The Case for Tax Reform-Driven Growth in Canada

Canada stands at a pivotal juncture in its economic evolution. Over the past decade, the country has witnessed a troubling divergence from its global peers, marked by declining business investment per worker, stagnant productivity growth, and a tax system increasingly at odds with modern economic realities. The urgency for reform is no longer a theoretical debate but a practical imperative, as evidenced by the stark data: between 2014 and 2023, Canada's business investment per worker fell by 15%, while the United States and OECD countries saw gains of 21% and 11%, respectively. This gap has eroded Canada's competitive edge, necessitating a strategic reimagining of its tax framework to catalyze long-term investment and resilience.

The Structural Challenges of Canada's Tax System

Canada's current tax system is characterized by an overreliance on income-based taxation, which now accounts for 67% of federal revenues, compared to just 10% from consumption taxes like the Goods and Services Tax (GST). This imbalance disincentivizes work, savings, and investment, as income taxes impose higher economic costs than consumption taxes, which are generally less distortionary. The Organisation for Economic Co-operation and Development (OECD) highlights that its members derive 32% of revenues from consumption taxes, a model Canada has yet to adopt meaningfully.

Compounding this issue is the complexity of Canada's tax code. A 2025 report by CPA Ontario reveals that 88% of its members view reforming personal and corporate income taxes as essential, while 84% describe the system as overly complex. This complexity not only raises compliance costs but also creates inefficiencies that deter businesses and talent. For instance, high marginal tax rates in some provinces-exceeding 53%-discourage top professionals and entrepreneurs from locating in Canada. Meanwhile, the corporate tax rate of 26% (combined federal–provincial) lags behind the U.S. federal rate of 21%, further disadvantaging Canadian firms in global markets.

Strategic Tax Reforms: Lessons from Global Competitors

To address these challenges, Canada must adopt a tax strategy that aligns with global best practices. A key component is shifting the tax mix toward consumption-based revenues. CPA Ontario recommends increasing the GST by 1% to raise additional revenue while protecting low-income households through enhanced GST credits. This approach mirrors OECD averages and could incentivize investment and savings, as consumption taxes are less harmful to economic growth.

Corporate tax reform is equally critical. Canada's high rates and rigid capital-cost allowances hinder competitiveness, particularly as U.S. trade policies and economic nationalism redirect investment flows. CPA Ontario proposes broader capital-cost allowances, an Estonia-style distributed-profits tax, and legislative stability to reduce compliance burdens. Estonia's model, which taxes corporate profits only when distributed, has made it the most competitive tax system in the OECD for 12 consecutive years. Similarly, Latvia's adoption of a flat tax and territorial system has attracted foreign investment, demonstrating the efficacy of simplified, neutral tax codes.

Personal income tax simplification and lower marginal rates are also essential. By reducing the tax wedge on labor and streamlining credits, Canada can enhance its appeal to cross-border professionals and entrepreneurs. For example, New Zealand's flat tax system and broad-based consumption taxes have contributed to its third-place ranking in the 2025 International Tax Competitiveness Index. However, New Zealand's productivity growth remains subpar, underscoring that tax reform alone is insufficient without complementary investments in innovation and infrastructure.

The Path Forward: A Tax System for the 21st Century

Canada's tax reforms must be part of a broader economic strategy that leverages its strengths in energy, artificial intelligence, and critical minerals while addressing structural weaknesses. The 2025 federal budget emphasizes this dual focus, recognizing that a modern tax system is foundational to fostering investment, innovation, and productivity. However, success will require political will to implement coherent, long-term reforms rather than ad hoc adjustments.

The stakes are high. As the OECD notes, Canada's real GDP per capita has declined for three consecutive years, a worrying trend for a nation historically reliant on rising living standards. Without decisive action, the country risks entrenching a labor-intensive economic model associated with lower wages and stagnation. Conversely, a tax system that prioritizes neutrality, simplicity, and competitiveness can attract capital, talent, and innovation, positioning Canada as a leader in the global economy.

Conclusion

The case for tax reform-driven growth in Canada is both compelling and urgent. By shifting toward consumption taxes, lowering corporate rates, simplifying personal taxes, and learning from the successes of countries like Estonia and Latvia, Canada can rebuild its competitive edge. These reforms are not merely fiscal adjustments but strategic investments in the nation's future. As global economic uncertainties persist, Canada must act decisively to ensure its tax system reflects the realities of the 21st century-a system that rewards innovation, incentivizes investment, and fosters long-term prosperity.