Canada has dropped two spots on an international tax competitiveness index, in part due to Ottawa’s raising of the capital gains inclusion rate this year.
Canada fell from 15th place in 2023 to 17th this year among the 38 Organisation for Economic Co-operation and Development (OECD) countries analyzed, said the annual report from the International Tax Foundation. The foundation analyzes changes in countries’ tax systems of each country it rank and grades them on competitiveness and neutrality.
The foundation said Canada’s digital services tax and its capital gains tax hike, enacted this year, contributed to the lower ranking. Canada’s phasing out of full expensing for machinery and its accelerated investment incentive for buildings also played a role in its rating, the foundation said. “Canada taxes capital gains at a rate of 35.7 percent and dividends at 39.3 percent, well above the respective OECD averages of 19.7 percent and 24 percent,” the report said, noting that Canada ranks 35th out of the 38 OECD countries for capital gains tax competitiveness.
The changes to Canada’s capital gains tax, implemented June 25, mean Canadian companies must pay taxes on 66.7 percent of their realized capital gains, up from the previous 50 percent. Individuals now pay tax on 50 percent of the first $250,000 of capital gains earned in the year, and 66.7 percent of any gain above that threshold under the new system. Critics of the hike say it penalizes doctors, farmers and small business owners but Finance Minister Chrystia Freeland has described the changes as a way to encourage “fairness” in Canada’s tax system that will largely impact the wealthiest 0.13 percent of Canadians. Freeland said in June that the changes to the tax meant the government wouldn’t have to take on more debt because the increase is estimated to bring in $19.4 billion over the next five years. Canada’s overall ranking in the new report may have been 17th, but it fell much lower in some of the individual categories, coming in at 26th place for corporate taxes and 31st for individual taxes.
Canada also scored eighth on consumption tax competitiveness, but came in at the 25th spot for property tax competitiveness.
The report suggests Canadians shoulder a heavy tax burden compared to other OECD countries, said MEI economist Emmanuelle B. Faubert in a release on the ranking.
“Ottawa seems determined to discourage entrepreneurship, outpacing other countries in making investment less attractive,” said Faubert. “In the midst of a productivity crisis, Canada should be focused on making our tax regime more competitive to attract investment—but instead, we’re moving in the wrong direction.”
The Canadian Taxpayers Federation (CTF) commented on Canada’s dip in the tax competitiveness ranking, saying the report should serve as a “five-alarm siren to stop hiking taxes.”
The Fraser Institute also released a statement on Canada’s ranking and called on the government to “enact broad-based tax reform” in response.
The top five countries on the tax competitiveness index were Estonia, Latvia, New Zealand, Switzerland, and Lithuania. Australia placed 13th on the index, while the United States came in just behind Canada in 18th place. The UK was in the No. 30 slot.
