Canada at a crossroads

Ruth Todd, Regional Managing Partner and National Leader, KPMG Private Enterprise, KPMG in Canada.
Dino Infanti, Partner and National Leader, KPMG Private Enterprise Tax, KPMG in Canada.

At this pivotal moment, Canada needs a more ambitious mindset and faster, more resilient economic growth. Given rising trade and market disruptions, we need to overcome the complacency of the past and build a globally competitive tax system. This will require a willingness to move corporate taxes in a direction that supports private enterprises and makes Canada one of the best places in the world to invest, innovate and grow a business.

For decades, Canada has struggled to overcome sluggish productivity due to a combination of factors, including relatively low levels of business investment, innovation and research and development (R&D) spending. This is despite findings that indicate tax incentives for R&D have a positive effect on productivity, particularly among industries that are more entrepreneurial and R&D intensive.

Today, persistent economic uncertainty and ever-evolving U.S. tariff threats have caused many companies to adopt a more defensive position and a more cautious investment approach. This may include whether to situate manufacturing or other business operations in Canada, the U.S. or elsewhere.

A recent KPMG survey of Canadian business leaders confirmed that the current environment is making it more difficult to plan for longer-term investments. Almost four in five (77 per cent) report that their company has delayed or reduced investments in projects, technology, machinery, equipment or intellectual property due to the trade war. More than half (57 per cent) are planning to reduce their spending on R&D and capital expenditures over the next year. Notably, nearly three quarters of business leaders believe current Canadian tax policies are not providing enough of an inducement to invest.

Faced with challenges that are national in scale, a national response is needed to modernize economic and tax policies and drive investment and productivity gains in Canada. KPMG’s poll revealed that tax reform is an imperative for Canadian business leaders, with nine in 10 saying it’s time to simplify the tax system and cut the investment tax rate to grow the economy. Furthermore, an examination of the tax system ranks high on the list of top government priorities. Business leaders want governments to prioritize removing trade barriers (64 per cent), undertake a comprehensive tax review to improve competitiveness (58 per cent) and expedite resource and major infrastructure projects (56 per cent).

At the federal level, the current government campaigned on certain tax changes that are intended to promote productivity and growth. These include expanding flow-through shares beyond the mining sector to Canadian startups that allow investors to deduct eligible R&D expenses, a 20 per cent AI adoption tax credit targeting small- and mid-sized businesses, enhancing the Scientific Research & Economic Development (SR&ED) program and a patent box regime that lowers tax rates on IP income.

Canada's competitive tax advantage over the U.S. was eliminated with the enactment of the U.S. Tax Cuts and Jobs Act of 2017, which significantly lowered the U.S federal corporate tax rate from 35 per cent to 21 per cent. Prior to this, Canada had a lower combined federal-provincial corporate tax rate relative to the U.S.

According to the U.S.-based Tax Foundation’s 2024 International Tax Competitiveness Index, the U.S. federal and state corporate income tax average rate is 25.6 per cent compared with Canada’s average combined federal and provincial/territorial corporate income tax rate of 26.1 per cent.

When evaluating tax competitiveness based on these averages, it’s important to recognize the significant range among Canadian provincial and territorial corporate income tax rates and U.S. state corporate income tax rates. For example, Alberta currently has the lowest combined federal-provincial corporate tax rate at 23 per cent, with P.E.I. ranking the highest at 30.5 per cent for 2025 (decreasing to 30 per cent in 2026). U.S. states with the lowest combined federal and state corporate income tax rate of 21 per cent include Nevada, Ohio, South Dakota, Texas, Washington and Wyoming, while Minnesota is on the highest end of the range at 30.8 per cent.

With the signing of the One Big Beautiful Bill Act into law on July 4, 2025, the U.S. tax changes mean more needs to be done to move the needle in Canada. These tax and spending measures, along with tariffs, are considered the centerpiece of the Trump administration’s economic agenda. In addition to personal tax cuts, the law provides for more than $US 564.6 billion in tax breaks for business and makes permanent tax incentives that allow for accelerated business write-offs. This permits U.S. businesses to write-off investments, expansion and modernization.

The originally proposed “revenge tax” provisions of the bill (Section 899) were removed, which would have had negative tax consequences for non-U.S. investors and businesses. Discussions with the U.S. also led to G7 countries proposing changes to the OECD’s international tax regime under Pillar Two – the global minimum tax rules for multinational enterprises – that would, if adopted, provide a carve-out for U.S. multinationals.

These and other tax changes are poised to make the U.S. tax regime even more competitive and more likely to attract capital -- at a time when 60 per cent of Canadian business leaders say limited access to capital is hindering their ability to invest in their operations, expansion plans and technology. Since capital is mobile, Canada needs to respond and create the conditions to improve access to domestic and foreign capital and reward productivity-enhancing investments, including AI adoption.

In the light of U.S. changes, Canada needs to make permanent its incentives providing immediate expensing for certain properties and accelerated depreciation for a range of other assets. These incentives can provide the greatest positive impact, at least in the short term, given that they focus on stimulating new investments. Consideration should also be given to reducing the general corporate income tax rate. While the cost of general rate reductions should be evaluated against other government priorities, it is important not to underestimate the potential value of a Canadian corporate tax advantage in helping to maintain and enhance the competitiveness of Canadian firms.

Despite many unknowns, rarely have Canadian businesses and governments been so single-minded in collectively striving to improve economic resilience and competitiveness. Streamlining complex taxes and implementing more favourable tax policies present a unique opportunity to take charge of our future and strengthen our prosperity.

• Be ambitious: Given current economic conditions, evaluate new approaches, including a possible reduction to the general corporate tax rate, in conjunction with fiscally responsible government spending.
• Make the tax system simpler and easier: Reduce complexity through greater rationalization as it applies to large and small businesses, review tax rates, credits and deductions, and eliminate tax measures that are overly complex to administer.
• Enable faster investment write-offs: Further accelerate tax deductions for the cost of new investments in order to maximize the incentive for businesses to enhance productivity.
• Speed-up R&D investments: Fast-track enhancements to the SR&ED tax credit program and the creation of a Canadian “patent box”, which are positive, productivity-enhancing initiatives.
• Provide adequate R&D incentives to large companies: Currently, SR&ED tax credits generated by larger firms – Canadian or foreign-owned – can only be applied against tax otherwise payable and are not refundable. This undercuts the value of this incentive for some of the biggest firms carrying out these activities in Canada.
• Simplify provincial sales tax collection for business: Retail sales taxes, in provinces that continue to impose them, are a significant added business expense. Both the monetary cost of retail sales taxes and the cost of complying with two systems impose a substantial additional tax and compliance burden, in contrast to a harmonized value-added tax or provincial HST.
• Reduce the reporting burden: Evaluate business tax reporting requirements to determine whether they are worthwhile given the costs, and if various reporting obligations can be rationalized or their objectives achieved more efficiently through other means.
• Review business penalties: Determine the number and level of potential penalties businesses may be exposed to currently, in conjunction with the government’s plan to impose stricter enforcement, with an additional $3.75 billion in fines and penalties over the next few years.
   

KPMG Private Enterprise professionals can help you and your business navigate change, equipping you with insights and strategies to face current challenges and explore opportunities for the future.

^{Information is current to July 30, 2025.}