This is the first in a series of articles in our special report on taxation in Canada.
Every year, the Washington, D.C.-based Center for Global Tax Policy releases an International Tax Competitiveness Index, ranking 38 developed countries according to an overall score that combines corporate, individual, consumption and property taxes, along with cross-border tax rules. Released last October, the 2024 edition ranks Canada 17th—down two pegs from 2023.
What does it mean to Canada’s economy to be firmly ensconced in the middle of the pack? It all depends on who is shouldering the tax burden and whether it’s onerous enough to convince businesses, investors and high-net-worth individuals to allocate their investment dollars elsewhere. But it is a question that Canadian policymakers may come under increasing pressure to address, given the emphasis on Canada’s competitiveness and self-generated economic growth in the wake of U.S. President Donald Trump’s attempts to radically realign global trade.
Capital is fluid. We’re in a global competition to attract investment.
Franco Terrazzano
Family offices are obviously concerned about the effect of taxes on their enterprises. According to the North America Family Office Report 2024 by Campden Wealth and RBC, 38 per cent of family offices identified tax regulation and compliance issues as their top strategic concern. In Canadian Family Offices’ survey of multi-family offices last year, two-thirds of respondents ranked Canada’s tax rates among their Top 3 concerns.
Canada’s poor showing on the International Tax Competitiveness Index becomes more troubling when you drill down to two factors that are likely to most directly affect the likelihood of investing here, says Franco Terrazzano, federal director of the Canadian Taxpayers Federation.
“We’re ranked 31st on income tax competitiveness and 26th on business tax competitiveness,” he says. “That’s brutal. Canada’s taxes are so high that they’re discouraging entrepreneurialism, business growth and business success. All of those problems are amplified by the current tariff situation.”
Terrazzano estimates that, on average, Canadians spend about 43 per cent of their income on taxes of all kinds, from the municipal level on up. A progressive tax system will generally make taxes even more costly for high-income earners, depending on the deductions and incentives available to them.
“However, capital is fluid,” he says. “We’re in a global competition to attract investment. For businesses, entrepreneurs, and higher-income individuals, Canada’s uncompetitive tax system is one of the factors in whether they believe they’re being treated fairly and whether they invest in Canada or not.”
Terrazzano also sees an appetite among some members of the political class to seek short-term public support for “make the rich pay” policies that will only continue to erode Canada’s competitiveness.
Among OECD countries, we’ve gotten markedly worse in terms of our competitiveness on personal income taxes, and I think that’s a growing problem for Canada.
Jake Fuss
While demands for higher taxes on high-income earners might look like a winning political issue in principle, that support appears to dwindle when actual tax rates become part of the discussion. A 2023 Fraser Institute poll conducted by Leger Marketing asked Canadians to define appropriate tax rates on personal income. While 70 per cent of respondents said that some Canadians don’t pay their fair share of taxes, more than three-quarters (78 per cent) believed the combined federal/provincial tax rate should not exceed 50 per cent.
“We already have eight provinces in Canada that have combined top tax rates above 50 per cent,” says Jake Fuss, director, fiscal studies, with the Fraser Institute. “That would actually be incongruous with what many Canadians think.”
The Fraser Institute’s report—Canada’s Rising Personal Tax Rates and Falling Tax Competitiveness 2024, co-authored by Fuss—sees Canada struggling to remain competitive in income taxes, arguing that federal and provincial increases to Canada’s marginal income tax rates from 2009 to 2023 have placed the country at a competitive disadvantage.
“We found that at different income levels of $50,000, $75,000, $150,000 and $300,000, Canada’s marginal tax rates were generally higher than every U.S. state,” Fuss says. “Among OECD countries, we’ve gotten markedly worse in terms of our competitiveness on personal income taxes, and I think that’s a growing problem for Canada.”
Fuss says that wealthy Canadians are already paying their fair share of taxes. As of 2023, the top 20 per cent of income-earning families pay nearly two-thirds (61.9 per cent) of the country’s personal income taxes and more than half (53.1 per cent) of total taxes.
Proponents of higher taxes for wealthy families argue, however, that wealth inequality in Canada is so substantial that tax increases represent the best policy option to maintain social cohesion, top up ailing social services and renew failing infrastructure.
There’s certainly room to raise additional revenue at the federal level.
Alex Hemingway
Alex Hemingway, senior economist and public finance policy analyst with the BC Society for Policy Solutions, a progressive public policy research institute, notes that Parliamentary Budget Office wealth distribution models estimate that the richest one per cent of Canadians controls nearly a quarter of Canada’s wealth (24.3 per cent), amounting to $3.5 trillion. He looks to federal government spending as a percentage of GDP as a better guideline to maximizing tax revenue. That topped out at 24.44 per cent in 1992, but stood at 21.23 per cent in 2023. Top income tax rates are currently off their historical peaks as well.
“There’s certainly room to raise additional revenue at the federal level in Canada, and there’s a strong case to be made that we’re not at the revenue-maximizing top rate,” he says. “I think we should ask ourselves whether we’re faring well as a result of those few decades of reduced public investment in terms of the state of our physical and social infrastructure, and ask whether it might be wise to sustain and increase those investments.”
Hemingway advocates for an annual tax that would apply a rate of one per cent on net wealth above $10 million, two per cent above $50 million and three per cent above $100 million. He estimates that these taxes would affect only the top one-half of one per cent of wealthy Canadians—approximately 87,000 families.
“It could generate very substantial revenue, upwards of $32 billion in its first year,” he says. “At these rates, it would slow the rate of growth of these large fortunes, but it wouldn’t actually erode them, so we should see continuing increases in revenue. We tried to model this in a relatively conservative way, accounting for behavioural response like avoidance and evasion, using the best available estimates in the literature.”
He also points to studies that indicate that increasing the capital gains inclusion rate to 80 per cent would affect only the top 10 per cent of income earners and raise an additional $20 billion. A competitive economy, he argues, would use this revenue to improve the health and well-being of Canadians across the income spectrum, build better business infrastructure and inspire higher incomes for consumers.
Advocates for higher taxes, including Hemingway, characterize the lower-tax regime of the early 2000s as a time when the federal government under-invested in the country.
For Michael Zagari, investment advisor and associate portfolio manager at Wellington-Altus, that same period represents a rare moment where Canada could hold its head up high as a tax-competitive, business-friendly jurisdiction.
It’s fair to say that Canada is trending toward a higher-tax country, particularly for certain groups like high-income earners, investors and businesses.
Michael Zagari
“At that time, the federal government reduced corporate tax rates from 28 to 21 per cent,” he says. “Our effective tax rate on new business investment became the lowest in the G7—certainly a point of pride. I believe that reputation attracted investment and talent.”
But Zagari says that both his firm’s clients and industry peers see Canada’s competitiveness eroding. They point to rising taxes, regulatory complexity and a perception that Ottawa is less focused on growing the economy than it is on redistributing existing wealth.
“It’s fair to say that Canada is trending toward a higher-tax country, particularly for certain groups like high-income earners, investors and businesses,” he says. “My clients have been noticing this for years. Many are frustrated, especially business owners and investors who feel targeted by policies like the discussion around the capital gains inclusion rate—they see it as a symptom of a broader appetite for higher taxes on wealth. They’re asking tough questions about whether Canada is still a competitive place to grow wealth or run a business.”
Even the new Alternative Minimum Tax (AMT), which will affect a small percentage of high-income earners, is seen as more symbolic than a game-changer.
“The real concern is what it signals: essentially a willingness to tweak the system incrementally to squeeze more from the top end,” Zagari says.
Uncertainty around [taxes] is creating a catalyst for Canadians who have created businesses or have significant savings to look at residency options outside of Canada.
Arthur Salzer
Concerns about both the AMT and the Trudeau government’s capital gains inclusion proposal are echoed by clients of Arthur Salzer, chief executive officer and chief investment officer of Northland Wealth Management—even following the announcement that the increase to the inclusion rate for capital gains has been put on ice.
“Uncertainty around this issue is creating a catalyst for Canadians who have created businesses or have significant savings to look at residency options outside of Canada,” he says. “We’ve seen families, Canadian entrepreneurs and professionals begin to seriously consider the benefits of these actions.”
He points to the list of U.S. states that have no income tax at all, added to the availability of substantial federal tax write-offs, such as mortgage interest deductibility.
Zagari agrees that many businesses and high-net-worth individuals—those most capable of shifting their capital—will leave for greener pastures if they perceive that the tax system is taking advantage of them.
“Canada’s future on taxation is at a crossroads,” he says. “The ‘tax the rich’ narrative has momentum, driven by inequality concerns and a younger electorate that feels squeezed, but it’s not a done deal. If we keep losing investment and high earners, common sense might trump ideology, pushing us toward a more competitive, lower-tax stance.”
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