Canada must regain its competitiveness 

We need tax reforms and other initiatives that will help spur entrepreneurial spirit and encourage investment

Ian MadsenCanada is gradually losing its competitiveness – but it can be regained.

According to the International Institute for Management Development (IMD), a graduate business school and research centre, we’re down three spots from 2018 to 13th.

Canada is now ranked below the United States and Switzerland, as well as other energy-dominated nations such as Norway, the United Arab Emirates and Qatar. Consequently, its attractiveness as a place to live, work, invest, start or operate a business, or retire in, has dropped.

Abundant natural resources, relatively safe streets, good public schools, strong rule of law, relatively easy immigration rules, efficient financial markets and a well-educated workforce are no longer sufficient. All but the first are essential in any modern, dynamic, robustly growing economy, which Canada currently lacks.

Canada’s gross domestic product growth rate is about two per cent, barely above the population growth rate of roughly one per cent. Fostering investment is crucial to raising productivity, and thus growth and living standards.

The ranking and reputation of Canada’s ease of doing business is falling. In a World Bank annual survey, Canada ranked 22nd, below some nations that were previously not in its league, such as North Macedonia and Malaysia, and well below other advanced nations.

While the World Bank doesn’t examine the tax burden on individuals or companies directly, it does look at ease of paying taxes, including complexity.

The World Bank cites studies showing that a 10 per cent reduction in tax complexity is equivalent to a one per cent reduction in the tax rate. Tax burdens are not directly examined by the bank, but complexity makes it difficult and more expensive for small businesses to file taxes.

One relatively easy way to reduce tax complexity is to make the calculation of corporate income tax congruent with International Financial Reporting Standards. This isn’t difficult, although it may require adjustment of rates to bring in the same amount of money for the federal government and the provinces.

It would also make it more difficult for politicians to make the tax code a Christmas tree, festooned with shiny baubles of exclusions, deductions, credits and preferences that seek to direct business investment and behaviour towards political ends.

In the United States, our biggest trading partner and closest competitor, most of these were done away with in the great tax reform package in 2018. It brought about a surge in capital investment (only later counteracted by harsh trade action that harmed business confidence).

In that nation, rates were also reduced, to 21 per cent, which superficially appears worse than the Canada’s 15 per cent. But the U.S. rate is effectively on free cash flow, not income, making the overall burden lower and also making it more attractive to spend on machinery, equipment, instruments and structures. And provincial rates add 11 to 13 per cent to the Canadian total, while many American states have little or no state income tax.

Canada also lacks critical mass in certain key sectors: semiconductors and computer hardware; biotechnology, pharmaceuticals and medical devices and instruments; defence electronics and aerospace; information technology and venture capital.

Canada has to try harder to attract and retain businesses, and the quality, well-paying jobs those businesses generate. Trying harder includes making corporate income taxes simpler and lower. The former can be done intelligently and carefully, and the latter can be done gradually, as Quebec is doing.

Taxation on individuals is also politically contentious. If this nation wanted to make a bold effort to provide incentives to entrepreneurial spirit, it would make the tax rate on incomes over $5 million or $10 million a year lower than those in the next lowest bracket – to give high earners something to strive for.

It would also attract investors from around the world to revitalize the economy. It would also accelerate the incipient, if sluggish, trend to diversify into the industries of tomorrow.

Canada doesn’t exist in a vacuum. It’s competing for the best talent and the hungriest capital from around the world. It doesn’t have Silicon Valley, a biotech eco-system or a vibrant defence sector, and no gimmicks and giveaways by the federal government or the provinces will really change that.

However, some smart reforms to taxes, and a change in attitude and approach, can garner more interest and investment.

Canada can become a strong player in world competitiveness, if the government can form a pro-growth, pro-business plan. Only a little imagination and courage is needed.

Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.

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