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.
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