Commentary
Ottawa is working overtime to attract foreign investment while Canadian investors put billions of dollars into foreign securities. If Canada cannot give its homegrown investors good reasons to put their money to work here, why should it expect foreign investors to do so?
In 2025, Canadian investors bought $133.8 billion of foreign securities, the most since 2021, with most of that investment going into U.S. corporate securities. Foreign investors, meanwhile, bought $116.4 billion of Canadian securities. That does not mean investment is fleeing Canada. Foreign direct investment remained strong, with more money flowing into Canadian businesses from abroad than Canadian businesses invested overseas.
Canada’s deeper problem, however, is productivity. The OECD reports that investment per worker in Canada in 2023 was only 85 percent of its 2014 level. Over the same period, investment per worker rose 21 percent in the United States. The Bank of Canada has estimated that if Canadian productivity growth since 2000 had matched that of other G7 countries, GDP would be about 9 percent higher, or almost $7,000 more per person.
Canada needs more investment in the businesses, equipment, and technology that allow workers to produce more. Canadians have every reason to invest abroad when the returns are better. The challenge for Ottawa is to make productive investment in Canada more attractive, not discourage Canadians from investing elsewhere.
The timing makes this more urgent. The Bank of Canada warns that U.S. tariffs and trade uncertainty still threaten a fragile recovery in exports and investment. If access to our largest market is less predictable, Canada has even more reason to improve the things it controls: productivity, investment incentives, and confidence.
The federal government’s proposed Productivity Mega Deduction is therefore constructive. Allowing businesses to deduct the full cost of qualifying investments immediately can influence an investment decision before a dollar is spent. Ottawa estimates the measure will cut the marginal effective tax rate on new business investment from roughly 13 percent to 6.4 percent.
But that solves only one part of the calculation. A deduction lowers the after-tax cost of qualifying investments. It does not remove weak expected demand, trade uncertainty, regulatory delay or the tax consequences when an investment succeeds. The mega deduction can improve a project’s expected return. It cannot, by itself, make Canada the place where capital most wants to be.
I like metaphors. Imagine you plant an apple tree. It produces 100 apples a year. Someone offers to buy it because he can make it produce 200. Society gets more apples, more income, and more tax revenue. But if selling the tree creates a tax bill that makes reinvestment unattractive, you may keep it. The asset stays in less productive hands.
Taxes do not merely collect revenue. They change behaviour. Ottawa should be using that influence to encourage Canadians to reinvest their money at home.
First, make capital-gains relief more favourable when proceeds are reinvested in Canada. Canada already allows a limited deferral when gains from eligible small-business shares are reinvested in other qualifying small-business shares. Broaden that principle. If an entrepreneur sells a Canadian business and reinvests within a defined period in qualifying Canadian businesses or productive assets, defer the gain until the money leaves that system. That directly rewards reinvestment rather than simply lowering tax on every gain.
Second, reward owners who build employment and payroll in Canada. Sweden’s tax rules for closely held companies partly link the tax treatment of owners’ dividends to the wages their businesses pay. Canada need not copy Sweden, but the principle is useful: sustained Canadian employment, payroll growth, and reinvestment should count when deciding how successful business owners are taxed.
Third, change the tax mix rather than simply collecting less. Canada relies more heavily on income taxes and less on consumption taxes than the OECD average. In its 2025 Canada survey, the OECD examined shifting taxes equal to 1 percent of GDP from labour income to consumption without changing total tax revenue. It estimated the change could raise potential GDP by about 0.8 percent over 10 years and 1.1 percent in the long run.
A somewhat higher HST, paired with larger credits for lower- and modest-income households, could create room to reduce taxes on work and productive investment without increasing the deficit.
A larger TFSA limit alone would not solve the problem. It would, however, give Canadians more room to save and invest. Greater savings can help lower the cost of capital, making more money available for productive investment in Canada, provided Canadian businesses offer returns attractive enough to compete with opportunities abroad.
Canada does not lack investment summits, speeches, or promotional campaigns. It lacks enough reasons for capital created here to remain here. Improving productivity could strengthen the Canadian economy and support a rising Canadian dollar, which could also help make Canada more attractive to investors looking to keep their capital here.
Before asking the world to invest in Canada, Ottawa should give Canadians who save, build companies, and take risks stronger reasons to keep doing so at home. If Canada becomes a place where successful investment wants to remain, foreign investors will notice too.
Capital is mobile. The goal should be simple: Make Canada a place where success wants to stay.
Harry Margulies is an author and international tax advisor. He writes for the Frontier Centre for Public Policy.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
