Canada is falling behind the United States on personal-tax competitiveness, according to a newly released international study that raises questions about how the country’s tax system affects workers, investors and economic growth.
The Tax Foundation’s 2026 International Tax Competitiveness Index, published October 19, places Canada 28th among 38 OECD countries for individual taxes, compared with 17th for the United States. The findings have prompted renewed calls for Ottawa and provincial governments to lower taxes and improve Canada’s attractiveness to investment.
The results come as Canadians face affordability pressures and businesses navigate growing uncertainty over cross-border trade. Although Canada performs better in some other areas of taxation, its personal-tax ranking highlights concerns about how employment and investment income are taxed.
Canada Falls 11 Places Behind the United States on Personal-Tax Competitiveness
The Tax Foundation’s latest international comparison places Canada 28th out of 38 member countries of the Organisation for Economic Co-operation and Development for individual taxes. Canada received a score of 57.1, while the United States ranked 17th with a score of 62.7. These are comparative index scores, not the percentage of income paid in taxes. The rankings indicate that the study considers America’s personal-tax structure more competitive, particularly in its treatment of income from investments. The Tax Foundation, a U.S.-based tax-policy research organization, evaluates how taxation influences economic decisions rather than simply identifying where people pay the smallest annual tax bill.
The results have attracted attention because Canada competes directly with the United States for skilled workers, entrepreneurs and business investment. Differences in tax treatment can affect how much income individuals retain from additional employment or successful investments. However, the ranking also requires context. Canada placed 15th overall in the same study, ahead of the United States in 17th place. That distinction demonstrates why a weaker result in one category does not mean Canada’s entire tax system ranks below America’s. The personal-tax figures identify a particular vulnerability within a much broader economic comparison.
The Study Measures More Than the Income Tax Taken From a Paycheque
The Tax Foundation evaluates personal-tax competitiveness using three main measures: taxes on ordinary employment income, the complexity of certain income-tax rules, and taxes on capital gains and dividends. Canada’s position varies substantially across these categories. It ranks 22nd for ordinary income taxation, compared with 20th for the United States. The gap is much larger for capital gains and dividends, where Canada ranks 34th and the United States 26th. Both countries share the top ranking on the study’s narrower complexity measure, which focuses on personal-income surtaxes and unconventional social-insurance contributions rather than how difficult it is to complete an annual tax return.
These distinctions are important because personal taxes influence households differently. A salaried employee earning $60,000 faces different considerations from an entrepreneur selling a successful company or an investor receiving dividends. The Tax Foundation’s methodology also considers how high marginal rates can affect decisions to work additional hours, hire employees or invest. Its approach emphasizes economic competitiveness and tax neutrality, meaning the extent to which taxes avoid favouring one activity over another. It does not directly measure the quality of public services, household living standards or whether a country’s tax system distributes income fairly. The ranking is therefore one useful indicator of economic policy, rather than a complete assessment of what Canadians receive for their taxes.
Federal and Provincial Income Taxes Create Different Burdens Across Canada
Canada’s personal income-tax system combines federal and provincial or territorial taxes, meaning the amount someone owes depends partly on where they live. For 2026, the lowest federal income-tax rate is 14% on taxable income up to $58,523. The next bracket is taxed at 20.5% up to $117,045, followed by higher rates of 26%, 29% and 33%. The highest federal rate applies to taxable income exceeding $258,482. Provincial taxes are added separately, and credits and deductions can reduce the final amount payable. These figures are marginal rates, meaning the higher percentage applies only to income within the relevant bracket, not an individual’s entire earnings.
The federal government has already taken steps to reduce income taxes. Prime Minister Mark Carney’s government lowered the lowest marginal rate from 15% to 14%, beginning July 1, 2025, with the change receiving legislative approval in March 2026. The Department of Finance estimates that nearly 22 million Canadians will benefit, with maximum savings of $420 per person and $840 for a two-income family in 2026. However, the reduction does not necessarily resolve the competitiveness concerns raised by the Tax Foundation. A family earning moderate wages may welcome a few hundred dollars in savings, while a highly paid professional considering an international move might focus more heavily on combined federal and provincial marginal tax rates. Both experiences matter when evaluating Canada’s tax policies.
Taxes on Capital Gains and Dividends Are a Major Weakness in Canada’s Ranking
One of the clearest findings concerns investment income. Canada ranks 34th among 38 countries for the competitiveness of capital gains and dividend taxation, substantially below the United States in 26th place. The Tax Foundation considers these taxes particularly important because company profits can face taxation at both the corporate and shareholder levels. When a company earns money, it may pay corporate income tax. Shareholders can then face additional personal taxes when the business distributes dividends or when they sell shares at a profit. The report argues that these combined costs can discourage saving, business investment and the financing of new projects.
Canada’s capital-gains rules already provide some preferential treatment. Under the general inclusion-rate rules, only half of a realized capital gain is included in taxable income. For example, an investor who realizes a $10,000 profit on shares held in a regular taxable investment account generally includes $5,000 in taxable income, subject to applicable exemptions and adjustments. The resulting tax depends on the investor’s circumstances and marginal rate. In March 2025, Carney cancelled a proposed increase in the capital-gains inclusion rate, maintaining the existing one-half approach. Despite that decision, Canada’s investment-tax ranking remains weak. This suggests that further debate over investment taxation is likely, particularly as policymakers consider how to encourage Canadian entrepreneurs to expand their businesses domestically.
Tax-Free Savings Accounts Help Protect Canadian Investors From Additional Taxes
Canada’s relatively weak investment-tax ranking does not mean every investor pays high taxes on their savings. Registered accounts provide substantial protection. For 2026, the annual Tax-Free Savings Account contribution limit is $7,000, with unused contribution room carrying forward for eligible account holders. Interest, dividends and capital gains earned in a TFSA are generally tax-free, including when the money is withdrawn. Registered Retirement Savings Plans offer a different advantage: eligible contributions can reduce taxable income, while investment earnings generally remain untaxed until funds are withdrawn. These arrangements allow millions of Canadians to save without facing the same treatment as investments held in ordinary taxable accounts.
However, these benefits depend on individual financial circumstances. A worker struggling with rent and grocery bills may have little money available to contribute to a TFSA or RRSP. A higher-income household with substantial savings may have greater opportunities to use registered accounts and eventually invest additional money outside them. The Tax Foundation’s ranking focuses on the broader structure of investment taxation, including the treatment of capital gains and dividends outside preferential arrangements. For policymakers, this raises an important question about whether further reductions in investment taxes would primarily encourage productive investment or provide additional advantages to people who already have significant financial assets.
OECD Paycheque Data Shows a Smaller Gap Between Canadian and American Workers
Another international comparison provides a different perspective on how taxes affect ordinary employees. The OECD’s Taxing Wages 2026 report found that the average tax wedge for a single worker earning the average national wage was 32.1% in Canada during 2025, compared with 30% in the United States. The OECD average was 35.1%. The tax wedge measures income taxes and employee and employer social contributions, minus applicable cash benefits, as a share of total labour costs. It is not simply the percentage of an employee’s gross salary withheld from a paycheque. Under this particular measure, Canada’s burden was 2.1 percentage points higher than America’s.
The OECD also examined households with children. For a one-earner married couple with two children, the tax wedge was 22.1% in Canada and 19.6% in the United States. These findings demonstrate that personal circumstances can change how the two tax systems compare. They also show why an 11-place competitiveness ranking should not be interpreted as an 11-percentage-point difference in income taxes. A Canadian family evaluating its finances must consider wages, tax credits, pension contributions and government benefits together. International tax-structure rankings provide valuable comparisons, but the actual financial impact varies by household composition, income level and location.
Canada Still Ranks Ahead of the United States on Overall Tax Competitiveness
Despite its weaker individual-tax ranking, Canada finishes ahead of the United States in the Tax Foundation’s overall assessment. Canada ranks 15th, receiving a score of 72.2, while the United States ranks 17th with 71.2. The index evaluates five broad categories: corporate taxes, individual taxes, consumption taxes, property taxes and cross-border tax rules. Canada performs relatively well on consumption taxes, placing eighth among the 38 countries, although the United States ranks even higher in third place. The American advantage is also substantial in corporate taxation, where the United States ranks eighth and Canada 17th.
Canada performs better than the United States in other categories. It ranks 25th for property taxes compared with America’s 27th, and 28th for cross-border tax rules compared with America’s 37th. These differences help explain why Canada’s overall position remains stronger despite its comparatively weak personal and corporate income-tax results. The broader index also shows how different national systems can achieve similar overall scores through different approaches. Estonia holds first place, supported by a structure that generally taxes corporate profits when distributed rather than as they are earned. Canada’s position suggests that reform efforts could focus on identified weaknesses without assuming that every component of its tax system needs replacing.
Canada’s Ranking Has Not Suddenly Collapsed, but the Study’s Methodology Has Changed
The 2026 findings also require careful interpretation when compared with previous years. The Tax Foundation revised its methodology for corporate taxes, individual taxes and cross-border rules, making results from earlier published editions unsuitable for direct comparison. To address this problem, researchers recalculated previous years using the updated approach. Under that consistent methodology, Canada ranked 15th overall in both 2025 and 2026, while the United States slipped from 16th to 17th. Canada’s latest position therefore should not be presented as evidence that the entire country’s tax competitiveness suddenly deteriorated over the past year.
Several Canadian tax-policy changes are reflected in the new findings. During 2025, Ottawa cancelled its proposed capital-gains inclusion-rate increase, eliminated the digital services tax and restored certain business-investment deductions. However, the Tax Foundation noted that additional investment incentives announced in September 2026 arrived after the study’s cutoff date. Those measures could affect future assessments if implemented as proposed. This distinction matters because policy announcements, enacted legislation and tax provisions captured by an international study do not always align perfectly. Rankings provide a useful snapshot, but they can lag behind government decisions and should not be treated as a real-time measurement of every tax-policy change.
Taxpayer Advocates Demand Further Cuts as Government Revenue Remains a Major Concern
The Canadian Taxpayers Federation responded to the October 19 findings by calling for further personal and corporate income-tax reductions. Federal director Franco Terrazzano described the results as a warning that Canadian workers and businesses face an economic disadvantage compared with their American competitors. The organization argued that lower taxes would help households retain more income and encourage companies to invest domestically, particularly while American trade restrictions place pressure on Canadian industries. Its position reflects a longstanding preference for smaller tax burdens and reduced government intervention in the economy. However, the competitiveness ranking itself does not establish how large a tax reduction should be or how governments would finance it.
Government revenue is an important part of that discussion. The OECD’s Revenue Statistics 2025 report found that total taxes represented 34.9% of Canada’s GDP in 2024, compared with 25.6% in the United States. These economy-wide figures include different categories of taxation and do not represent the amount deducted from an individual worker’s salary. They also reflect different approaches to financing public services and social programs. Canada’s recent reduction in the lowest federal income-tax rate alone is projected to cost approximately $27.2 billion in revenue over five years. Any additional cuts would therefore require policymakers to consider their effects on public finances, service delivery and economic growth. Improving competitiveness involves balancing those priorities rather than evaluating tax rates in isolation.
The Next Challenge Is Making Canada’s Tax System More Competitive Without Sacrificing Essential Services
The findings arrive as Ottawa is already pursuing changes intended to encourage domestic investment. In September 2026, the federal government announced its proposed Productivity Mega Deduction, which would expand immediate tax deductions to approximately two-thirds of eligible capital investment. The Department of Finance estimated an incremental fiscal cost of $36 billion over five years. Although the measure primarily concerns business-investment taxation rather than personal income taxes, it reflects the government’s recognition that tax policy can influence where companies expand and purchase equipment. For Canada, attracting private investment has become especially important as trade uncertainty increases pressure to strengthen domestic productivity.
The personal-tax ranking raises a related challenge. Policymakers could examine combined federal and provincial marginal rates, the treatment of dividends and capital gains, and opportunities to simplify rules without creating unnecessary financial advantages for particular groups. Any changes would need to be evaluated against their effects on investment, household incomes, tax fairness and government revenue. The Tax Foundation’s results do not prove that lower taxes alone would resolve Canada’s economic difficulties. They do, however, identify areas where Canada’s system compares unfavourably with those of competing economies. With the United States ranking 11 places higher on individual taxes, the central question is whether future reforms can strengthen Canada’s appeal to workers and investors while maintaining the services Canadians expect.
