Canada Drops to 12th Place in Global Innovation Ranking: Report

Higher income taxes impairs innovation, leads to migration, study suggests

Parliament Hill is seen below a Canada flag in Gatineau, Quebec, on Sept. 18, 2020. (Sean Kilpatrick/The Canadian Press)

A new report suggests Canada’s tax rates are “uncompetitive” and are impairing innovation when compared to other similar countries, including the United States.

The report, Taxes, Innovation, and Productivity Growth, released by the Fraser Institute on Feb. 7, found that innovation in Canada, which it called “a key driver of higher living standards,” has declined compared to 15 other relatively similar countries.

Canada’s ranking on the Global Innovation Index was in the top 10 in 2014 but had dropped to 12th place by 2022. Other top countries included in the ranking were the United Kingdom, Netherlands, Switzerland, Germany, Finland, Denmark, Korea, and the U.S.

“Innovation is a crucial ingredient in improved productivity and higher living standards, but unfortunately, Canada’s innovation performance over the past decade has been unimpressive to say the least,” said Steven Globerman, senior fellow at the Fraser Institute and co-author of the report, in a news release.

“When it comes to promoting innovation, Canada currently has one of the least favourable tax regimes among advanced economies.”

In an essay accompanying the study, Globerman notes that companies and high-income earners, including “star” scientists are “geographically mobile,” and will tend to migrate to “jurisdictions with lower marginal tax rates.”

A February 7, 2023 study released by the Fraser Institute of Canada finds innovation has declined in comparison to relatively similar countries. (Fraser Institute Handout)

Canada dropped significantly from eighth place on the ranking of corporate taxes in 2014, to 12th place in 2022. In terms of personal income taxes, Canada dropped its ranking from 11th on the list to 13th.

Meanwhile, the U.S. achieved new rankings on the list for innovation, going from sixth in 2014 to the number two position in 2022. The U.S. scored significantly higher in corporate tax, with its rank rising from 15th place in 2014, to ninth place in 2022.

With regard to personal income taxes, the U.S. started in 12th place and ended up in fourth place last year.

Globermam said it was particularly concerning to see Canada’s ranking relative to that of the U.S.

Given that “highly educated individuals” cross the border in significant migration numbers, he noted, having a “less attractive tax environment” may be a “significant handicap to increased innovation” in Canada, he said.

“Policymakers across Canada should review their tax policies with an understanding that high tax rates deter innovation, and ultimately deny Canadians higher living standards,” he said.