Canada’s Tax System Needs a Reset: Lower Taxes, More Investment, More Jobs

The Future of Employment in Canada – Article 11 of 26

Canada’s Tax System Needs a Reset: Lower Taxes, More Investment, More Jobs

Canada should be one of the most competitive countries in the world to invest, establish businesses, attract talent, and create employment.

Canada Must Become More Competitive

Canada has the resources, talent, institutions, and geographic advantages to become one of the world’s most attractive destinations for investment and employment.

Yet Canada faces increasing international competition.

Businesses compare countries before establishing operations. Investors evaluate taxation, infrastructure, regulations, workforce availability, and expected returns. Skilled professionals consider compensation, career opportunities, and quality of life.

Canada cannot rely on its traditional advantages alone.

It must create compelling reasons for Canadian entrepreneurs to establish and expand businesses at home and for international companies to invest, develop technologies, build facilities, and hire Canadian workers.

Taxation is one of the most important economic policy tools available to governments.

An effective tax system should encourage productive investment, reward employment, support entrepreneurship, and provide sustainable funding for essential public services.

However, competitive taxation must be accompanied by corporate accountability, effective enforcement, responsible government spending, and fair competition.

Canada should compete internationally through attractive taxation, skilled workers, reliable institutions, innovation, and economic opportunity.

Seven reforms deserve serious consideration.

1. Individuals: Protect All Canadians and Reward Work, Skills, and Career Advancement

Canada’s economic strength begins with its people.

Employees, skilled professionals, entrepreneurs, and families contribute to economic growth through their work, spending, investment, and innovation.

A competitive personal income tax system should protect Canadians across income levels while encouraging employment, professional advancement, entrepreneurship, and financial security.

Canada should introduce a simplified, nationally coordinated personal income tax framework.

Proposed Combined Federal and Provincial Personal Income Tax Rates

Each proposed marginal rate would apply to the portion of taxable income within its respective bracket.

Protecting All Canadians

Tax reform should benefit Canadians across income levels, including lower-income workers, middle-income families, skilled professionals, entrepreneurs, and higher-income taxpayers.

Appropriate tax credits and safeguards should ensure that people currently paying little or no income tax are not disadvantaged by the proposed starting rate.

Canada should also review income-tested benefit reductions that can significantly diminish the financial benefit of earning additional income.

A more competitive system should provide greater financial rewards for work while maintaining essential public services and appropriate support for vulnerable Canadians.

Attracting and Retaining Skilled Professionals

Canada competes internationally for engineers, scientists, researchers, technology specialists, healthcare professionals, executives, and entrepreneurs.

These individuals evaluate not only gross compensation but also the income they retain after taxes.

Competitive personal income taxation could help Canadian employers attract and retain skilled professionals while encouraging entrepreneurship, household investment, and career development.

Protect all Canadians and reward work, skills, and career advancement.

2. Businesses: Introduce Competitive Corporate Tax Rates That Reward Job Creation

Small and medium-sized businesses are important engines of employment, entrepreneurship, and innovation.

They serve local communities, introduce new technologies, support larger industries, and create opportunities for Canadian workers.

However, Canada’s tax system should not only help businesses start. It should encourage them to expand.

A successful small business should have strong financial incentives to become a medium-sized company.

A medium-sized company should have compelling reasons to become a major Canadian enterprise.

And international corporations should view Canada as an attractive location for investment and expansion.

Canada should introduce a simplified corporate tax structure with internationally competitive rates and additional incentives for Canadian employment creation.

Proposed Combined Federal and Provincial Corporate Income Tax Rates

These progressive rates would apply to eligible active business profits across businesses of different sizes.

Companies demonstrating sustained net Canadian employment growth would qualify for the employment incentive rates.

The incentives should be based on measurable job creation, genuine employment relationships, and safeguards against artificial hiring arrangements.

Making Canada More Competitive

Ontario’s current combined general corporate income tax rate is 26.5%.

A proposed combined rate of 12% on taxable active business profits above $500,000 would represent a substantial reduction.

This could improve Canada’s attractiveness for business investment and expansion.

Companies evaluating manufacturing facilities, technology development centres, aerospace operations, regional headquarters, and other investments compare the cost of operating across multiple jurisdictions.

Competitive taxation can influence these decisions alongside energy prices, infrastructure, workforce capabilities, regulatory efficiency, and market access.

Competing Internationally

Ireland provides an instructive example.

Its standard corporate tax rate on qualifying trading income is 12.5%, with additional international minimum-tax requirements for certain large multinational groups.

Ireland demonstrates how competitive taxation can form part of a broader strategy for attracting international investment.

Canada has additional advantages, including proximity to the United States, extensive natural resources, strong research institutions, and access to international markets.

Competitive corporate tax rates could strengthen these advantages.

For Canadian entrepreneurs, lower rates could make expansion more financially attractive.

For international corporations, they could improve the business case for establishing Canadian operations.

For investors, they could increase the attractiveness of financing Canadian projects.

For workers, additional business investment could create employment opportunities.

Reward Companies That Create Canadian Jobs

The proposed employment incentive introduces an important principle:

Companies that create and sustain Canadian employment should receive a measurable financial benefit.

A company expanding its Canadian workforce would potentially qualify for lower corporate tax rates.

This could encourage businesses to locate additional activities in Canada, expand domestic operations, and invest in long-term employment.

The policy should recognize sustainable net job creation rather than simply rewarding short-term hiring.

Protecting Government Revenue

Lower corporate tax rates would initially reduce revenue collected on existing taxable profits, assuming business behaviour remained unchanged.

Additional investment, employment, and economic growth could expand the tax base over time, but those gains are uncertain.

Implementation should therefore include independent fiscal modelling, federal-provincial coordination, and a responsible transition plan.

Canada should become a preferred destination for investment, innovation, business expansion, and employment creation.

3. Large Corporations: Strengthen Tax Accountability and Transparency

Large corporations contribute significantly to Canada’s economy through employment, investment, research, production, and international trade.

Their contributions should be recognized.

However, corporations receiving substantial government contracts, subsidies, tax incentives, or other public financial support should be subject to meaningful accountability.

Canada should strengthen transparency concerning:

• Corporate income taxes paid in Canada.
• Canadian taxable profits and material related-party transactions.
• Significant government subsidies and tax incentives received.
• Relevant international corporate structures.
• Compliance with tax and reporting obligations.
• Measurable outcomes associated with major public incentives.

Disclosure requirements should protect legitimate commercial confidentiality while ensuring that public financial support can be evaluated.

Government Incentives Should Produce Measurable Results

When governments provide substantial financial incentives to businesses, those incentives should be linked to defined objectives.

Examples include employment creation, research investment, domestic production, workforce development, and regional economic growth.

Where appropriate, agreements should contain performance conditions, reporting obligations, and provisions for recovering funds when material commitments are not met.

The goal should be accountability without unnecessary bureaucracy.

Competitive corporate tax rates and strong corporate accountability should work together.

4. Close Corporate Tax Loopholes and Aggressive Tax Avoidance

Canada should distinguish between legitimate business tax planning and artificial arrangements designed to avoid taxes on economic activity conducted in Canada.

Complex corporate structures can make it difficult to determine where profits are genuinely earned.

Canada already has legislation addressing many aggressive tax practices. The priority should be identifying remaining gaps, strengthening enforcement, and ensuring consistent application.

Seven areas require particular attention.

1. Offshore Profit Shifting

Scrutinize arrangements that artificially transfer Canadian-generated profits to lower-tax jurisdictions without corresponding genuine economic activity.

2. Inflated Intercompany Management Fees

Ensure that charges for management, consulting, administration, and other related-party services reflect legitimate activity and arm’s-length pricing.

3. Questionable Intellectual Property Royalties

Review arrangements involving patents, trademarks, software, and other intellectual property where royalty payments do not reasonably reflect economic substance.

4. Excessive Related-Party Interest Deductions

Strengthen enforcement against artificial financing structures primarily designed to reduce Canadian taxable income.

5. Misuse of Foreign Subsidiary Tax Treatment

Examine arrangements that improperly claim favourable tax treatment through foreign entities lacking genuine commercial substance.

6. Artificial Tax Losses

Target transactions designed primarily to manufacture tax losses or deductions without corresponding economic activity.

7. Improper Tax Incentive Claims

Strengthen verification of research, employment, innovation, and investment incentives to ensure public benefits support legitimate qualifying activities.

Strengthening Enforcement

Canada should provide tax authorities with sufficient specialized expertise and analytical resources to investigate complex multinational arrangements.

Enforcement should focus on material risks, deliberate misrepresentation, and abusive practices while avoiding unnecessary compliance burdens for legitimate businesses.

Lower corporate tax rates should be accompanied by stronger enforcement of fair and transparent tax rules.

5. Establish Independent Oversight of Major Government Spending

Canadians contribute significant financial resources to governments through personal income taxes, corporate taxes, consumption taxes, and other charges.

They should expect those resources to be managed responsibly.

Yet major government projects can involve substantial financial commitments, complex procurement arrangements, long-term operating expenses, and delivery risks.

Canada should establish independent Taxpayer Investment Review Offices at the federal level and in every province.

Independent Review Before Approval

These offices would evaluate proposed medium-sized and large public projects before final approval.

Projects exceeding defined financial thresholds would undergo independent assessment, subject to appropriate exceptions for emergencies and national security.

The review should examine:

1. Economic justification and public benefits.
2. Total project and lifecycle costs.
3. Expected employment and economic impacts.
4. Alternative solutions and cost-effectiveness.
5. Procurement fairness and supplier competition.
6. Financial, operational, and implementation risks.
7. Measurable outcomes and long-term accountability.

Transparency and Independence

Review offices should operate independently from the government departments proposing the expenditures.

Their findings should generally be publicly accessible, subject to legitimate confidentiality and security considerations.

Governments would retain final decision-making authority.

However, when a government proceeds despite an unfavourable independent assessment, it should publicly explain the decision.

The offices should complement existing auditors and legislative oversight bodies rather than duplicate their responsibilities.

Protecting taxpayers’ money should begin before major expenditures are approved—not after projects encounter cost overruns or fail to deliver.

6. Address Excess Monopoly Profits While Protecting Consumers

A healthy economy depends on effective competition.

Businesses should be rewarded for innovation, productivity, quality, and responsible investment.

However, markets with limited competition and high barriers to entry can allow dominant companies to exercise substantial pricing power.

Canada should examine additional taxation of clearly defined excess economic profits associated with entrenched market power.

Distinguish Corporate Success From Monopoly Power

Large companies should not face additional taxes simply because they are successful.

Any excess-profit tax should be based on objective economic evidence, including market concentration, barriers to entry, and returns attributable to sustained market power.

Protect Consumers Against Higher Prices

Additional corporate taxation should not simply become another cost transferred to consumers.

Canada should consider mechanisms such as:

• Independent pricing and margin reviews.
• Restrictions on recovering specified tax costs through regulated consumer rates.
• Stronger monitoring of pricing practices.
• More effective competition enforcement.
• Measures that reduce unnecessary barriers for new competitors.

Taxation alone cannot guarantee that businesses will not adjust prices indirectly. Consumer protection therefore requires careful policy design and ongoing regulatory oversight.

Canadian consumers should benefit from competitive markets—not pay more because established companies face insufficient competition.

7. Reform Government Procurement to Expand Competition and Canadian Employment

Government procurement represents an important opportunity for Canadian businesses to develop capabilities, win contracts, and create employment.

However, complex bidding requirements, oversized contracts, restrictive qualifications, and repeated contract extensions can disadvantage smaller suppliers.

Canada should modernize procurement to encourage competition, transparency, innovation, and value for taxpayers.

Break Up Unnecessarily Large Contracts

Where practical, divide major contracts into smaller competitive opportunities that qualified specialized suppliers can deliver.

Expand Opportunities for SMBs

Establish measurable participation objectives for qualified small and medium-sized businesses, consistent with procurement obligations and value-for-money requirements.

Simplify Bidding

Reduce unnecessary administrative requirements and ensure financial, insurance, and experience criteria are proportionate to contract risks.

Strengthen Transparency

Publish accessible information about major contract awards, amendments, supplier concentration, and delivery performance.

Improve Oversight of Non-Competitive Awards

Require appropriate scrutiny of sole-source contracts and repeated extensions, while preserving legitimate exceptions.

Reward Capability and Performance

Evaluate suppliers based on relevant expertise, innovation, delivery capability, and demonstrated results—not simply company size or incumbent relationships.

Why Procurement Reform Matters

A qualified Canadian technology company should have a fair opportunity to compete for government technology projects.

A specialized engineering company should not be automatically excluded because it lacks the financial scale of a multinational supplier.

A smaller professional services company should be evaluated on its expertise, performance, and value.

Opening procurement to more qualified suppliers could encourage business growth, innovation, and employment.

Government contracts should reward capability, competition, innovation, and results.

The Bigger Economic Opportunity: Make Canada a Preferred Destination for Investment

These seven reforms are interconnected.

Personal income tax reform could strengthen Canada’s ability to attract and retain skilled professionals while providing greater financial opportunities for Canadians across income levels.

Competitive corporate tax rates could improve the financial case for establishing and expanding businesses.

Employment incentives could encourage companies to create and sustain Canadian jobs.

Corporate accountability and stronger tax enforcement could improve confidence in the fairness of the system.

Independent government spending reviews could strengthen public investment decisions.

Competition reforms could reduce barriers facing consumers and new businesses.

Procurement reform could create opportunities for Canadian companies to compete, develop capabilities, and expand.

Together, these measures could contribute to a stronger economic environment for technology, manufacturing, aerospace, defence, energy, financial services, and other strategically important industries.

Attracting International Investment

Canada should compete more effectively for companies considering new North American operations.

A combination of competitive taxation, skilled workers, market access, strong institutions, and reliable infrastructure could strengthen Canada’s investment proposition.

Encouraging Domestic Investment

Canadian entrepreneurs should have compelling reasons to establish and expand businesses at home.

Competitive taxation could encourage companies to reinvest in technology, production, innovation, and workforce development.

Creating Employment

Business investment can generate demand for employees across a wide range of occupations.

When companies establish operations, develop technologies, increase production, or enter new markets, they can create opportunities for Canadian workers.

Tax policy should support these activities while recognizing that investment and employment also depend on broader economic conditions.

Maintaining Fiscal Responsibility

The proposed reductions in individual and corporate tax rates would have significant implications for federal and provincial revenues.

Governments should independently evaluate the direct fiscal costs, potential economic responses, distributional impacts, and consequences for essential public services.

Any implementation should be supported by transparent modelling, measurable milestones, and periodic review.

Economic competitiveness must be accompanied by fiscal responsibility.

Canada’s Future Depends on the Choices Made Today

Canada has the talent, resources, institutions, and geographic advantages to compete successfully in the global economy.

But those advantages cannot be taken for granted.

Investors compare countries.

Businesses compare operating environments.

Entrepreneurs evaluate opportunities.

Skilled professionals decide where their careers and families can prosper.

Canada must provide compelling reasons for them to choose this country.

That requires a tax system that protects Canadians, rewards productive economic activity, supports entrepreneurship, encourages investment, and strengthens employment.

It also requires governments to demonstrate greater accountability for public expenditures and corporations to comply with fair and transparent rules.

Canada should not have to choose between economic competitiveness and fairness. It should pursue both.

Protect all Canadians. Reward work and skills. Lower barriers to investment. Encourage job creation. Close abusive tax arrangements. Strengthen competition. Demand accountability.

These are important foundations for a more competitive economy and a stronger future of employment in Canada.

A Practical First Step: National Tax Competitiveness and Job Creation Review

The federal and provincial governments should jointly establish an independent review with a 12-month mandate to evaluate these seven reforms.

The review should produce:

• Fiscal and economic analysis of the proposed combined personal income tax rates, including protections for Canadians across income levels.
• Modelling of the proposed 10% and 12% combined corporate rates and the 8% and 11% employment incentives.
• International comparisons of Canada’s investment and employment competitiveness.
• Recommendations for closing remaining corporate tax-avoidance gaps.
• A framework for independent reviews of major government expenditures.
• Options for addressing excess monopoly profits while protecting consumers.
• Procurement reforms that expand fair competition and qualified SMB participation.

The objective should be a transparent, costed, and measurable national strategy that supports investment, employment, productivity, and fiscal accountability.

The ultimate goal is not simply to collect more tax or less tax. It is to protect Canadians, build a stronger economy, create more opportunities, and deliver better value from every public dollar.

The Future of Employment in Canada — Article 11 of 26

Policy note: The personal and corporate income tax rates presented in this article are proposed combined federal and provincial rates. They would require federal-provincial coordination, independent fiscal analysis, and legislative implementation.

References and Further Reading

1. Canada Revenue Agency — Federal and provincial corporate income tax rates.
2. Canada Revenue Agency — Personal income tax rates and brackets.
3. Department of Finance Canada — Tax policy and federal fiscal planning.
4. Revenue Commissioners of Ireland — Corporation tax rates.
5. OECD — International taxation, investment, and base erosion and profit shifting.
6. Office of the Parliamentary Budget Officer — Fiscal analysis and public spending.
7. Competition Bureau Canada — Competition enforcement and market power.
8. Public Services and Procurement Canada — Government procurement.
9. Office of the Auditor General of Canada — Public expenditure oversight.