Canada's once formidable advantage in corporate taxation is under threat, adding to an increasingly uncompetitive and uncertain landscape for businesses.

This was a key takeaway from the Aug. 28 Means & Ways panel titled Tipping Point where four leading experts convened to discuss the critical role of Canada's corporate tax policies in attracting investment.

"By 2012, we had created a significant policy advantage with our corporate tax system," said Jack Mintz, President's Fellow of the School of Public Policy at the University of Calgary. This advantage was particularly crucial given Canada's proximity to the United States, a much larger market with a more favourable business climate.

Since then, “when you start looking at the combined changes, we've lost our policy advantage. And that, of course, means that we have to have other advantages to attract investment, which we currently don't have.”

The trend in recent years has been moving toward businesses shouldering a greater tax burden. Corporate income tax revenue has risen as a share of GDP to levels not seen in 50 years. With emerging fiscal challenges, it will become increasingly difficult to keep taxes low.

Recent federal actions have exemplified this shift, with the government tapping into business revenue more aggressively. New capital gains taxes and the early adoption of the Global Minimum Tax has raised concerns among business and economists. The introduction of a digital services tax is contributing to tensions with the U.S. Additionally, the carbon tax continues to pose a significant competitive headwind.

Tax competitiveness “is a pretty fundamental and simple way of ensuring that Canada remains attractive for investment and that Canadian companies have the ability to invest in their future and grow the economic pie,” said Lisa Raitt, vice-chair of Global Investment Banking at CIBC and co-chair of the Coalition for a Better Future. "The higher your taxes are, the less incentive there is for investment."

“The implementation of that global minimum tax has had a very real and significant impact on Canadian insurance companies, which, quite frankly, are really superstars.”

**HON. LISA RAITT, VICE-CHAIR, GLOBAL INVESTMENT BANKING, CIBC**

New investment

Raitt noted that this lack of investment is leading to sluggish per capita economic growth.

Given the current climate of skepticism toward large corporations, businesses remain vulnerable. Still, polling shows that Canadians understand there are limits to how high corporate taxes can rise. A new public opinion survey by Nanos Research Group, commissioned by Means & Ways, found that 77 per cent of respondents believe higher business taxes in Canada compared to the U.S. would negatively impact the nation's ability to attract new investments.

“Canadians overwhelmingly believe that higher business tax rates in Canada would have a negative or somewhat negative impact on our overall global competitiveness,’’ said Nik Nanos, chief data scientist at Nanos Research.

That suggests there may be less political gain from higher taxes on business than some believe. For example, the government’s new taxes on capital gains failed to get much traction — a big change from a decade ago when a proposed tax increase on high income earners in 2015 helped propel Prime Minister Justin Trudeau to power.

“It's this broader narrative of taxes going up,’’ Nanos said. Canadians are wondering, “who will be next.”

According to Raitt, it’s about understanding how our tax system interacts with the broader economic environment and global tax trends to ensure Canada’s policies are aligned with international developments.

“My opinion, they're only thinking about it in terms of revenue generation. I don't know whether or not they think clearly about the unintended consequences that it could have,” Raitt said. “The implementation of that global minimum tax has had a very real and significant impact on Canadian insurance companies, which, quite frankly, are really superstars on the world stage in terms of the business that they do around the world.”

Predictability and certainty is also important, said Raitt, who cited the “surprise” decision to impose a surtax on the financial sector.

Young people, enterprises and entrepreneurs — are much more mobile today than they were 10 and 20 years ago. There are a lot more global options. So we have to compete to create an environment where young Canadians want to stay and to build lives and families and to build enterprises so that we have the wealth that we need to pay for that social safety net that we all want.

**NIK NANOS, CHIEF DATA SCIENTIST, NANOS RESEARCH**

Looming problems

“Uncertainty, as well as tax rates, does lend itself to difficulties with investors wanting to come and invest in your stock,” Raitt said.

The government’s decision to enact the Global Minimum Tax this year, ahead of its major trading partners, drew criticism. The new cross-border global tax regime, signed by nearly 140 countries, aims to eliminate loopholes that allow multinationals to shift profits to low-tax jurisdictions. It imposes a minimum tax of 15 per cent on corporate income in each jurisdiction. While the goal is to ensure fair taxation, critics argue that it could disadvantage domestic champions by imposing higher tax rates than those faced by their international competitors.

Given our relationship with the U.S. I think we shouldn't have even gotten into the corporate minimum tax of the OECD, but instead, followed more what the US is doing… which means we should have stalled in moving ahead, rather than being first mover, that is now putting some companies in a risky situation.

**JACK MINTZ, SCHOOL OF PUBLIC POLICY, UNIVERSITY OF CALGARY**

Many of the signatories, including the U.S., have yet to outline a clear roadmap for implementation, while others, like Switzerland, are moving more gradually to align their rollout with other countries.

Raitt highlighted this as another example of the Canadian government’s overly rushed approach, comparing it to the introduction of the carbon tax. “It's a government that wanted to be seen as the first responder, the first country to implement this carbon tax in order to show the way and have other countries follow," she said. "But if you stand and look, there's not a lot of other countries standing behind Canada.”

Mintz concurred.

“We should have stalled in moving ahead and trying to see how things are going to evolve over time, rather than being first mover,” according to Mintz. “That is now putting some companies, as we've seen with financial companies, in a risky situation where Canada moves ahead while other countries are still implementing what is an extremely complex agreement.”

What you've seen in the U.S. is a fairly effective campaign by the corporate community to make the point, ‘This is how the U.S. ensures that the social safety net can be funded… the tax rate is a big part of that.’ It's one of the reasons the U.S. [lowered] its tax rate, and it's one of the reasons you've seen a lot of countries over the last 20 years lowering their tax rates.

**JON LIEBER, HEAD OF RESEARCH AND MANAGING DIRECTOR, U.S., EURASIA GROUP**

The recent enactment of a digital services tax also could create problems, according to Jon Lieber, a U.S. policy expert at Eurasia Group.

Canada’s Digital Services Tax Act (DST), which imposes a three per cent tax on revenue earned by large businesses from digital activities. "The Americans are not happy about it," Lieber noted, predicting that this issue will play out over several years and could trigger retaliation. American lawmakers “see it as a ‘cash grab’ of U.S.-based businesses."

“Some countries have put a pause on their plans because of what's happening on the OECD agreement that we talked about earlier, Canada's gone ahead with their DST,” he said. “The Biden administration seems to be kind of taking a wait and see approach, but I think if Trump wins, this is very likely to result in either a USMCA Dispute Settlement panel or direct retaliation. So I think that's a real risk for Canadian businesses.”

Watch the full discussion here