Bank chiefs push Ottawa to fix tax drag as firms hold back on growth and capital spending
Canadian firms are investing barely half as much per worker as US companies – and leading bank economists say Ottawa’s tax rules are a big part of the problem, not just the solution.
Economists from Toronto‑Dominion Bank, Bank of Nova Scotia and National Bank of Canada are urging Prime Minister Mark Carney to go beyond modest tweaks and launch real tax reform, arguing that current policy discourages higher earnings, scaling up and long‑term capital spending, according to Bloomberg.
At a sold‑out Economic Club of Canada event in Toronto, TD chief economist Beata Caranci said Carney’s latest budget does not change incentives enough to shift behaviour.
“I don’t think it’s enough,” she said, calling the measures “a good first step” that mainly unwind “previous bad policy.”
Carney’s November budget set a headline goal of attracting $1tn in public and private investment over five years through tax incentives and new spending on housing, infrastructure and defence, as reported by Bloomberg.
Several of the corporate tax changes were carried over from the previous government.
Scotiabank chief economist Jean‑François Perrault called the $1tn target “completely unrealistic” because Canada would have to roughly double current investment levels, although he added that the country would still benefit if the plan only partially succeeds, Bloomberg said.
Caranci focused on how the current framework shapes decisions inside businesses.
She pointed to the preferential small‑business tax rate, which stops after $500,000 in income, and said it creates a “bunching” of firms at that threshold instead of encouraging them to grow.
She recommended at least indexing the $500,000 cap, warning that “you’re artificially keeping companies smaller,” according to Bloomberg.
Perrault agreed that many firms are not trying to maximise profit growth because they see the tax system and regulation as built‑in disadvantages.
Deloitte’s Future of Canada Centre reaches a similar conclusion from a macro lens.
According to Deloitte, inflation‑adjusted GDP per person has “essentially flattened” over the past decade while Canadian business investment in machinery, equipment and intellectual property has fallen behind peer economies.
Deloitte says business investment per worker in Canada fell 15 percent from 2014 to 2023.
Over the same period, it rose 21 percent in the United States and 11 percent across OECD countries.
As a result, Canadian firms now invest a little more than half as much per employee as US companies, and about two‑thirds of the OECD average.
Deloitte argues that the federal government’s first “Canada Strong” budget did introduce some pro‑investment steps, including expensing measures and accelerated write‑offs for certain assets, but was “silent on more meaningful tax reform” and therefore missed a chance to align tax policy with its growth agenda.
The firm also notes that Canada leans heavily on income taxes, has nearly 300 tax expenditures and applies some of the highest marginal personal tax rates in the OECD, all of which it links to weaker investment and productivity.
The Bank of Canada has separately warned that the country is stuck in a “vicious circle” where weak productivity leads to reduced investment and vice versa, reinforcing the message from both street economists and Deloitte that tax design is now central to Canada’s competitiveness story.
Bloomberg also reports that, on the energy side, Carney’s government has cleared some regulatory hurdles for new west coast pipelines to ship more oil to Asia, but no company has committed to build one.
National Bank chief economist Stéfane Marion said Canada needs to be “a little bit more aggressive” and aim to complete such a project in less than 10 years.
Perrault warned that Canada risks losing the urgency it showed when US President Donald Trump imposed tariffs and threatened to make the country the 51st US state.
“I’m worried that as much as we want to seize the moment, that we don’t,” he said, according to Bloomberg.
Deloitte concludes that without meaningful tax reform, Canada faces slower growth, weaker revenues and more pressure over time to borrow, raise taxes or cut key spending, with the burden shifting to future generations.
