High marginal tax rates ‘choking’ economy amid trade war: IIAC

The report focuses on personal marginal tax rates, which are “too high, and discourage additional work, investment and risk-taking, as the reward for earning more is diminished.”

The IIAC illustrates Canada’s competitive disadvantage with an analysis of the country’s top marginal tax rates versus those of the U.S. Eight provinces top the list, with the first state — California — not appearing until ninth place.

Overall, Canada’s top combined marginal rates range from 47.5% in Saskatchewan to 54.8% in Newfoundland and Labrador. In the U.S., the top combined federal and state income tax rates — in those states that tax wages — range from 39.5% in Arizona to 50.3% in California.

Canada’s high personal tax rates contribute to high-skilled workers moving to the U.S., the IIAC’s report says, noting that in recent years, Canadians received the third-largest number of U.S. employer-sponsored H-1B temporary (non-immigrant) visas.

The report shows that a professional with taxable income of C$150,000 or US$105,000 (roughly the median wage of an H-1B worker in the U.S.) faces higher combined marginal personal income tax rates in every province compared to several states, including California, New York and Texas — major centres that attract professionals in tech, banking and business, and oil and gas, respectively.

The IIAC calculates that the combined marginal tax rate for such a worker would be highest in Quebec, for example, at 47.46%, versus 33.3% in California.

Canada’s tax disadvantage holds for other levels of income, as shown in the report.

“Canada urgently needs comprehensive tax reform to build a more resilient and competitive economy,” the IIAC report says. It suggests broad-based tax cuts to personal income tax rates, reducing the federal corporate income tax rate to 13% from 15%, and eliminating inefficient and complex tax expenditures, among other measures.

The U.S. corporate rate is 21%, while in Canada, the 2024 general corporate rate ranges from 23% (Alberta) to 31% (P.E.I.).

In a 2025 shadow budget on Tuesday, the C.D. Howe Institute also called for tax reform, including tax cuts, to improve Canada’s economy.

“A prime suspect behind Canada’s decade-long struggle with stagnant capital investment, productivity and wages is taxation that discourages work, and individual and corporate saving and reinvestment,” the C.D. Howe shadow budget says. “Personal income tax rates are too high, and the thresholds at which they apply are too low — especially by comparison with Canada’s principal competitor for talent, the United States.”

The C.D. Howe shadow budget suggests targeting personal marginal effective tax rates at middle-income levels, given these tend to be the highest in light of income-tested reductions of benefits. Specifically, it would lower the tax rate for the second tax bracket from 20.5% to 19% in 2026, then to 17% in 2027, and to 15% in 2028, reducing the number of federal tax brackets from five to four.

The shadow budget also suggests lowering the federal corporate income tax rate by two percentage points. “Lower corporate income tax rates will lead to more capital investment and increase economic growth in the long term,” the shadow budget says.

It also calls for the revocation of “inefficient and unfair” tax measures, including the luxury tax, tax on share buybacks, and reforms to the alternative minimum tax related to the treatment of charitable donations.

These measures, along with others, “respond to Canada’s long-standing challenges in enhancing productivity and boosting growth and to the more immediate threats emanating from the United States,” the C.D. Howe Institute shadow budget says.