Canada risks trailing its peers in productivity and growth, in spite of recently announced “bold initiatives” in housing, infrastructure and energy, TD Bank economists argue. (Photo by Chip Somodevilla/Getty Images) · Chip Somodevilla via Getty Images
Excessive taxes and red tape are “the silent killer of competitiveness” in Canada but have been overlooked in Prime Minister Mark Carney’s economic agenda, TD Bank’s economists argue in a new report.
Without a serious overhaul of its tax and regulatory system, chief economist Beata Caranci and managing director Francis Fong write, Canada will continue to trail its peers in productivity and growth, in spite of recently announced “bold initiatives” in housing, infrastructure and energy.
The economists write that global competitiveness must be the “north star” of any reform, urging Ottawa to treat business investment “with the same urgency it treats other crises.”
Investment per worker in Canada ranks near the bottom of OECD countries, the TD report notes, and the gap on that metric with the U.S. “has widened out significantly since 2010.” This, Caranci and Fong say, is the main contributor to the productivity “emergency” declared last year by Bank of Canada senior deputy governor Carolyn Rogers. On another OECD measure of regulatory stringency, Canada ranks 26th out of 38 countries — the economists point to a Transport Canada/KPMG study that found the number of industrial regulations has risen 36.6 per cent since 2006 and now tops 305,000.
TD argues the root of the problem is decades of ineffectual tax reform. The last major overhaul was the Carter Commission — which took place in the 1960s and “was not done with the lens of enhancing Canada’s competitiveness.” Minor efforts in the late 1990s also “did not move the needle on competitiveness and investment,” the report says.
The competitiveness problem isn’t only corporate. TD warns that Canada’s high personal tax rates make it harder to attract and retain skilled workers. While inequality has eased, the share of taxes paid by top earners has grown — raising the question of how Canada can lure talent when the financial return is higher abroad. A major issue, the economists argue, is that tax reform is “inherently a politically divisive process,” with taxes going up for some and down for others. “No government wants to pull on that thread,” they observed.
This is a turning point in Canada’s history.TD economists Beata Caranci and Francis Fong
But TD says reversing the slide in productivity will mean a fundamental shift in how Canada approaches both taxation and regulation. The report calls for broadening the tax base while lowering statutory rates and cutting back on the tangle of credits and carve-outs that have made compliance expensive and opaque.
On regulation, TD urges governments to focus reviews only on rules that “are shown to be binding constraints on costs,” and to eliminate exemptions that let departments avoid scrutiny. The federal one-for-one rule, introduced a decade ago, has achieved “middling-to-no success,” the report says, because it counts the removal of obsolete rules as progress, even when those regulations no longer cost firms time or money.
Caranci and Fong argue that policy should help firms grow, not freeze them in place. Current key incentives “result in a clustering of businesses around asset thresholds,” rewarding companies — many of which were not founded recently — for staying small rather than scaling up.
The report also warns that competitiveness depends on talent as much as capital. Aligning Canada’s personal tax competitiveness with peer economies, TD adds, is essential to driving long-term growth.
The authors frame the moment as one of urgency. “This is a turning point in Canada’s history — let’s not waste that opportunity by sidestepping real barriers just because gaining broad support is difficult.”
Without bold changes, they warn, Canada risks “death by a thousand cuts” to its competitiveness.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf.
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