Summary

Canada’s economic dynamism depends on company formation and investment but in the last decade every metric in this area has been moving in the wrong direction. In Q2 2025, Statistics Canada recorded a $43.7 billion capital outflow, the largest since 2007¹. Today, for every dollar foreign investors put into Canada, Canadians send $2.17 abroad². 

The current federal approach of offering subsidies to individual companies, one deal at a time, to bribe them to set up offices and factories in the country cannot reverse this trend. Instead of chasing companies with cheques or picking winners and losers, Canada must build a business environment that attracts them naturally.

The single most powerful lever to resolve this situation is corporate tax reform. Research spanning more than half a century has confirmed repeatedly that corporate taxes are the most harmful tax type for growth and in particular for company formation and investment. It is not a coincidence that company investments have shrunk since the US made its corporate tax regime more competitive compared to Canada in 2017.

Countries from Ireland and Singapore to Estonia have proven this by using a competitive and creative corporate tax regime to attract huge foreign investments and local company formation. 

Following Estonia’s lead, if Canada copies that creativity to reform corporate tax to only tax profits taken out of a business rather than profits that are reinvested it could change the environment for company formation and investment overnight.

Canada Is Losing

Something is deeply wrong with Canada’s economy. Business investment per worker has been falling since 2015³. Canadian workers now receive only 55 cents of new capital for every dollar their American counterparts receive⁴. Investment in machinery and equipment dropped 16% over the past decade when adjusted for workforce size⁵. A third of small businesses expect their capital spending to shrink further⁶.

At the same time the most talented founders and entrepreneurs are leaving Canada. The talent exodus is real. Entrepreneurs are leaving. The Fraser Institute found that Estonians start 45 times more tech businesses per person than Canadians⁷. That gap reflects policy choices, not cultural differences.

In all, the number of companies being started in Canada has been stagnant or falling for decades. New companies are the essential driver of economic success for a country. If we cannot find a way to attract and retain entrepreneurs and make it profitable for them to invest in their companies, economic growth will remain sluggish.

The Failed Approach: Subsidies and Bribes

To try and reverse these trends the government has focussed on targeted subsidies especially for electric vehicles and clean energy projects. But rather than creating a genuinely competitive environment for attracting the best companies this just further distorts markets. This is the economic equivalent of paying people to be your friend. Chasing companies one deal at a time - or picking winners and losers - is expensive, distortive, unsustainable, and sends a message that Canada cannot compete on fundamentals. Ireland took the opposite approach: a 12.5% corporate rate, using simple rules and no special deals or handholding. As a result Ireland has seen continual investment from foreign firms for decades and the country’s GDP per capita is now roughly double Canada’s⁸.

The Solution: Fix Corporate Taxes

The OECD’s definitive research over decades has established a clear ranking for tax reform: corporate taxes harm economic growth more than any other tax type⁹. One major study across 70 countries found that a 10 percentage-point cut in corporate tax rates raises annual GDP growth by one to two percentage points¹⁰. For attracting foreign investment specifically, the evidence is even stronger. A one-point tax cut raises foreign direct investment by about 3.3%¹¹.

These dynamics used to work in Canada’s favour. Historically Canada used to have a significant tax advantage over the United States. Before 2017, the U.S. had the highest corporate rate in the developed world at nearly 39%¹² and Canada’s rate of about 26% looked attractive¹³. Then the U.S. Tax Cuts and Jobs Act slashed the American rate to roughly 21%¹⁴, essentially reaching parity with Canada overnight. Canada’s competitive edge vanished. Canada has not responded and the impacts have been clear as investments have fled South of the border. In short the world has changed, but Canadian policy has not kept pace.

There are Bold but Proven Models to Supercharge Growth

Estonia offers a bold alternative. Under its “distributed profits” tax model, companies pay zero corporate tax on earnings they reinvest in the business. Tax applies only when profits are taken out directly or indirectly. This creates a powerful incentive to grow, hire, and invest rather than extract cash. The results speak for themselves. Since implementing this system in 2000, Estonia’s GDP per capita has grown over 700%¹⁵. Living standards rose from roughly 35% of Canada’s level in 1993 to 70% today. Estonia has ranked first on the Tax Foundation’s International Tax Competitiveness Index for over ten consecutive years¹⁶. As Estonian Ambassador Eerik Marmei put it: “Simple and clear rules of taxes create confidence among businesses, promote business expansion, capital investment and most importantly, create jobs.”¹⁷

This isn’t about slashing government revenue. Estonia maintains a broad tax base, minimal exemptions, and a solid consumption tax. The approach shifts the timing of taxation, not the ultimate amount, while removing the penalty on reinvestment that holds back growth.

Existing Solutions

Estonia’s Distributed Profits Tax : Companies pay 0% tax on reinvested earnings, with a 22% rate applying only when profits are distributed¹⁸. This rewards growth and simplifies compliance. Estonia has topped global competitiveness rankings for over a decade.

Ireland’s Low-Rate Model : A 12.5% headline corporate rate¹⁹, combined with simplicity and predictability, transformed Ireland from Western Europe’s poorest country to one of its richest. Irish GDP per capita now exceeds Canada’s by a wide margin.

What Must Be Done

Canada must stop tinkering at the margins and embrace transformational change or, as the Canadian economist, Jack Mintz, calls it, implement “Big Bang” corporate tax reform²⁰. The Estonia model provides a tested blueprint. Implementation requires coordinated action at both federal and provincial levels.

Adopt distributed profits taxation. The federal government should eliminate corporate income tax on annual earnings and apply tax only when profits are distributed directly as dividends, share buybacks, or bonuses or other indirect distributions. This removes the tax penalty on reinvestment and encourages companies to grow in Canada rather than elsewhere.

Tax passive income and capital gains immediately. Following economist Jack Mintz’s recommendation, the distributed profits system should not defer tax on passive investment income or capital gains realized by corporations. This prevents the corporate structure from being used purely for personal tax avoidance while preserving the incentive for active business reinvestment.

Make the changes permanent. Temporary tax measures create uncertainty and undermine long-term planning. Any new system must be legislated as a permanent policy, not a sunset provision. Business investment decisions span decades; tax policy should match that horizon.

Harmonize with the federal approach. Provinces should align their corporate tax systems with the federal distributed profits model. A unified national approach maximizes simplicity and competitiveness while reducing compliance costs for businesses operating across provincial boundaries.

Common Questions

Won’t this blow a hole in government revenue? Not necessarily. Estonia’s model shifts the timing of revenue collection, not its ultimate amount. Companies still pay tax when profits come out. A broader consumption tax base and the elimination of complex credits can maintain revenue while removing the worst growth-killing distortions. The economic growth generated by increased investment will itself generate tax revenue. When Estonia replaced progressive income tax rates (16-33%) with a 26% flat tax in 1994 total government tax revenues actually grew more than quadrupling between 1996 and 2007²¹.

Isn’t this just a gift to corporations and the wealthy? This is a gift to Canadian workers. Economic research shows that somewhere between 30% and 90% of corporate tax burden ultimately falls on workers through lower wages²². When businesses reinvest, they hire more people, buy more equipment, and raise productivity, which raises wages. The current system punishes exactly the behaviour that creates jobs.

Can a small country’s approach really work for Canada? Ireland faced the same skepticism and proved it wrong. Canada has successfully reformed its tax system before. In the late 1990s, both Liberal and Conservative governments cut federal corporate rates from over 28% to 15% based on clear evidence²³. That consensus can be rebuilt. The principle is simple: don’t tax the behaviour you want more of.

Conclusion

Canada is losing ground. Investment is falling, talent is leaving, and company-by-company subsidies cannot fix a fundamentally uncompetitive system. The path forward is clear. Estonia’s distributed profits model has proven that taxing only extracted profits, not reinvested earnings, drives growth without sacrificing revenue. Canada should adopt this model now, make the change permanent, and build a business environment that attracts investment on its own merits. It’s time to be bold and venture to be wise.

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