www.policyschool.ca
PUBLICATIONS
PUBLICATIONS
SPP Research Paper
SPP Research Paper
Volume 14:21 September 2021
2020 TAX COMPETITIVENESS
REPORT: CANADA’S
INVESTMENT CHALLENGE
Philip Bazel and Jack Mintz
†
SUMMARY
Canada is already at a disadvantage with lagging growth and productivity
even before the massive economic destruction caused by the COVID-19
pandemic. Before the pandemic hit, Canada’s corporate tax system was
already becoming uncompetitive in attracting highly profitable investments
relative to other developed countries. Canada’s general corporate tax rate,
averaging 26.1 per cent, is within spitting distance of the highest rates in
the OECD. While some industries may benefit from special preferences, the
corporate tax has become increasingly inecient and complex with targeted
measures, and in some cases impeding the allocation of capital to growth
industries like communications and services.
This was having a serious eect on Canada’s economic health before
COVID-19. Business investment in Canada has lagged that of many countries
since 2015, well before the pandemic. Productivity has been weak and wages
for workers have been depressed, particularly for unskilled labour.
Additionally, the corporate tax system currently distorts the allocation of
capital in the economy, favouring some sectors over others. In fact, some of
the sectors least-favoured by the tax system — including retail and tourism,
which face an eight-point tax disadvantage compared to the government-
favoured manufacturing sector — are the very ones that had the roughest time
during the pandemic and face a more dicult road to recovery.
†
We wish to thank the editor, Ken McKenzie, and two anonymous reviewers for detailed comments that significantly improved
the paper.
1
If Canada is going to “build back better,” as some politicians claim to want, it will need
investors willing to build things. That will require governments focusing on policies that
stimulate economic growth, including tax reform.
While it is politically popular for some parties to push for higher corporate tax rates,
that won’t solve our investment problem. Some limited benefit can be realized by
reducing tax rates and broadening the corporate base elsewhere but Canada’s
unwieldy corporate income tax has become too serious for those measures to
suciently address the problem. A broader approach to corporate tax reform will be
required to ensure that Canada is able to recover to good economic health after the
COVID-19 pandemic.
2
The 2020 pandemic has altered the economy’s course with the worst recession since
the Great Depression. Well into the year 2021, COVID-19 health restrictions still linger
and will continue to do so until herd immunity is established. This tax competitiveness
report is therefore focused less on the year 2020, and more on the prospects for a
post-COVID recovery. Will the priority be on growth, investment and getting people
back to work? Or will governments be concerned about their damaged balance sheets
and raise corporate levies?
Fiscal pressures could result in higher taxes. We will argue, however, that a focus on
growth and productivity should be the priority for corporate tax policy if a country’s
investment performance has been weak prior to the pandemic. That is the case of
Canada.
Most corporate tax changes in 2020 were responses to the pandemic.
1
Of 94 countries,
72 deferred payment of corporate taxes in 2020, 25 introduced new deductions or tax
credits and 21 extended carry-forward or carry-back provisions for losses. Ten countries
introduced accelerated depreciation. Canada was not one of these countries; by and
large, no corporate tax changes occurred in Canada, except for Alberta accelerating by
a year and half its corporate rate reduction from 10 to eight per cent, as of July 1, 2020.
Instead, Canada’s policy focused on temporary relief, including tax deferrals, wage
and rent subsidies, and liquidity programs. Perhaps this reflects that Canada already
had a relatively low marginal eective tax rate (METR) on capital in 2020 (15.6 per
cent with temporary accelerated depreciation and 19.5 per cent without), well below
the averages for the G7, OECD and 94-country group surveyed in this study. While its
METR is relatively low, Canada’s corporate income tax rate — averaging 26.1 per cent
— is above the current U.S. rate (25.7 per cent) and the OECD GDP-weighted average
(25.8 per cent), the 10
th
highest of 34 OECD countries. It is not far o the highest
corporate income tax rates among OECD countries (Portugal is at 31.5 per cent and
Japan at 30.6 per cent).
While Canada’s corporate tax system is competitive for marginal investments, due to
temporary accelerated-depreciation allowances, it is less attractive for highly profitable
projects that are “lumpy” (i.e., consisting of large lumps of capital investment), because
of Canada’s relatively high corporate income tax rate by international standards. More
concerning is that the corporate tax system is distorting the allocation of capital in
the economy.
2
Federal and provincial governments have recently been swinging back
towards introducing new tax preferences, such as accelerated depreciation, in part to
reduce fiscal costs. However, these initiatives create a more distortionary corporate tax
system with respect to capital allocation, as seen in the wide variation in METRs across
industries and assets.
1
Analysis is based on legislation adopted by end of 2020. Any 2021 budgetary changes are not included in
estimates.
2
Taxation is one source of distortion in capital markets. Others include regulations and imperfect competition,
both potentially resulting in higher markups and regulations. In a recent paper, Baquee and Farhi (2020) find
that the misallocation of capital reduces productivity by 15 per cent. Similarly, Da-Rocha, Mendes Tavaremal
and Retuccia (2020) find that misallocation due to dierential taxes on establishments cause substantial
productivity losses — one half due to the static eect and other half to a dynamic eect.
3
A high-rate and non-neutral corporate tax system, we shall argue, undermines
productivity. With lumpy investment, a high statutory tax rate that falls on economic
rents, discourages the location of highly profitable resource- and knowledge-based
projects in a country.
3
High corporate income tax rates also discourage companies
from keeping profits in Canada as companies book more administrative and financing
expenses here rather than in low-tax countries, despite recent policies to curtail
profit-shifting.
This paper is focused on the taxation of investment; its focus is on the corporate
income tax. As is well known, investment also depends on other factors, such as
domestic and international demand for goods and services, infrastructure, regulations
and policy uncertainty. The current weak investment climate in Canada is substantially
influenced by other factors that we later mention. Nonetheless, we should avoid
substantial increases in taxes on investment. This is a particular concern, as recent G7
discussions could encourage higher corporate taxes in the future, making it harder for
economies to recover from the 2020 recession.
Critically, the investment climate in Canada needs to be improved. New capital
spending is crucial, since companies replace older vintages of capital with more
advanced technologies. Investment also increases available value-added to raise
employment and worker salaries. Numerous studies, including McKenzie and Ferede
(2018), find that reductions in corporate taxes contribute to higher wages as a product
of more investment.
In the discussion below, we begin with a review of 2020 corporate tax changes
among the 94 countries surveyed in this paper. This will be followed by our annual
comparisons of corporate income tax rates and METRs across groups and individual
countries. We then review METRs in Canada for industries and provinces, before
turning to Canada’s investment performance as background for directions for
corporate tax reform.
CORPORATE TAX CHANGES: WHAT HAPPENED IN 2020?
With the pandemic-induced downturns in many sectors, governments implemented
various programs to help support the economy. Tax payments were deferred. Central
banks provided credit support to minimize bankruptcies. Governments provided
temporary financial support for households and businesses, including wage subsidies.
As part of a much broader package, corporate tax measures were typically in the form
of tax deferral and temporary relief.
As shown in Table 1, 72 of 94 countries provided corporate tax deferrals (with 32
providing waivers for penalties and interest). With respect to corporate tax changes,
3
Devereux and Grith (2002) provide a measure of “average” eective tax rates to capture the notion that
corporate location could be discouraged by high taxes on above-normal (economic) profits. However, ex post
measurement of above-normal rates of return to capital may be evidence of compensation for risk instead of
the presence of economic rent. Since we cannot disentangle risk from economic profits in measuring above-
normal rates of return to capital, it is useful to at least provide comparisons of both statutory corporate
income tax rates and marginal eective tax rates.
4
the two most popular were higher deductions or tax credits (typically temporary)
and a more liberal treatment of tax losses, such as extending carry-back and carry-
forward periods. Extending carry-back loss provisions was one of the more interesting
shifts this year. This provided immediate cash to companies so long as they had paid
corporate income taxes in earlier years. Canada did not make any adjustments to its
loss-osetting provisions.
Table 1: Number of Countries with Corporate Tax Adjustments During the
COVID Recession
G7 OECD Global (95 countries)
Rate adjustment 1 2 5
Deferral* 6 27 72
Interest/penalty waiver 1 10 32
Wage subsidy* 3 8 15
Capital subsidies* 3 9 9
Loan assistance/guarantee 2 6 7
Tax-loss extension 4 16 21
Higher deductions/credits 5 16 29
*Canada provided corporate tax deferrals and wage and rental subsidies as COVID relief measures.
Source: EY Tax COVID-19 Response Tracker (2020).
A few countries revised corporate income tax rates in 2020. The United Kingdom
suspended its legislated tax-rate reduction from 19 to 17 per cent in 2020, while
bumping up the capital-cost allowance for structures from two to three per cent. In
the U.K.’s March 2021 budget,
4
it introduced a two-year, 130-per-cent super-deduction
for depreciable assets. This will be followed by an increase in the corporate income tax
rate from 19 to 25 per cent for profits in excess of 250,000 pounds beginning April 1,
2023. Besides reversing its low corporate-tax-rate policy, the shift represents another
major change. Since 2008, the U.K. has lowered its top corporate income tax rate by 10
points to 20 per cent, eliminating the dierence in rates between small and large firms.
In 2023, corporate income tax rates will vary again by profit size.
Chile reduced its corporate income tax rate from 22 to 10 per cent for small and
medium-sized businesses until 2023, while Colombia targeted a corporate income tax-
rate reduction for air transport. Kenya lowered its general corporate income tax from
30 to 25 per cent, and Romania provided a discount to corporate tax payments on a
short-run basis. Outside of Alberta’s acceleration by a year and half of its corporate-
rate reduction from 10 to eight per cent, no other rate or base changes of importance
were adopted in 2020.
Several countries have legislated changes in corporate income tax rates beyond 2020.
Of the 94 countries, these include Austria (from 25 per cent in 2020 to 21 per cent by
4
As we include legislated changes adopted by the end of 2020 in our analysis, any 2021 tax changes, such as
the new U.K. budget, are not included.
5
2023), France (continuing its rate reduction to 25 per cent by 2022), Colombia (32 to
30 per cent by 2022) and Indonesia (22 to 20 per cent by 2022).
Not surprisingly, very few countries have made long-run adjustments to their
corporate tax policies in 2020. Tax measures have been largely temporary to deal
with the economic impact from health restrictions and lockdowns. With respect to the
corporate income tax, a key post-COVID issue is whether to raise corporate tax to deal
with fiscal pressures or reduce corporate taxes to encourage economic growth and
economic adjustment. Governments used corporate tax policy to encourage growth
in the year after the 2008 financial crisis. Unlike other taxes, corporate income tax
rates and eective tax rates on capital continued to fall after 2009, despite the sharp
increase in public debt among many countries. We will return to these issues below.
Probably, the most important shift in corporate tax policy recently are measures
to reduce the scope for shifting corporate profits to low-tax jurisdictions. The G20
countries have agreed to a 15-per-cent minimum corporate income tax on foreign
profits earned by companies with more than $750 million in revenues (similar to
proposals made in OECD Pillar Two discussions).
5
While it is too early to tell how this
proposal will be implemented, it could increase taxes paid by foreign subsidiaries of
a parent residing in a capital-exporting country when covered taxes — foreign-profit
and withholding taxes — are less than 15 per cent of profits. This current proposal will
require agreement on the base (potentially book profits).
CANADA HAS LOST ITS CORPORATE INCOME TAX-RATE
ADVANTAGE
Although 2020 has been a relatively quiet year for corporate tax reforms, we note that
Canada virtually lost its corporate income tax-rate advantage after 2016. As shown
in Figure 1 below, Canada’s federal-provincial corporate income tax rate (including
Alberta’s eight-per-cent rate) was 26.1 per cent in 2020, about equal to the GDP-
weighted average of corporate income tax rates in the OECD (25.8 per cent)
6
. In 2016,
Canada had a tax advantage of almost five points, compared to the OECD weighted-
average tax rate.
5
For Pillar Two discussions, see https://www.oecd.org/tax/beps/public-consultation-document-global-
anti-base-erosion-proposal-pillar-two.pdf. The OECD has also discussed a special tax on large technology
companies to shift from a pure-source base tax, according to where profits are earned, to one in which part
of the income would be allocated to where users reside.
6
This rate includes the legislated rate reductions mentioned earlier and excludes the U.K.s rate hike legislated
in 2021.
6
Figure 1: Canada and Weighted-Average General Corporate Income Tax Rates Among
OECD Countries From 2009 to 2020
31.0%
29.4%
27.6%
26.1%
26.3%
26.3%
26.6%
26.6%
26.6%
26.8%
26.2%
26.1%
33.1%
33.2%
33.1%
33.0%
32.5%
32.4%
31.8%
31.4%
31.0%
26.8%
25.8%
25.7%
0%
5%
10%
15%
20%
25%
30%
35%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
CIT
Canada OECD w
Note: General corporate income tax rates are the combined central-subnational corporate rate plus any
profit-based contribution rates applicable to large companies. Legislated corporate tax rate changes are
applied the year they are passed.
While Canada’s general corporate income tax rate has changed little since 2013, other
countries have reduced corporate income tax rates (Figure 2). This includes the U.S.
(from 39.1 to 25.7 per cent after 2017) and France (from over 35 per cent to 25.8 per
cent by 2022). The new Biden administration has proposed raising the U.S. rate to 28
per cent, although Congress will make the final determination. As mentioned above, the
U.K. is reversing course by hiking its general corporate income tax rate in 2023 from 19
to 25 per cent, almost back to where it was in 2011 when the rate was 26 per cent.
On a regional GDP-weighted average basis,
7
we note that Canada’s corporate income
tax rate is slightly below the Americas’ average (26.8 per cent), slightly above the
average for Asia and Oceania (25.6 per cent), and well above the European and
94-country averages (23.6 and 25.4 per cent, respectively). A comparison of individual
corporate income tax rates is provided in Figure 2 below.
Overall, 64 of 94 countries now levy corporate income tax rates at 26 per cent or
below, with the lowest rates found in Europe (Hungary at nine per cent, Bulgaria at 10
per cent and Ireland at 12.5 per cent).
7
Details in the appendix.
7
Figure 2: General Corporate Income Tax Rates by Country 2020 and 2016
9.0%
10.0%
10.0%
10.0%
12.5%
14.8%
15.0%
15.0%
15.0%
15.0%
15.0%
16.0%
16.5%
17.0%
17.0%
18.0%
18.0%
19.0%
19.0%
19.0%
19.0%
19.2%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.6%
21.0%
21.4%
21.7%
21.8%
22.0%
22.0%
22.5%
22.5%
23.0%
23.3%
24.0%
24.0%
24.9%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.4%
25.5%
25.7%
25.7%
25.8%
26.1%
26.5%
27.0%
27.0%
27.2%
27.5%
27.9%
27.9%
28.0%
28.0%
29.0%
29.5%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.6%
31.0%
31.5%
32.0%
34.0%
34.5%
35.0%
35.0%
38.6%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Hungary
Bulgaria
Paraguay
Qatar
Ireland
Switzerland
Uzbekistan
Mauritius
Georgia
Serbia
Ecuador
Romania
Hong Kong
Kuwait
Singapore
Ukraine
Croatia
Czech Republic
Poland
Slovenia
United Kingdom
Jordan
Iceland
Fiji
Latvia
Estonia
Finland
Turkey
Indonesia
Kazakhstan
Saudi Arabia
Thailand
Vietnam
Russia
Madagascar
Sweden
Austria
Botswana
Netherlands
Lesotho
Denmark
Norway
Egypt
Slovak Republic
Israel
India
Malaysia
Greece
Luxembourg
Kenya
Spain
China
Argentina
Bangladesh
Bolivia
Ghana
Iran
Panama
Uruguay
94 Country w
Belgium
OECD w
United States
France
Canada
G7 w
Dominican Republic
Chile
Tunisia
Korea S.
Jamaica
Italy
New Zealand
South Africa
Pakistan
Peru
Uganda
Australia
Germany
Mexico
Colombia
Costa Rica
Ethiopia
Philippines
Rwanda
Sierra Leone
Tanzania
Trinidad and Tobago
Japan
Morocco
Portugal
Nigeria
Brazil
Venezuela
Zambia
Chad
Guyana
w = GDP-weighted average.
2020 2016
8
9.0%
10.0%
10.0%
10.0%
12.5%
14.8%
15.0%
15.0%
15.0%
15.0%
15.0%
16.0%
16.5%
17.0%
17.0%
18.0%
18.0%
19.0%
19.0%
19.0%
19.0%
19.2%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.6%
21.0%
21.4%
21.7%
21.8%
22.0%
22.0%
22.5%
22.5%
23.0%
23.3%
24.0%
24.0%
24.9%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.0%
25.4%
25.5%
25.7%
25.7%
25.8%
26.1%
26.5%
27.0%
27.0%
27.2%
27.5%
27.9%
27.9%
28.0%
28.0%
29.0%
29.5%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.0%
30.6%
31.0%
31.5%
32.0%
34.0%
34.5%
35.0%
35.0%
38.6%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Hungary
Bulgaria
Paraguay
Qatar
Ireland
Switzerland
Uzbekistan
Mauritius
Georgia
Serbia
Ecuador
Romania
Hong Kong
Kuwait
Singapore
Ukraine
Croatia
Czech Republic
Poland
Slovenia
United Kingdom
Jordan
Iceland
Fiji
Latvia
Estonia
Finland
Turkey
Indonesia
Kazakhstan
Saudi Arabia
Thailand
Vietnam
Russia
Madagascar
Sweden
Austria
Botswana
Netherlands
Lesotho
Denmark
Norway
Egypt
Slovak Republic
Israel
India
Malaysia
Greece
Luxembourg
Kenya
Spain
China
Argentina
Bangladesh
Bolivia
Ghana
Iran
Panama
Uruguay
94 Country w
Belgium
OECD w
United States
France
Canada
G7 w
Dominican Republic
Chile
Tunisia
Korea S.
Jamaica
Italy
New Zealand
South Africa
Pakistan
Peru
Uganda
Australia
Germany
Mexico
Colombia
Costa Rica
Ethiopia
Philippines
Rwanda
Sierra Leone
Tanzania
Trinidad and Tobago
Japan
Morocco
Portugal
Nigeria
Brazil
Venezuela
Zambia
Chad
Guyana
w = GDP-weighted average.
2020 2016
Besides the U.S. and France, sharp reductions of over five points in corporate income
tax rates since 2016 have occurred in Belgium (eight points), Greece (five points), India
(12 points), Argentina (10 points), Colombia (10 points), Hungary (10 points), and Kenya
(five points). Only a few countries have increased corporate income tax rates since 2016
(Egypt, Latvia, Pakistan, Taiwan, Trinidad and Tobago, Turkey, South Korea, the Slovak
Republic, Tunisia and Slovenia). Generally, corporate income tax rates have continued
to fall globally, dropping over four points from a GDP-weighted average of 29.6 per
cent in 2016 to 25.4 per cent among the 94 countries. Canada has stood still, except for
the tax-rate reduction in Alberta.
MARGINAL EFFECTIVE TAX RATES: IMPACT ON INVESTMENT
To gauge how corporate taxation in open economies impacts investment, we measure
the METR, similar to our earlier reports. The tax paid on profits from investment
depends on more than just the corporate income tax rate. It depends on provisions
that determine taxable profits such as interest, depreciation, inventory cost, fees and
other deductions including non-profit taxes. Investment allowances and tax credits
also reduce the profit-tax base. On the other hand, inflation can aect the value of
investment deductions. Depreciation and inventory deductions based on historical
values are eroded by inflation, while nominal-interest deductions can be beneficial
to holding assets with inflating values.
8
Overall, if tax deductions are more than the
8
Inventory deductions based on FIFO (first in, first out) valuation results in the use of the historical prices to
measure the cost of replacing inventories. This results in a higher eective tax rate. LIFO (last in, first out)
enables companies to deduct inventory costs closer to replacement cost. Many countries provide an average
pricing approach.
9
economic (including inflation-indexed) costs of employing capital, then the eective
tax rate on capital will be below the statutory corporate income tax rate, thereby
encouraging capital investment. Alternatively, tax deductions that are smaller than
economic costs can lead to an eective tax rate above the statutory corporate tax rate.
Other tax provisions also aect investment costs. These include sales taxes on capital
purchases, wealth or asset-based corporate taxes and transfer taxes on real property
and financial transactions. These additional taxes increase the eective tax rate on
capital. In our analysis, we do not include labour taxes, such as employer-based payroll
taxes, since these aect the cost of labour, not capital. As discussed in our 2019 report
(Bazel and Mintz 2020), a tax on the cost of producing goods would be a weighted
average of eective capital and labour tax rates, which we have calculated for
provinces in Canada but are unable to apply to the 94 countries.
In the appendix, we provide some details on the parameters that drive the country
models, including inflation rates, tax-depreciation rates, inventory-cost valuation, and
other taxes. With most countries having value-added taxes (VATs) as sales taxes, few
countries levy non-refundable sales tax on capital inputs purchased by manufacturing
and service industries (except the VAT-exempt financial sector). We note that 13
countries levy asset-based taxes (the highest in Kazakhstan, at 1.5 per cent); that
number would be much larger if we included eective municipal property tax rates
that are not measurable across countries. The most frequently used taxes are capital
transfer taxes (typically real estate transfer tax), which are applied in 56 countries.
We assume that these taxes are applied at the time assets are initially purchased
and avoided through tax-planning arrangements if assets are resold. To evaluate the
eect of taxes, we estimate the METR, which is explained in Box A. The theoretical
methodology used in the analysis has been provided in numerous past publications and
is not repeated here.
9
9
See Mintz and Bazel (2015). We include all industries except oil and gas, mining and finance. For a more
limited comparison of oil and gas by country, see Mintz (2016), and for mining, see Bazel and Mintz (2019).
10
BOX A
The impact of taxes on capital investment is based on an analytical measure of the
marginal eective tax rate (METR). The METR is the annualized value of corporate
taxes paid as a percentage of the pre-tax profitability of marginal investments.
Marginal investments are those that are incremental to the economy: They earn
sucient profit to attract financing from investors, covering risk and taxes. At the
margin, businesses invest in capital until the rate of return on capital, net of taxes
and risk, is equal to the cost of financing capital (or the interest rate). If the rate of
return is more (less) than financing costs, firms will invest more (less) in capital. Thus,
if a government increases the tax rate, it will result in businesses rejecting marginal
projects that were profitable before taxes were increased.
For example, suppose companies must pay out in after-tax profits a return (net of risk
and taxes) equal to five per cent to attract financing from equity and bondholders for
a new investment project. If the tax wedge is 50 per cent, it means that the company
must earn a 10-per-cent net-of-risk rate of return to cover taxes and cost of financing.
If the project earns less than 10 per cent as a pre-tax rate of return, the project will
not move forward. Of course, some projects might earn more than a 10-per-cent rate
of return on capital, but as long as the minimal rate of return is earned, a project will
be profitable to undertake. Therefore, if the tax wedge decreases, more investment
projects become profitable, since a lower rate of return is acceptable to cover both
tax and financing costs.
Briefly, the eective tax rate, or tax wedge, is the portion of capital-related taxes
paid as a share of the pre-tax rate of return on capital for marginal investments (on
the assumption that businesses invest in capital until the after-tax return on capital
is equal to the cost of financing capital). Taxes that impinge on capital investment
include corporate income taxes (the rate and base), sales taxes on capital purchases
(such as retail sales taxes), asset-based taxes (capital taxes and property taxes),
and transfer taxes on real estate and financial transactions. In our analysis, we have
included most taxes except municipal property taxes, since they are dicult to
measure due to variations in municipal rates and bases, and are unobservable by
industry (even for Canada).
In our analysis, we use similar capital structures to isolate tax dierences among
94 countries (country-specific capital weights, if available, would give a dierent
ranking). The capital structures, reflecting the distribution of assets among machinery,
buildings, inventory and land investments, are based on Canadian data. Economic
depreciation rates for assets are also based on Statistics Canada estimates. Bond
interest rates reflect dierences in inflation rates across countries (following the
purchasing-power-parity assumption). Equity costs are based on a marginal supplier
of finance equating the after-tax rates of return on stocks and bonds (the marginal
investor is assumed to be a G7 investor holding an international portfolio of bonds and
equity). The analysis includes manufacturing and service industries (services include
construction, utilities, transportation, communications, trade, and other business and
household services).
11
When it comes to investments with returns just sucient to attract international
capital, Canada’s METR is competitive internationally. As shown in Figure 3, Canada’s
METR at 15.6 per cent is well below the OECD weighted average of 23.4 per cent. It
is also well below the G7 average (25.3 per cent). It is also below the average of BRIC
countries (Brazil, Russia, India and China), at 24.6 per cent, and the average of the 94
countries, at 23.2 per cent. Going back to 2016, Canada’s METR was much higher, by
almost five points (20.7 per cent), but so was the METR of other countries, which were
especially influenced by the U.S. rate, prior to the tax reform implemented there on
Jan. 1, 2021.
Figure 3: Canada’s METR Compared to Other Country Groups
20.7
30.7
26.8
30.7
27.4
28.2
15.6
25.3
24.6
24.7
23.4
23.2
0%
5%
10%
15%
20%
25%
30%
35%
Canada
G7 w
BRIC w
G20 w
OECD w
94 Country w
METR
2016 2020
w = GDP-weighted average.
A significant step in reducing the METR from 20.7 per cent in 2016 to 15.6 per cent in
2020 in Canada was the adoption of temporary accelerated depreciation in November
2018, a move largely seen as a direct response to the U.S. tax reform containing a
similar temporary incentive.
10
Introduced by Canada’s minister of finance as part of
the Accelerated Investment Incentive, new purchases of manufacturing and clean-
energy machinery are expensed for five years, with a phase-out from 2024–27. Regular
depreciation rates were boosted by one-and-a-half times the statutory capital-cost-
allowance rate, also for five years, which were to be similarly phased out thereafter. The
half-year convention — restricting first-year tax depreciation to one-half of the statutory
capital-cost-allowance rate — was also dropped on a corresponding temporary basis.
The provinces that collect their own corporate income tax (Quebec and Alberta) also
adopted accelerated depreciation on a temporary basis.
10
As one element of U.S. reform, investments in assets with lives less than 20 years qualify for 100-per-cent
bonus depreciation for five years (to be phased out thereafter).
12
When temporary accelerated depreciation is fully phased out in 2028, Canada’s METR
will rise from 15.6 per cent to 19.5 per cent.
11
The U.K. METR will rise from 21.2 to 26.5
per cent. The U.S. will also be phasing out bonus depreciation by 2028 and might be
increasing its corporate tax rate (the Biden campaign proposed a corporate income tax
rate of 28 per cent). If both of those measures are brought in, the U.S. METR will rise by
almost a half, from 22.6 to 32.1 per cent. These increases will slow down investment —
in the U.K., by potentially 20 per cent.
12
On a regional basis (see the appendix), Canada’s METR in 2020 is well below the
average of its most direct competitors in the Americas (24.0 per cent), as well as Asia
and Oceania (26.2 per cent) and Europe (21.1 per cent). Canada’s METR is above that of
Africa (12.7 per cent) and the Middle East and North African countries (7.9 per cent). As
for all 94 countries, GDP-weighted average is 23.2 per cent, almost eight points higher
than Canada’s. Canada’s existing METR is 40
th
lowest of 94 countries (Figure 4).
Much of Canada’s competitiveness for marginal projects is driven by exceedingly low
manufacturing METRs. As shown in the appendix, the manufacturing METR in Canada
is only 9.4 per cent, one of the lowest in the OECD (the lowest are Estonia at 8.8
per cent, Slovenia and Switzerland both at 8.5 per cent, and Turkey at 5.3 per cent).
Services are taxed more heavily in Canada at an METR of 17.6 per cent, about eight
points higher than manufacturing. The Canadian METR on services is only somewhat
below other countries.
Few other industrialized countries tax services so heavily relative to manufacturing as
Canada does. Among the 94 countries, Brazil favours manufacturing more heavily than
services (17.5 per cent and 40.1 per cent respectively) primarily due to a non-refundable
VAT on capital purchases made by the service sector. Other countries that favour
manufacturing over services include Guyana (24.3 and 34.8 per cent respectively), Kenya
(3.3 and 17.1 per cent respectively) and Lesotho (11.9 and 23.9 per cent respectively).
Some other countries have done the opposite — favouring services much more than
manufacturing, such as Bolivia, Costa Rica, Egypt, Ethiopia, Iran, Ukraine and Zambia.
Leaving aside the obvious distortions favouring some business activities over others, it
also raises issue regarding post-COVID recovery. The most heavily aected industries
by the pandemic are services such as air transportation, retail and tourism, where
economic adjustments will be critical. Yet, Canada and several other countries have
a strong bias towards manufacturing, which has almost returned to its pre-pandemic
production levels.
11
Some other tax changes occurred in Canada during the 2016–20 period, including the corporate-tax-rate
reduction in Alberta. Thus, without accelerated depreciation, the 2020 METR is less than the 2016 METR.
12
See M. Devereux (2021). https://oxfordtax.sbs.ox.ac.uk/article/what-will-the-budget-do-for-corporate-
investment.
13
Figure 4: METR by Country in 2020 and 2016
-10.9%
-6.4%
3.1%
4.4%
4.7%
5.7%
6.3%
7.0%
7.1%
7.4%
7.6%
7.7%
8.3%
8.8%
9.4%
9.6%
9.7%
10.1%
10.4%
10.5%
10.7%
10.9%
11.2%
11.3%
11.5%
11.6%
12.5%
12.7%
13.3%
13.7%
13.8%
14.4%
14.4%
14.9%
15.0%
15.1%
15.4%
15.6%
15.6%
15.9%
16.1%
16.5%
16.5%
16.8%
17.4%
17.4%
17.7%
17.9%
18.0%
18.8%
19.0%
19.2%
19.2%
19.3%
19.5%
19.7%
19.8%
20.0%
20.2%
20.6%
20.6%
20.9%
21.1%
21.2%
21.3%
21.8%
21.8%
21.8%
22.1%
22.2%
22.3%
22.6%
22.9%
23.1%
23.2%
23.3%
23.4%
24.2%
25.1%
25.2%
25.3%
26.1%
26.4%
26.6%
27.2%
28.0%
28.1%
28.4%
29.3%
29.3%
33.2%
33.8%
37.0%
37.7%
37.8%
38.8%
70.4%
-20% -10% 0% 10% 20% 30% 40% 50% 60%
Ukraine
Egypt
Turkey
Romania
Qatar
Ghana
Bulgaria
Paraguay
Estonia
Slovenia
Hong Kong
Iran
Switzerland
Kuwait
Zambia
Chile
Greece
Nigeria
Croatia
Latvia
Hungary
Vietnam
Singapore
Bangladesh
Poland
Mauritius
Fiji
Slovak Republic
South Africa
Sierra Leone
Denmark
Finland
Madagascar
Saudi Arabia
Kenya
Iceland
Czech Republic
Canada
Luxembourg
Ethiopia
Kazakhstan
Morocco
Rwanda
Jordan
Sweden
Indonesia
Ireland
Serbia
Panama
Tunisia
Spain
Netherlands
Tanzania
Mexico
Israel
Italy
New Zealand
Norway
Uganda
Austria
China
Georgia
Colombia
United Kingdom
Lesotho
Malaysia
Dominican Republic
Uruguay
Portugal
Bolivia
Peru
United States
Uzbekistan
Costa Rica
94 Country w
Belgium
OECD w
Jamaica
Trinidad and Tobago
Botswana
G7 w
Germany
Philippines
Ecuador
Russia
France
Australia
Chad
Korea S.
Thailand
Pakistan
Guyana
Brazil
India
Argentina
Japan
Venezuela
2020 2016
14
-10.9%
-6.4%
3.1%
4.4%
4.7%
5.7%
6.3%
7.0%
7.1%
7.4%
7.6%
7.7%
8.3%
8.8%
9.4%
9.6%
9.7%
10.1%
10.4%
10.5%
10.7%
10.9%
11.2%
11.3%
11.5%
11.6%
12.5%
12.7%
13.3%
13.7%
13.8%
14.4%
14.4%
14.9%
15.0%
15.1%
15.4%
15.6%
15.6%
15.9%
16.1%
16.5%
16.5%
16.8%
17.4%
17.4%
17.7%
17.9%
18.0%
18.8%
19.0%
19.2%
19.2%
19.3%
19.5%
19.7%
19.8%
20.0%
20.2%
20.6%
20.6%
20.9%
21.1%
21.2%
21.3%
21.8%
21.8%
21.8%
22.1%
22.2%
22.3%
22.6%
22.9%
23.1%
23.2%
23.3%
23.4%
24.2%
25.1%
25.2%
25.3%
26.1%
26.4%
26.6%
27.2%
28.0%
28.1%
28.4%
29.3%
29.3%
33.2%
33.8%
37.0%
37.7%
37.8%
38.8%
70.4%
-20% -10% 0% 10% 20% 30% 40% 50% 60%
Ukraine
Egypt
Turkey
Romania
Qatar
Ghana
Bulgaria
Paraguay
Estonia
Slovenia
Hong Kong
Iran
Switzerland
Kuwait
Zambia
Chile
Greece
Nigeria
Croatia
Latvia
Hungary
Vietnam
Singapore
Bangladesh
Poland
Mauritius
Fiji
Slovak Republic
South Africa
Sierra Leone
Denmark
Finland
Madagascar
Saudi Arabia
Kenya
Iceland
Czech Republic
Canada
Luxembourg
Ethiopia
Kazakhstan
Morocco
Rwanda
Jordan
Sweden
Indonesia
Ireland
Serbia
Panama
Tunisia
Spain
Netherlands
Tanzania
Mexico
Israel
Italy
New Zealand
Norway
Uganda
Austria
China
Georgia
Colombia
United Kingdom
Lesotho
Malaysia
Dominican Republic
Uruguay
Portugal
Bolivia
Peru
United States
Uzbekistan
Costa Rica
94 Country w
Belgium
OECD w
Jamaica
Trinidad and Tobago
Botswana
G7 w
Germany
Philippines
Ecuador
Russia
France
Australia
Chad
Korea S.
Thailand
Pakistan
Guyana
Brazil
India
Argentina
Japan
Venezuela
2020 2016
w = GDP-weighted average.
A MORE DETAILED LOOK AT FEDERAL-PROVINCIAL METRS
Given Canada’s federal nature, a detailed look at federal-provincial METRs is in order.
As shown in tables 2a and 2b, METRs are calculated by industry and province and
by asset type and province for 2020. Also provided are the METR by industry and
province in 2020 under the assumption that accelerated depreciation is fully phased
out (Table 2c). What is striking is the degree of tax non-neutrality among provinces,
assets, and industries, largely but not exclusively driven by federal policy through the
Accelerated Investment Incentive and the Atlantic Investment Tax Credit.
As mentioned above, Canada has a corporate tax policy that strongly favours
manufacturing, a trend going back to 1972 when U.S. competitiveness was a significant
concern (Jog and Mintz 1989). Forestry and forest-related manufactured products
is also heavily favoured, with an METR that is 7.2 per cent, driven by accelerated tax
depreciation and the federal Atlantic credits and other various provincial tax credits
(Figure 5a). Agriculture, transportation/storage, communication and utility sectors are
taxed at rates close to the average METR in Canada, while the rest of the service sector
(construction, trade and other household and business services) bear above-average
METRs, in excess of 20 per cent. This bias against the service sector was a significant
concern in the report of the Technical Committee on Business Taxation (1997), which
recommended reducing corporate income tax rates to the tax rate on manufacturing
income to improve neutrality. The federal government proceeded in that direction after
2000, but reversed course in 2007, amplifying dierences further in 2018.
15
Table 2a: Federal-Provincial METRs by Industry and Province 2020
2020
Agriculture
Forestry
Electrical Power, Gas & Water
Transportation & Storage
Communications
Other Services
Aggregate
2020
Buildings
Machinery & Equipment
Land
Inventory
Aggregate
Canada 14.7% 7.2% 15.4% 20.8% 7.4% 21.1% 22.9% 14.8% 15.9% 20.4% 15.6%
Newfoundland 10.1% -16.1% 14.6% 22.6% -13.3% 23.2% 24.0% 13.3% 14.1% 19.0% 8.0%
Prince Edward Island -0.4% -37.5% 15.5% 23.5% -52.5% 24.4% 25.3% 19.8% 14.1% 22.7% 11.3%
Nova Scotia 7.9% -16.5% 14.4% 21.9% -20.5% 22.7% 23.9% 13.9% 14.0% 19.4% 12.3%
New Brunswick 2.2% -16.2% 14.2% 21.8% -12.3% 22.6% 23.6% 15.7% 13.8% 19.0% 10.7%
Quebec 15.0% -1.2% 12.2% 19.5% -0.7% 20.3% 21.4% 12.4% 11.1% 18.2% 11.5%
Ontario 15.2% 10.3% 13.0% 19.9% 11.5% 20.5% 22.1% 14.0% 12.8% 18.3% 15.1%
Manitoba 18.7% 1.9% 23.6% 26.7% -3.9% 25.3% 26.3% 20.5% 25.0% 28.6% 21.0%
Saskatchewan 17.9% 10.9% 22.7% 25.7% 12.5% 26.0% 26.1% 18.5% 26.9% 27.6% 20.6%
Alberta 11.0% 9.2% 10.3% 16.7% 12.0% 17.2% 17.8% 9.7% 9.8% 13.8% 12.1%
British Columbia 21.3% 18.3% 25.8% 28.0% 18.2% 26.7% 28.8% 21.7% 30.3% 31.5% 25.6%
Table 2b: Federal-Provincial METRs by Province and Asset Type 2020
Agriculture
Forestry
Electrical Power, Gas & Water
Construction
Manufacturing
Wholesale Trade
Retail Trade
Transportation & Storage
Communications
Other Services
Aggregate
2020
Buildings
Machinery & Equipment
Land
Inventory
Aggregate
Canada* 20.8% 8.4% 12.4% 24.2% 15.6%
Newfoundland 12.2% -12.0% 13.3% 27.9% 8.0%
Prince Edward Island 19.8% -14.4% 14.3% 28.6% 11.3%
Nova Scotia 18.9% -3.1% 13.7% 26.8% 12.3%
New Brunswick 17.0% -6.2% 13.3% 27.0% 10.7%
Quebec 19.7% -5.0% 12.4% 24.6% 11.5%
Ontario 20.9% 5.7% 12.7% 24.1% 15.1%
Manitoba 20.2% 22.9% 13.1% 25.0% 21.0%
Saskatchewan 21.7% 21.5% 11.4% 24.2% 20.6%
Alberta 16.3% 6.3% 9.4% 21.3% 12.1%
British Columbia 27.9% 27.9% 14.0% 25.1% 25.6%
Figure 2c: Federal-Provincial METRs by Province and Industry Without Accelerated
Depreciation
2020
Agriculture
Forestry
Electrical Power, Gas & Water
Transportation & Storage
Communications
Other Services
Aggregate
Canada 18.3% 13.3% 19.0% 23.0% 13.7% 23.2% 24.7% 17.8% 22.1% 24.5% 19.5%
Newfoundland 12.8% -5.3% 18.9% 25.1% -3.9% 25.6% 26.0% 17.6% 21.5% 24.0% 13.3%
Prince Edward Island 4.7% -22.4% 19.8% 26.1% -33.9% 26.7% 27.3% 22.7% 22.0% 27.0% 16.3%
Nova Scotia 10.8% -5.7% 18.5% 24.3% -8.0% 25.0% 25.8% 17.6% 21.1% 24.3% 17.1%
New Brunswick 6.2% -5.6% 18.3% 24.3% -2.6% 24.8% 25.5% 18.8% 21.0% 23.8% 15.6%
Quebec 18.4% 5.1% 16.2% 21.8% 5.7% 22.5% 23.3% 15.9% 18.2% 22.8% 15.8%
Ontario 18.8% 16.2% 16.8% 22.1% 17.8% 22.6% 23.9% 17.2% 19.4% 22.7% 19.3%
Manitoba 22.5% 9.1% 26.8% 28.7% 4.8% 27.3% 28.0% 23.2% 30.3% 32.1% 24.5%
Saskatchewan 22.2% 16.5% 25.9% 27.8% 17.9% 27.9% 27.8% 21.0% 31.9% 31.0% 24.0%
Alberta 14.6% 14.5% 13.7% 18.8% 16.8% 19.2% 19.5% 12.5% 15.9% 18.2% 15.5%
British Columbia 24.4% 23.4% 28.9% 30.0% 23.4% 28.6% 30.4% 24.4% 34.8% 34.7% 28.7%
This favouritism can also be seen in the METR bias towards machinery-intensive
businesses (Figure 5b). While investments in machinery bear an METR of 8.4 per cent
16
and investments in land bear 12.4 per cent, investments in structures are taxed at 20.8
per cent and inventories at 24.2 per cent (the latter due to FIFO accounting).
As for the provinces, the METR on investment in British Columbia is the highest
in Canada (and close to the OECD average) at 25.6 per cent. This is followed by
Manitoba at 21 per cent and Saskatchewan at 20.6 per cent. All three of these
provinces rely on the retail sales tax that results in high METRs on machinery and
equipment and structures (Figure 5b). If the provinces harmonized their sales taxes
with the federal GST, most sales taxes on capital purchases would be refunded,
thereby reducing the METR.
The lowest METRs are in the Atlantic provinces, largely driven by the federal Atlantic
Investment Tax Credit that is available to agriculture, forestry and manufacturing
industries. Quebec also has a low METR at 11.5 per cent, driven by federal as well as
provincial incentives for investments in machinery and equipment.
Alberta’s METR is now 12.1 per cent, in part reflecting its corporate income tax rate of
eight per cent. With the federal rate, Alberta companies bear a corporate income tax
rate of 23 per cent, which is one of the lowest in North America (the U.S. federal rate is
21 per cent, and some states — Nevada, Ohio, Texas and Washington — currently do not
have a corporate income tax
13
). If the U.S. increases its federal corporate income tax
rate, Alberta will have the lowest corporate income tax rate in North America as well as
one of the lowest METRs on capital.
While Canada has a relatively low METR to encourage capital investment, its corporate
tax has become more distortionary. The inter-industry and inter-asset dispersion index
(see Chen and Mintz 2010 for its explanation) has increased by more than two-and-a-
half times from 2016 (.0732 compared to 0.0286). These non-neutralities have several
economic impacts:
• They undermine productivity as businesses shift capital to projects in part
to benefit from tax preferences. While some preferences may be given to
activities that generate unremunerated benefits to other firms (e.g., research
and development and exploration expenditures), many preferences are driven
by political considerations rather than to correct market failures. Distortionary
taxes, including the corporate income tax, have been found to reduce
economic growth rates, unlike less distortionary taxes such as consumption
taxes and property taxes (e.g., Kneller, Bleaney and Gemmel 1999 and Baquee
and Farhi 2020).
13
These four states have gross receipt taxes. In related work, we have estimated an aggregate METR for a select
group of U.S. states with gross receipt taxes rather than income taxes. We estimate an aggregate METR of
19.2 per cent in Texas, 18.1 in Nevada, 27.8 in Washington, and 16.2 in Ohio. These estimates along with others
can be found in Alberta Budget 2021, Fiscal Plan, “Corporate Marginal Eective Tax Rate Comparison, 2020,”
p. 151, at https://open.alberta.ca/dataset/6f47f49d-d79e-4298-9450-08a61a6c57b2/resource/ec1d42ee-
ecca-48a9-b450-6b18352b58d3/download/budget-2021-fiscal-plan-2021-24.pdf.
17
• Tax credits and hefty capital-cost deductions can push companies into non-
taxpaying positions, blunting the eectiveness of incentives. On average, 59
per cent of corporations were non-taxpaying in the years 2012–16.
14
• Targeted incentives for capital increase the demand for capital inputs,
potentially resulting in higher capital-goods prices. Thus, the incentive accrues
to suppliers of capital and can benefit suppliers rather than the firm (Goolsbee
(1998) finds 35 to 70 per cent of the incentive accrues to suppliers).
• Incentives biased towards machinery reduce the demand for unskilled labour,
while creating more demand for complementary inputs such as skilled labour.
It can then contribute to more economic inequality (Slavìk and Yazici 2019).
CANADA’S INVESTMENT PERFORMANCE
It is well known that Canada’s investment performance since the commodity-price
crash in late 2014 has been subpar.
15
That has contributed to weak per capita GDP
performance, which can ultimately impact labour compensation. In this section, we will
tie these issues together.
Canada’s business investment as a share of GDP — the investment rate — has had
periods of weak performance, with various peaks and valleys, since 1981 (Figure 5).
During the commodity boom, investment as share of GDP perked up, reaching as high
as 18 per cent of GDP in 2006 and 2014, but fell back to 13 per cent of GDP by 2019.
The current level of investment is better than the 1983–97 period, which generally
saw investment lower than 13 per cent of GDP. At that time, Canada suered two
major recessions in the early 1980s and 1990s and experienced high public deficits
and debt, accompanied by high interest and inflation rates. It was also a period of low
productivity growth.
16
As we pointed out last year, investment in residential real estate has grown since 2015,
but not private non-residential investment (Bazel and Mintz 2020). The same trend
holds true in 2020, with residential investment growing and non-residential investment
in machinery and structures falling.
17
14
Canada Revenue Agency, Taxation Statistics, https://www.canada.ca/content/dam/cra-arc/prog-policy/
stats/t2-corp-stats/2012-2016/t2-crp-sttstcs-tbl09-e.pdf. Little other data are provided to assess the impact
of tax losses on investment by industry or size of firms. For early work, see Mintz (1988), which shows that tax
losses can either increase or reduce METRs.
15
See, for example, W. Robson and M. Wu (2021), https://www.cdhowe.org/intelligence-memos/robson-wu-–-
our-capital-investment-crisis.
16
See, CEIC Data, Canada’s Labour Productivity Growth, 1977-2020, https://www.ceicdata.com/en/indicator/
canada/labour-productivity-growth.
17
Statistics Canada, “Gross domestic product, income and expenditure, fourth quarter 2020,” https://www150.
statcan.gc.ca/n1/daily-quotidien/210302/dq210302a-eng.htm?HPA=1.
18
Figure 5: Private Real Non-Residential Investment as a Share of Real GDP, 1981–2019
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
Source: Statistics Canada Table 36-10-0096-01 and Table 36-10-0222-01.
More disaggregated information provides further understanding with respect to
Canada’s lagging investment performance. Real private non-residential investment
declined by seven per cent since 2015 (Figure 6a). Engineering construction (e.g.,
heavy and civil engineering as defined by Statistics Canada) has been the weakest,
falling 15 per cent, followed by machinery and investment, falling almost seven per cent.
Non-residential building investment recovered to roughly its 2015 value in 2019, and
investment in intellectual-property products rose five per cent over the four years.
Figure 6a: Private Non-Residential Real Investment Growth by Asset Type
Source: Statistics Canada 36-10-0096-01.
19
Superficially, it might be presumed that much of the decline in business investment has
been linked entirely to the resource sector, particularly the energy industry. However,
that is not the case. As shown in Figure 6b, the largest decline from 2015 to 2019 was
in mining, quarrying, and oil and gas (30 per cent) as expected, but several other
industries experienced a loss in investment as well. These include retail trade (-14 per
cent), agriculture, forestry, fishing and hunting (-21 per cent), and the finance, insurance,
real estate, rental and leasing industries (-8 per cent).
18
Manufacturing grew primarily in the last two years, perhaps reflecting expensing under
the corporate income tax that was adopted November 2018. Construction investment
rose roughly 10 per cent, partly influenced by the growth in residential real estate. The
“information and cultural” industry rose just over 18 per cent from 2015 to 2019. The
best performance over the four years was “transportation and warehousing,” at 31 per
cent, partly driven by the growth in digital trade.
Past studies on sectoral investment, such as Parsons (2008), have shown that an
increase in the METR causes investment to decline. However, other factors clearly aect
investment, such as growth in demand, interest rates, political stability and regulation.
Figure 6b: Private Non-Residential Real Investment Growth by Industry
60%
70%
80%
90%
100%
110%
120%
130%
140%
2015
2016
2017
2018
2019
Mining, quarrying and oil and
gas extraction
Manufacturing
Transportation and
warehousing
Finance, insurance, real
estate, rental and leasing
Agriculture, forestry, fishing
and hunting
Information and cultural
industries
Retail trade
Construction
Source: Statistics Canada 36-10-0096-01.
As we discussed in the previous section, the corporate tax is currently not a significant
obstacle to business investment. Even without accelerated depreciation, Canada’s
corporate tax burden, measured by the METR, was below its most important
competitors, including the United States. Nor has it changed much from 2015 to
November 2019. However, other countries did not stand still, especially the U.S., where
tax reform resulted in a sharp reduction in the METR. As discussed above, Canada’s
18
If real estate was excluded from finance, insurance and leasing, the decline in investment would have been
steeper, since real estate includes residential construction.
20
general corporate income tax rate is now slightly above the U.S. rate and the OECD
average. Large-scale, lumpy investment projects that earn high economic rents, such
as in knowledge-based and resource industries, are less competitive for companies to
locate in Canada when the general corporate tax rate is high.
In Figure 7, we compare gross fixed capital formation, or what might be more
commonly referred to as investment in physical capital (including both private and
public investment) by OECD country. Certainly the commodity downturn aected
resource economies most (e.g., Canada, Australia, Brazil and Mexico), although some
other resource economies, such as Norway, India, Russia and New Zealand, had
growing investment expenditures.
Countries are grouped according to whether a country is (i) high-taxed (corporate rates
that are 30 per cent or above), (ii) low-taxed (19 per cent or less), (iii) medium-taxed
(corporate tax rates ranging from 20 to 29 per cent) or (iv) experienced significant
corporate-tax-rate reductions of at least five points during the period 2016–19. Only
Estonia and Latvia tax distributed profits at 20 per cent (reinvested profits are exempt),
so we treat these countries as low-taxed.
Once public investment is included, gross fixed capital formation in Canada shrank
by 0.5 per cent during these four years, less than the medium-taxed country average
(11.1 per cent). This contrasts to low-tax countries, which saw 15.8 per cent growth,
with the highest growth being in Ireland (115.1 per cent). High-tax countries had
paltry investment growth (3.7 per cent). Those countries that had sharp reductions in
corporate rates, all of which had high corporate income tax rates in 2016, had quite
good investment growth (14.4 per cent).
Among OECD countries, Canada had the fourth-worst growth in gross fixed capital
formation since 2015, even worse than other economies with similar corporate income
tax rates. Among the countries where investment is growing fastest, we see low-tax
countries, including Ireland, Hungary and Estonia.
21
Figure 7: Percentage Change in Investment by Country from 2015 to 2019
14.3%
30.7%
5.0%
39.8%
115.1%
16.6%
11.9%
23.3%
7.9%
5.8%
15.8%
-0.5%
4.4%
20.9%
17.5%
5.0%
21.0%
27.0%
12.4%
11.2%
4.7%
13.9%
16.4%
7.7%
1.7%
19.1%
10.2%
11.1%
-0.4%
-9.0%
12.9%
3.2%
-4.1%
27.9%
3.7%
12.9%
15.7%
24.1%
13.0%
14.4%
-30%
-10%
10%
30%
50%
70%
90%
110%
130%
Czech Republic
Estonia
Hong Kong
Hungary
Ireland
Latvia
Poland
Slovenia
Switzerland
United Kingdom
Low Tax Ave. w
Canada
Chile
Denmark
Finland
Greece
Iceland
Israel
Italy
Korea,Rep.
Netherlands
New Zealand
Norway
Russia
Slovak Republic
Spain
Sweden
Medium Tax Ave. w
Australia
Brazil
Germany
japan
Mexico
Portugal
High Tax Ave. w
Belgium
France
India
United States
Large Change Ave. w
Note: “Ave. W” represents the GDP-weighted average.
Source: National accounts data via OECD and World Bank.
Obviously, investment depends on multiple factors. The poor Canadian investment
performance is partly related to economic adjustment arising from the commodity bust
after 2014. However, the lack of investment in other industries is concerning, given its
importance to the adoption of new technologies and productivity. Many factors can
be considered, but the regulatory environment has been criticized the most.
19
High
marginal statutory tax rates at the personal level also imposes a barrier in attracting
skilled labour and entrepreneurs. The lack of business investment in the U.S. is
explained by a lack of competition and tightened governance; less so by the switch to
intangible expenditures or globalization (Gutiérrez and Philippon 2017).
20
GDP GROWTH PERFORMANCE
Investment enables an economy to produce more product per worker hours — labour
productivity. It also has “endogenous” growth eects as companies adopt the latest
innovations associated with new vintages of capital. This could lead to a substitution
for labour, but it also enables companies to reduce unit costs and become more
competitive. As economic studies have shown, investment leads to more demand for
19
See, for example, Deloitte’s review of factors impacting investment climate. While Canada’s talent, economic
stability, access to capital and domestic market support competitiveness compared to other countries, we are
weak in innovation, high tax rates and regulation. https://www2.deloitte.com/ca/en/pages/finance/articles/
canada-competitiveness-scorecard.html/#accordion1.
20
Investments in intangible assets (research and development, software and mineral exploration) contribute to
labour productivity, but the eect is relatively small (Gu and MacDonald 2020).
22
labour as the growth in output more than compensates for any labour displacement.
21
This has been referred to as “capital deepening,” in that workers become more
productive and businesses more cost ecient due to capital investment.
22
Reflecting declining investment, among other factors, Canada’s average five-year
GDP per-capita growth rate from 2016 to 2020 has turned negative (Figure 8) for
the first time since the Great Depression. Although annual per capita GDP growth
was exceptional in the early 1960s at over 4.2 per cent, it fell to an average of 0.5 per
cent in the 1990s, consistent with Fortin’s (1999) observation. It improved after 2000,
helped by the commodity boom and, in part, corporate and personal tax reforms,
but has swung negative to -0.75 per cent for the five-year period 2016–20. Excluding
2020, the 2016–19 average per-capita growth rate was only 0.45 per cent, similar to the
underperforming years 1991–2000. In other words, 2020 swamped whatever little per
capita growth Canada experienced in the previous four years.
Figure 8: Average Per Capita GDP Annual Growth Rates in Canada
-1%
0%
1%
2%
3%
4%
5%
1961-1970
1971-1980
1981-1990
1991-2000
2001-2005
2006-2010
2011-2015
2016-2020
Average Annual Per Capita GDP Growth Rate
Source: Statistics Canada, GDP (chained 2012 dollars) and population.
Lower per capita GDP growth can hurt labour compensation as well. In Figure 9 below,
we show the relationship between hourly labour-compensation and labour-productivity
measures by value-added (or GDP) per working hour by industrial sector.
21
A typical economic model shows that a reduction in the cost of capital increases demand for capital as well
as labour. The increase in demand for workers is driven by a higher return to labour induced by capital. Of
course, labour displacement is a major policy concern in that some employees may have diculty finding
new employment unless they are retrained.
22
The International Labour Organization (2013) concluded in a global review that increases in labour
productivity within economic sectors are the main driver of economic growth (rather than sectoral
reallocation). However, more recent work suggests that inter-sectoral dierences have a large impact on
productivity (see footnote 2).
23
The non-renewable resource sector generates the highest value-added per working
hour ($300) and pays the second-highest hourly labour compensation ($62). The
regulated utility sector generates the second-highest value-added per working hour
($191) and pays the highest labour compensation ($69 per hour). Manufacturing
generates value-added per hour equal to $62 and pays workers on average $42 per
hour. Accommodation and food services — notably one of the hardest hit sectors in the
pandemic — has the second-least value-added per hour at $23.50, with compensation
of $20.90 per hour.
23
In general, sectors with higher labour productivity tend to pay higher compensation to
attract more highly skilled workers. The correlation between value-added per hour and
hourly employment compensation is 0.61.
Another point to note is that sectors with high value-added not only better compensate
labour, but also capital owners and governments. Thus, improvements in growth also
lead to higher household investment income and tax revenues.
Figure 9: Real Value-Added and Employment Compensation per Hour Worked by
Sector 2019
Notes: Total compensation per hour worked consists of all payments in cash or in kind made by domestic
producers to workers for services rendered. It includes wages and salaries and employers’ contributions
for employees, plus an imputed labour income for self-employed workers.
Source: Statistics Canada 36-10-0480-01.
23
Note that value-added per working hour is quite high for the non-profit sector. This reflects the significant
amount of voluntary labour in the sector that is included in working hours.
24
DIRECTIONS FOR CORPORATE TAX REFORM
So, what have we learned so far?
• Canada’s corporate tax system is attractive to investment in marginal projects,
although it is more distortionary, resulting in a greater capital misallocation in
the economy since 2016. Canada also has a relatively high corporate income
tax rate compared to many countries, thereby making Canada less friendly to
projects with high economic rents from lumpy intangible capital or resource
investments.
• Canada’s pre-pandemic investment performance has been quite disappointing
since 2015. Overall, business investment lags that of most countries.
• As a result of weak labour productivity and per-capita GDP growth, companies
pay lower labour compensation.
Why corporate tax reform today?
It is important to consider what markets will look like in a post-COVID world once
health restrictions can be lifted and economies return to growth. The medium-term
implications are the following:
• Some business sectors, such as technology and transportation services linked
to home delivery have grown during the recession. Retail and household
services markets that do not depend on personal contact will continue to be
disrupted by new technologies in future years. The multinational technology
sector with large profits and low eective corporate tax rates will be favourite
candidates for taxation, such as recently proposed digital taxes on sales either
as a presumptive corporate income tax or an expansion of VATs on digital
services or both.
• Some sectors were not much aected during the recession, or will have
few recovery issues, such as utilities, health care, education, transportation
and logistics, finance and insurance, manufacturing, fishing, forestry,
construction, mining and public administration. Several sectors, such as health,
transportation, technology and manufacturing, will be important for domestic
security. If companies develop flexible working arrangements enabling more
work-from-home, commercial real estate will be challenged to some extent.
• Some businesses were severely impacted by the pandemic and could take
several years to recover, if they recover at all. These include accommodation
and food services, tourism, airlines, retail trade, wholesale trade, commercial
real estate and certain household and business services that relied on person-
to-person contact. The resource sector is springing back to pre-pandemic
levels in terms of production and pricing, but faces structural change as the
world continues its energy transition.
The pandemic that led to a sharp increase in temporary unemployment initially
will eventually result in structural unemployment that could last for long periods.
Eventually, the economy will adjust, but during this recovery period significant new
25
investment is needed. Many have been arguing that Canada should “build back better.”
If that is the case, our private investment performance needs to be urgently addressed.
Since 2000, Canada has reformed its corporate tax system to improve neutrality
and international competitiveness. With respect to international competitiveness,
the federal-provincial corporate income tax rate, once the highest among OECD
countries in 1999, has been reduced from 43 to 26 per cent. Capital taxes on non-
financial businesses have been eliminated, except for provincial-municipal property
taxes, which are levied at higher rates on non-residential compared to residential
property. Sales taxes on capital purchases have been largely removed, as federal and
provincial governments have shifted from one-stage retail sales taxes with significant
taxes on business inputs to value-added taxes (only British Columbia, Manitoba and
Saskatchewan continue to levy provincial retail sales taxes that result in high METRs, as
shown above).
As for neutrality, the dierence between large and small corporate income tax rates
have been reduced at the federal level (although, not so at the provincial level). The
federal government and most provinces have eliminated dierences in corporate
income tax rates among resource, manufacturing and non-manufacturing sectors.
Capital-cost allowances have been adjusted to reflect economic depreciation, except
for the renewal of manufacturing-machinery expensing in 2006 and the recent
adoption of accelerated depreciation in 2018. Some investment tax credits still linger at
the federal and provincial levels.
In recent years, Canada has shifted away from neutrality, with wide dierences in
tax burdens on business activities, as seen in our METR calculations above. To name
a few: accelerated depreciation, the small-business deduction, flow-through-share
tax credits, federal and provincial equity-financing credits, small-business enhanced
research and development tax credits, the exploration tax credit, the federal Atlantic
investment tax credit, provincial manufacturing tax credits, wind and solar tax credits,
interest deductions to earn exempt income, and the pension-plan tax exemption for
investments in controlled enterprises (Jog and Mintz 2013).
Even though there is a benefit to the rate reductions combined with base-broadening
revenue-neutral corporate tax reform that we have pursued since 2000, further eort
in this direction will likely achieve limited results. The most significant preferences, such
as the small-business deduction and clean-energy and manufacturing tax preferences,
are politically driven, so governments will be unwilling to remove them. Even if
neutrality could be improved by eliminating tax preferences, many businesses and
employees are unlikely to welcome tax hikes in the wake of the severe 2020 recession.
If foreign countries impose minimum taxes on subsidiaries operating in Canada, it
could result in tax incentives being less eective in encouraging investment, at least for
foreign companies operating here. While this may help reduce some distortions, it will
increase taxes paid by foreign companies in Canada relative to domestic companies, as
well as deter investment.
We suggest a broader approach to corporate tax reform be considered in the future.
That will be a topic left to a forthcoming separate paper.
26
CONCLUSIONS
In the discussion above, several conclusions were reached. First, Canada’s corporate tax
system is attractive to investment in marginal projects, although it has become much
more distortionary by favouring certain investment activities, including manufacturing,
forestry and machinery-intensive businesses, while taxing more heavily services and
structure-intensive firms. Second, Canada has a relatively high corporate income
tax rate compared to most countries, thereby being less attractive for projects with
high economic rents from intangible capital or resource investments. Third, Canada’s
investment performance has been moribund since 2015, well before the pandemic.
Overall, business investment has lagged that of most countries.
As a result of weak labour productivity and per-capita GDP growth, companies pay
lower labour compensation.
Canada could further pursue its corporate tax reforms by lowering rates and broadening
tax bases. However, if the aim is to simply be at or below the OECD average, tax reform
along these lines would have limited eects in spurring investment.
27
REFERENCES
Baquee, D. R. and E. Farhi. 2020. “Productivity and Misallocation in General
Equilibrium.” Quarterly Journal of Economics 135 (1): 105-163.
Bazel P. and J. Mintz. 2019. “Is Accelerated Depreciation Good or Misguided Policy?”
Canadian Tax Journal 67 (1): 41-55.
Bazel P. and J. Mintz. 2020. “The 2019 Tax Competitiveness Report: Canada’s
Investment and Growth Challenge.” SPP Research Papers. The School of Public
Policy, University of Calgary. March.
Da-Rocha, J. M., M. Mendes Tavarenul and D. Retuccia. 2019. “Policy Distortions and
Aggregate Productivity with Endogenous Establishment Level Productivity.”
National Bureau of Economic Research Working Paper 23339.
Devereux M. and R. Griths. 2002. “The Impact of Corporate Taxation on the Location
of Capital: A Review.” Swedish Economic Policy Review 9: 79-102.
Fortin, P. 1999. “Canada’s Standard of Living: Is There a Way Up?” Benefactor’s Lecture,
C. D. Howe Institute.
Goolsbee, A. 1998. “Investment Incentives, Prices and the Supply of Capital Goods.”
Quarterly Journal of Economics 113 (1): 121-148.
Gu, W. and R. Macdonald. 2020. “Business Sector Productivity and Sources of Labour
Productivity Growth in Canada.” Analytical Branch Research Paper Series,
Statistics Canada.
Gutiérrez, G. and T. Philippon. 2017. “Investment-less Growth: An Empirical
Investigation.” Brookings Papers on Economic Activity. Brookings Institution.
International Labour Organization. 2013. “Global Employment Trends 2013.” (Geneva:
International Labour Oce).
Jog, V. and J. Mintz. 1989. “Corporate Tax Reform and its Economic Impact: An
Evaluation of the June 18, 1987 Proposals.” In Economic Impacts of Tax Reform.
Eds. J. Mintz and J. Whalley (Toronto: Canadian Tax Foundation).
Jog V. and J. Mintz. 2013. “Sovereign Wealth and Pension Funds Controlling Canadian
Businesses: Tax Policy Implications.” SPP Research Papers 6 (5). The School of
Public Policy, University of Calgary. February.
Kneller, R., M. Bleaney and N. Gemmell. 1999. “Fiscal policy and growth: Evidence from
OECD countries.” Journal of Public Economics 74 (2). November: 171-190.
Maso, J., J. Meriküll and P. Vahter. 2011. “Gross Profit Taxation Versus Distributed
Profit Taxation and Firm Performance: Eects of Estonia’s Corporate Income Tax
Reform.” Working Paper 81-2011. University of Tartu, Faculty of Economics and
Business Administration.
28
McKenzie, K. and E. Ferede. 2018. “Who Pays the Corporate Tax?: Insights from the
Literature and Evidence for Canadian Provinces.” In Reforming the Corporate Tax in
a Changing World. Ed. B. Dahlby. (Toronto: Canadian Tax Foundation; Calgary: The
School of Public Policy, University of Calgary).
Mintz, J. 1988. “An Empirical Estimate of Refundability and Eective Corporate Tax
Rates.” Quarterly Journal of Economics. February: 225-31.
Mintz, J. 2016. “Taxes, Royalties and Cross-Border Investments.” In International
Taxation and the Extractive Industries. Eds. P. Daniel et al. (Washington, D. C.:
International Monetary Fund; New York and London: Routledge).
Mintz, J. 2018. “Global Implications of U.S. Tax Reform.” Tax Notes International 90 (11):
1183-94. Also published by the European Network of Economic and Fiscal Policy
Research as EconPol Working Paper 08, March 2018.
Mintz, J. 2021. “Tax Policy and Fiscal Sustainability Post-COVID.” Bloomberg Tax.
February 2.
Parsons, M. 2008. “Eect of Corporate Taxes on Canadian Investment: An Empirical
Investigation.” Working Paper 2008-01 (Ottawa: Finance Canada).
Slavìk, C. and H. Yazici. 2019. “On the Consequences of Eliminating Capital Tax
Dierentials.” Canadian Journal of Economics. February: 225-252.
Technical Committee on Business Taxation. 1997. Report (Ottawa).
29
APPENDIX
Marginal Eective Tax Rates (in per cent)
30
* = Simple average.
W = GDP weighted average.
31
Parameters Used in METR Model
32
33
About the Authors
Philip Bazel
Dr. Jack M. Mintz
34
ABOUT THE SCHOOL OF PUBLIC POLICY
The School of Public Policy has become the flagship school of its kind in Canada by providing a practical, global and
focused perspective on public policy analysis and practice in areas of energy and environmental policy, international policy
and economic and social policy that is unique in Canada.
The mission of The School of Public Policy is to strengthen Canada’s public service, institutions and economic performance
for the betterment of our families, communities and country. We do this by:
• Building capacity in Government through the formal training of public servants in degree and non-degree programs,
giving the people charged with making public policy work for Canada the hands-on expertise to represent our vital
interests both here and abroad;
• Improving Public Policy Discourse outside Government through executive and strategic assessment programs, building
a stronger understanding of what makes public policy work for those outside of the public sector and helps everyday
Canadians make informed decisions on the politics that will shape their futures;
• Providing a Global Perspective on Public Policy Research through international collaborations, education, and community
outreach programs, bringing global best practices to bear on Canadian public policy, resulting in decisions that benefit
all people for the long term, not a few people for the short term.
The School of Public Policy relies on industry experts and practitioners, as well as academics, to conduct research in their
areas of expertise. Using experts and practitioners is what makes our research especially relevant and applicable. Authors
may produce research in an area which they have a personal or professional stake. That is why The School subjects all
Research Papers to a double anonymous peer review. Then, once reviewers comments have been reflected, the work is
reviewed again by one of our Scientific Directors to ensure the accuracy and validity of analysis and data.
The School of Public Policy
University of Calgary, Downtown Campus
906 8th Avenue S.W., 5th Floor
Calgary, Alberta T2P 1H9
Phone: 403 210 3802
DISTRIBUTION
Our publications are available online at www.policyschool.ca.
DISCLAIMER
The opinions expressed in these publications are the authors' alone and
therefore do not necessarily reflect the opinions of the supporters, sta,
or boards of The School of Public Policy.
COPYRIGHT
Copyright
©
Bazel and Mintz 2021. This is an open-access paper
distributed under the terms of the Creative Commons license
CC BY-NC 4.0, which allows non-commercial sharing and redistribution
so long as the original author and publisher are credited.
ISSN
ISSN 2560-8312 The School of Public Policy Publications (Print)
ISSN 2560-8320 The School of Public Policy Publications (Online)
DATE OF ISSUE
September 2021
MEDIA INQUIRIES AND INFORMATION
For media inquiries, please contact Morten Paulsen at 403-220-2540.
Our web site, www.policyschool.ca, contains more information about
The School's events, publications, and sta.
DEVELOPMENT
For information about contributing to The School of Public Policy, please
contact Catherine Scheers by telephone at 403-210-6213 or by e-mail at
catherine.scheers@ucalgary.ca.
35
RECENT PUBLICATIONS BY THE SCHOOL OF PUBLIC POLICY
GENDER DISPARITIES IN THE LABOUR MARKET? EXAMINING THE COVID-19 PANDEMIC IN ALBERTA
https://www.policyschool.ca/wp-content/uploads/2021/09/AF4_Gender-Disparities_Baker-et-al.pdf
John Baker, Kourtney Koebel and Lindsay Tedds | September 2021
TAX POLICY TRENDS: AN EXAMINATION OF THE CONSERVATIVE PARTY OF CANADA’S PROPOSED CHILDCARE REFUNDABLE TAX CREDIT
https://www.policyschool.ca/wp-content/uploads/2021/09/TEG66_Childcare_Tax_Credit.pdf
Gillian Petit, Lindsay Tedds and Tammy Schirle | September 2021
NORTHERN AND ARCTIC SECURITY AND SOVEREIGNTY: CHALLENGES AND OPPORTUNITIES FOR A NORTHERN CORRIDOR
https://www.policyschool.ca/wp-content/uploads/2021/08/EN_FR_NC25_Arctic-Security_Lackenbauer-Koch.pdf
P. Whitney Lackenbauer and Katharina Koch | August 2021
SOCIAL POLICY TRENDS: OVERCROWDING AS A RESPONSE TO HIGH RENT
https://www.policyschool.ca/wp-content/uploads/2021/08/SPT-Aug.pdf
Ron Kneebone | August 2021
ENERGY AND ENVIRONMENTAL POLICY TRENDS: CANADA’S GHG EMISSIONS FROM TRANSPORTATION AND ELECTRICITY SECTORS
https://www.policyschool.ca/wp-content/uploads/2021/08/EEPT-August-2021-FINAL.pdf
Alaz Munzur | August 2021
VALUE-BASED MENTAL HEALTH SERVICES FOR YOUTH AND FAMILIES: THE ROLE OF PATIENT-REPORTED OUTCOME MEASURES IN YOUTH
MENTAL HEALTH SERVICES
https://www.policyschool.ca/wp-content/uploads/2021/07/HSP-87_Value-Based-Mental-Health.pdf
Megan Mungunzul Amarbayan, Travis Carpenter, Michèle L. Hébert, Maria Santana and Jennifer D. Zwicker | July 2021
SOCIAL POLICY TRENDS: THE GAP IN PURCHASING POWER BETWEEN HIGH-AND LOW-INCOME HOUSEHOLDS IN CANADA
https://www.policyschool.ca/wp-content/uploads/2021/07/Social-Policy-Trends-Inequalty.pdf
Ron Kneebone and Margarita Wilkins | July 2021
DIVERSIFICATION OF THE ALBERTA ECONOMY: IN SEARCH OF STABILITY
https://www.policyschool.ca/wp-content/uploads/2021/07/AF11_Diversification_Mansell.pdf
Robert Mansell | July 2021
ALBERTA’S PUBLIC DEBT: ENTERING THE THIRD CRISIS
https://www.policyschool.ca/wp-content/uploads/2021/07/AF22_AB-Public-Debt_Ascah.pdf
Robert Ascah | July 2021
ALBERTA AGRI-FOOD FUTURES
https://www.policyschool.ca/wp-content/uploads/2021/07/AF8_AB-Agri-Food_Spencer-McConnell.pdf
Karen Spencer and Kim McConnell, CM | July 2021
REVENUE OPTIONS TO CLOSE THE FISCAL GAP IN ALBERTA: PICK YOUR POISON
https://www.policyschool.ca/wp-content/uploads/2021/06/AF23_Fiscal-Gap_Crisan-McKenzie.pdf
Daria Crisan and Kenneth McKenzie | June 2021
THE FISCAL CHALLENGES FACING ALBERTA’S MUNICIPALITIES
https://www.policyschool.ca/wp-content/uploads/2021/06/AF25_AB-Municipalities_Dahlby-McMillan.pdf
Bev Dahlby and Melville McMillan | June 2021
WHAT IS THE FUTURE OF CANADA’S ENERGY SECTOR? EMERGING THEMES OF AN OPTIMAL PATHWAY
https://www.policyschool.ca/wp-content/uploads/2021/06/AF6_Canadas-Energy-Sector_Van-Wielingen.pdf
Mac Van Wielingen | June 2021