Canada’s Tax and Investment Advantages
- Canada has a strong corporate tax advantage compared to other countries, with a relatively low marginal effective tax rate on capital.
- Investment decisions should not be made based on tax incentives only, but also on factors such as political stability, regulatory environment, and strength of the workforce.
- Canada ticks all the boxes when it comes to being favourable for foreign investment, from strong tax advantages to great access to different markets.
When it comes to attracting foreign investment, Canada has all the ingredients that make it an advantageous destination. We have a great talent pool, favourable immigration policies, natural resources, diversity, stable social systems, political stability, and great market access across North America and globally. All of these factors, combined with Canada’s competitive advantage when it comes to corporate taxation, make it a top choice for foreign investment.
How competitive and attractive is Canada’s corporate tax system compared to other North American jurisdictions but also globally?
Starting with tax rates, Canada’s corporate tax system is relatively competitive, but a simple tax rate comparison with statutory rates does not tell the whole picture. Economists also calculate what we call a marginal effective tax rate (METR). The METR does not consider just the corporate tax rate, it considers other taxes on capital and business inputs and it measures a tax rate at the margin, which is the last dollar of business investment. On that basis, Canada has retained a corporate tax advantage compared to other countries. Our marginal effective tax rate on capital is still lower than the Organisation for Economic Co-operation and Development (OECD) average: Canada’s is about 15.5%, the OECD average is about 23.8%.
How does the Canadian tax landscape make Canada a favorable destination for foreign direct investment?
Yes, good question. I know our interview is focusing on taxation but it is also important for me to acknowledge right at the outset that business investment decisions turn on more than just tax considerations.
In fact, in our role as tax advisors, most of us stress to clients the importance of considering other non-tax factors when they are making investment decisions. Their investment decisions should never turn solely on perceived tax advantages, and these include the regulatory environment, the strength and diversity of our workforce, access to non-tax business location incentives from government, ease of access to both the domestic and foreign markets, and political stability of the host government. Canada has always ranked very favorably as an investment decision under any of these criteria.
“In our role as tax advisors, most of us stress to clients the importance of considering other non-tax factors when they are making investment decisions.”
The decline in world natural resource prices has taken some of the wind out of our sails, as have new regulatory measures that address the approval of natural resource development projects in light of concerns about environmental impact. These factors increase business uncertainty and that in turn has dampened business investment here, at least in the short-term.
To respond to your question for tax in general, in terms of our tax landscape, Canada has a very mature tax policy and administration system. It is designed to ensure a high degree of compliance but also to resolve tax disputes in a fair and timely manner when they do arise. It relies on the Canadian Revenue Agency’s Appeals branch and Notices of Objection domestically, and the domestic courts, starting with the Tax Court of Canada. For international disputes, Canada has an extensive bilateral tax treaty network: 93 tax treaties with different jurisdictions that are currently enforced. Those are designed in large part to resolve double tax issues where two different countries are taxing the same income where there are cross-border transactions. In sum, Canada does stack up quite favourably compared to other countries with respect to its tax system.
Tell us a little bit more about the ease and also the cost of doing business for investors in Canada?
Canada is a small, open economy, so our governments have long recognized the need to attract investment in a highly competitive global market for investment dollars.
For that reason, both the federal government and provincial governments have a variety of tax and non-tax incentives for attracting business. At the federal level, Invest in Canada’s whole mandate is to attract investment and they have a program to do that. We also have at the federal level the Export Development Canada department, which is there to assist businesses locating in Canada and providing exports for the economy.
“Canada has consistently ranked very highly in comparison to other countries in international surveys on ease of doing business, access to capital and incentives to invest.”
As I said, we are a small, open economy; we depend on exporting to sustain our standard of living. We have the Business Development Bank of Canada as well; we have the Trade Commissioner Services of Canada. Trade commissioners are part of Global Affairs Canada. They have 161 offices in different countries and their responsibilities are two-way: they are there to help Canadian companies export and invest abroad but they are also there to attract investment from the home country in which their offices are located. In addition to that, Canada has consistently ranked very highly in comparison to other countries in international surveys on ease of doing business, access to capital and incentives to invest.
What investment incentives overall or sector-specific do you consider the most appealing for potential foreign investors looking at Canada?
There are a number of tax incentives for investment at both the federal and provincial level. At the federal level, the biggest single business tax expenditure is known as the Scientific Research and Experimental Development tax credit. In a given year, it provides between $3 billion and $4 billion in tax incentives for businesses. It is a refundable tax credit; it is designed to encourage businesses to be more productive by investing in research and development (R&D), and for foreign businesses to perform their R&D activities here in Canada.
“These tax benefits are among the most generous R&D benefits in the world.”
These tax benefits are among the most generous R&D benefits in the world. There are lots of other tax incentives by sector or region at the federal level such as the Atlantic Investment Tax Credit. In addition to those, the federal government introduced three new expensing measures in its Fall Economic Statement in 2018. Those three measures included full expensing for manufacturing and processing machinery and equipment, full expensing for clean energy equipment, and a broad accelerated investment incentive.
If you had to sum up Canada’s competitive advantages from both a tax and an ease of doing business perspective for foreign companies looking to invest here, what would you put forward as the main highlights?
We do have a competitive advantage in the tax system standing on its own but I would highlight even more so some of the other factors that come into play with investment decisions.
Canada has a very strong talent team: we have a domestic labour supply that is highly skilled, highly educated, and among the most educated if not the most educated in the world.
We have a very favourable immigration policy that supports investment and immigration from skilled workers and investors. We have natural resources that the rest of the world is envious of here in Canada.
We believe in diversity, we have a very stable social system here in Canada, we have great political stability, and we have very good market access not just for the Canadian market but on a global basis.
We have a renewed Canada-United States-Mexico Agreement (CUSMA), which has preferred access into the American market, and we have the Comprehensive Economic and Trade Agreement (CETA) with the European Union. With all those things in consideration, Canada has to be considered top of the heap in terms of an attractive country in which to invest.