PERSPECTIVE: Canada Not as Tax Competitive as Federal Government Thinks – Fraser Institute

By Jack Mintz

Prime Minister Mark Carney often refers to the marginal effective corporate tax rate (MECTR) on new investment as an indicator that Canada is the most tax competitive economy for investment among the G7 countries. However, is that the case?

Remember that tax competitiveness is not just in relation to G7 countries that account for only 47 per cent of global GDP in 2026. The high-tax, slow growth European countries and Japan are not much of a bar to jump over. Many others have even lower corporate taxes than Canada. In an analysis of OECD countries (Bazel and Mintz 2022), we found that Canada has a lower MECTR compared to the OECD average but higher than several richer low-tax countries such as Ireland, Switzerland, Luxembourg, Denmark and Sweden.

As shown in the table below, we hardly tax manufacturing on new investment (a negative MECTR means that companies generate tax losses on marginal investments that may not get used). Even before the latest federal budget, Canada has taxed manufacturing far less than services. No other OECD country provides tax preferences for manufacturing as we do. Yet preferences have failed to reverse manufacturing’s declining share of value-added and employment.

This leads to another tax competitiveness problem. When taxes are not neutral—neutrality implying the same effective rates across business activities—it leads to lower productivity. So, while the 2025 federal budget favours manufacturing to attract capital, it squeezes other growing sectors from expanding. Services including construction, communications, transportation, utilities, trade and others are more heavily taxed than manufacturing with a MECTR at 18.6 per cent in 2026 (somewhat above our 2022 study at 17.7 per cent).

For Canada, benchmarking our tax system relative to the United States is most critical. The U.S. accounts for 59 per cent of the G7’s GDP and continues to be Canada’s largest trading partner by far. While Canada has a corporate tax advantage relative to the U.S. for marginal investments, there are reasons to believe that our advantage is not quite as large as it seems.

Finance Canada data only represent 31 per cent of Canada’s business capital stock. What is missing? Several sectors including financial services, mining, oil and gas and Canadian-controlled private corporations. Also, some taxes are not included that affect investment or the production costs: property taxes, royalties and mining profit taxes, energy taxes and, especially relevant to smaller businesses, personal income taxes.

Like Finance Canada, we find that Canada is tax competitive relative to the U.S. if we only focus on corporate income taxes, sales taxes on capital inputs and real estate transfer taxes (14.2 per cent compared to 22.7 per cent in the U.S.). After including oil/gas, mining and banks and insurance companies that are taxed three points higher than other businesses, Canada is still competitive at 16.4 per cent compared to 27.2 per cent in the U.S.

However, this will change after 2030 when Canada phases out accelerated depreciation in the next four years (the U.S. made its accelerated depreciation permanent). Canada’s MECTR will only be 1.9 percentage points less than the U.S. rate by 2034.

Even those differences shrink after including missing taxes. With property taxes, the Canada-U.S. difference in the MECTR declines to 1.1 percentage points.

Personal taxes on dividends and capital gains, especially relevant to closely-held companies, are lower than the U.S. Since this represents about one-fifth of Canada’s capital stock, the aggregate MECTR in Canada would be higher than that in the U.S. Since personal tax rates may also make labour more expensive to hire, Canada’s competitiveness would also be affected.

Canada levies a carbon tax on large emitters unlike the U.S. (carbon taxes are only applied in some states). In some recent unpublished work, we find that the utilities sector and oil/gas industries are particularly affected by higher carbon taxes in Canada relative to the U.S.

A more complete study will tie in property, energy and personal taxes to measure cost competitiveness between Canada and U.S. It’s incumbent for researchers including Finance Canada to provide better measurements. We are not as tax competitive as we think.

Sources: Calculations of METR by P. Bazel and J. Mintz, Lincoln Institute (U.S. property tax), Altus (Canadian property tax rate) and OECD Taxing Wages 2026.

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