To resist American domination, Canada must fix its failing tax system

Steve Suarez is a partner in the Toronto office of BLG, and the co-chair of the Taxation and Economics Committee of the Canadian Chamber of Commerce.

In January, 2025, then president-elect Donald Trump was asked whether he would use military force to annex Canada. “No – economic force,” he replied.

Subsequent events demonstrate that little sovereignty exists for nations whose economies are vulnerable to coercion. This is why Canada must ensure that its economy is as strong, resilient and internationally competitive as possible. Tax policy is an essential part of that equation and an expression of our sovereignty.

Historically, Canadian tax policy has been relatively passive, designed to tax whatever economic activity happens to occur. Very few of our recent tax initiatives have been economically stimulative, as opposed to strictly designed to raise revenue or enact complex OECD-inspired anti-avoidance rules of dubious relevance to us. Little wonder that Jim Balsillie, former co-chief executive officer of Research In Motion Ltd., once said: “We’ve got this funny disease where everybody helps their companies, but we don’t help ours. In fact, we subvert them.” In today’s era of aggressive international competition, Canada must align its tax policy with and actively support our broader economic strategy.

Our closest neighbour pursues this strategy in a major way. In early 2025, the U.S. levied tariffs on imports from virtually every other country on Earth to encourage production to move to America and join the U.S. tax base. A July, 2026, KPMG survey of 275 Canadian manufacturers found that 29 per cent have done just that. “It’s not necessarily their desire. But they may be left with little choice,” KPMG partner Anamika Gadia said in an Aug. 12 New York Times article.

July, 2025, saw the U.S. enact a massive tax stimulus program to support American business. In addition to extending major rate reductions, this initiative reduced the after-tax cost of business investment by expanding and accelerating expense deductibility, subsidized exports of intellectual property-related goods and services via a lower tax rate, and exempted some profits from taxation altogether.

As with tariffs, these tax measures are intended to tilt the playing field in favour of the home team. In a June, 2025, report, the Toronto Region Board of Trade described this U.S. tax policy as “a coordinated suite of incentives designed to anchor capital, intellectual property (IP), and high-value economic activity within the U.S.” that would “make expansion in the U.S. more financially attractive for manufacturers, while making Canada a less attractive destination for new investment.”

Canada’s competitors are aggressively using tax policy to further their economic self-interest at our expense. No one is coming to help us: We need to help ourselves.

The Globe and Mail’s Prosperity’s Path series identifies various possible planks of a national economic strategy. Canada’s energy abundance and geographic position make us an ideal supplier to Asian and European markets. That same profusion of energy and open space makes the country an excellent location for artificial intelligence data centres, which can address our lamentable productivity and provide “reliable access to computing power [and] greater jurisdiction over data,” Kevin Yin wrote in an August column.

It can also directly address our lamentable productivity. The efficiency gains from AI systems and advanced manufacturing technologies allow high-labour cost countries such as Canada to make things and become less reliant on foreign supply chains. And skills-and-trades training will ensure that both men and women find secure, well-paying and tax-generating employment.

The common thread among these strategies is the need for massive capital investment and willingness to take the accompanying risks. Canada’s tax system shares the rewards of investment, but little of the risk. The government almost always gets its share of profits, but doesn’t cut any cheques for the losers (just some degree of reduced taxes on other profits, if any and under various restrictions).

It’s time for Canada to invest in its own tax base by adopting policy that actively supports our broader economic objectives, rather than just waiting to take a cut of whatever develops. Whether it’s through changes to the existing system or preferably comprehensive tax reform, our system should reduce the after-tax cost of the investments that the country needs by more equitably sharing the associated risks.

This is not about picking winners. It is about producing the conditions that create and attract winners, and recognizing that Canada’s economy is the beating heart of its sovereignty.

Every significant tax initiative should be measured against the yardstick of whether it supports economic strategy. The Department of Finance’s Sept. 15 announcement of broad-based immediate expensing for capital investment hits the bullseye and in the government’s words “represents a sea-change in how Canada intends to stimulate business investment decisions.”

One cannot overstate the importance of this initiative, which exemplifies the type of economically-focused tax policy Canada needs. Conversely, a country requiring as much capital investment as Canada does needs complex, arbitrary interest deductibility limits such as our excessive interest and financing expenses limitation rules like a hole in the head. Personal tax rates that leave mobile, in-demand people as minority partners in their own paycheques are also a major impediment.

Geographic reality means our tax system must be competitive with the U.S. and responsive to the incentives it offers in those areas where we hope to compete. Attracting investment in our innovation economy has been a particular challenge: Small and early-stage businesses are at a major financing disadvantage relative to those in other countries. As Canadian financier Jeffrey Deacon explained to the Senate earlier this year: “When founders cannot access growth capital here, they don’t just sell their companies. They leave, and the tax base leaves with them.” Clock it.

The tax system can help level the playing field for our entrepreneurs and the businesses they invest in, whether through capital gains exemption and/or deferral; investment tax credits; more generous treatment of losses (including flow-through to investors offered in the 2025 Liberal Party platform); or expanding what domestic tax-exempt capital pools can invest in (as the U.S. is doing).

Canada’s $1.2-million lifetime capital gains exemption for investors is woefully uncompetitive with the US$15-million per business exemption for investors in shares of a “qualified small business.” If lightly taxing some activities creates more-than-offsetting spinoff effects and resulting tax revenue, we should get over ourselves, follow the math and embrace that choice as net-positive for Canada. Otherwise, we face increasing brain drain, more emigrating startups and diminished tax revenues. Without the tax revenues of a vibrant economy, we have nothing to reallocate.

Let’s study what has worked elsewhere. Israel leads the world in venture-backed startup businesses per capita, due in part to tax incentives, such as the New Angels Law, providing eligible investors in a domestic R&D company with an investment tax credit, and allowing domestic technology companies to deduct the purchase price of acquiring other qualified technology companies from their taxable income over five years. We can moan about Canadian companies being acquisition targets rather than buyers, or we can do something about it.

The upfront cost of actively investing in Canada’s tax base pales compared with the much larger cost of not doing so: a continuation of the managed decline that has characterized our economy for the past decade. Passive, non-stimulative tax policy can only work if your major competitors are playing by the same rules, and it is simply not a viable real-world strategy for the country when the U.S. is aggressively turning its tax policy dials all the way up to maximum stimulus. Accepting reduced tax revenue now in exchange for much more later is a winning investment that makes smart use of our fiscal capacity, and Ottawa’s momentous September productivity mega deduction signals that the current government gets it on this point.

Today’s international environment is highly competitive: businesses, people and capital are mobile, and have choices about where they want to be. To keep and support all we have, while attracting more, our tax policy must be an active participant in the competition. Canada’s sovereignty depends on using every tool at our disposal, including tax measures that other countries already employ. Our children’s future depends on it.

Prosperity’s Path