help Canadian business

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The survey also found that they would like the budget to rank the Canada-U.S. trade conflict (62 per cent) as the most pressing issue, following by attracting foreign investment (44 per cent), accelerating major projects (34 per cent), cost pressures on both businesses and households (34 per cent) and taxes / red tape (26 per cent).

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John Fragos, a spokesperson for Finance Minister François-Philippe Champagne, said the government is trying to “derisk” Canada’s tax regime to increase investment and make the G7’s most competitive economy. Recent policies, such as the mega-deduction to make investment more attractive, are important steps towards that goal, Fragos said.

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The keys to an effective corporate tax system, The Tax Foundation’s report says, are neutrality and competitiveness.

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As tax regimes become more complicated, as most have over time, they become less neutral in that they encourage biases towards, for example, labour over capital investment. And if a country’s corporate taxes are too high, it will drive investment elsewhere, reducing economic growth.

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Estonia earned the top spot in the OECD for its tax code for the 13th year in a row. It has a 22 percent tax rate on corporate income that is only applied to distributed profits and a flat 22 percent tax on individual income that does not apply to dividends. Estonia is followed at the top of the rankings by Latvia and New Zealand in the rankings.

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France came dead last in the rankings, trailing only Colombia and Italy.

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The Tax Foundation’s study compares national tax regimes, not those at the provincial or state levels.

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National Post

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