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Chapter 7
Building the Right Investment Environment

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We live in a global economy where people and businesses are increasingly able to move to where they obtain the greatest advantage. Skilled workers are locating in those places where their talents are most rewarded, where they can fully achieve their aspirations, and where they can experience the highest quality of life.

Similarly, for businesses, technological advances are lowering the costs of transportation and communications worldwide, permitting firms to invest where they can be most productive and can find the best combination of skills, investment opportunities and business environment.

In this context, governments play a critical role by establishing the right policy framework to encourage productive investment in those factors that support long-term prosperity: education and training, physical capital and innovation.

Relationship to Prosperity

The right policy framework begins with a sound macroeconomic environment. The combination of disciplined monetary policy and prudent fiscal planning lays the foundation for investment by keeping interest rates low and uncertainty muted. Sound macroeconomic policy must be complemented by effective structural policies that address taxation, regulation, financial markets, competition, openness and government efficiency.

The tax system should be appropriate to raise the revenue needed to pay for the social programs that Canadians value and to support investment in education and basic research. It must also be efficient and competitive to enhance incentives to save, invest and work. This means not only that the tax rates should be as low as possible, but also that the mix of taxes should be economically efficient.

Good regulation is essential to a robust economy. An appropriate regulatory framework helps to protect the health and safety of Canadians and the environment in which we live, at the least possible economic cost.

World-class financial markets, along with open and efficient product markets, play a vital role in creating the right setting for individuals and businesses to invest and promote prosperity in Canada. Competition induced by open markets encourages firms to reach their productive potential.

Finally, the public service plays a key role in ensuring that all of its programs deliver results for Canadians at a reasonable cost. Strong public management and oversight are critical to efficient and cost-effective government, and ultimately to a more prosperous Canada.

Building the Right Investment Environment

Recent Performance and Broad Policy Directions

1. Maintaining Canada’s Macroeconomic Advantage

Sound macroeconomic conditions are fundamental to a country’s prosperity. The combination of effective monetary policy and prudent fiscal planning encourages households and businesses to save and invest, and hence leads to higher growth. Lower debt leaves government finances less exposed to interest-rate fluctuations; it enables government to spend less on servicing debt, freeing resources to fund social programs and to invest in support of economic growth and tax reduction; and it gives Canadians a greater ability to face the challenge of an aging population. Strong fiscal and monetary credibility give the central bank the flexibility to cushion the impacts of negative shocks to the economy.

Fiscal Policy

Eliminating the federal deficit in 1997 was an essential part of restoring the country’s economic stability. The Government has now recorded eight consecutive surpluses and has committed to maintaining balanced budgets or better. The federal debt, expressed as a share of the size of the economy, has fallen from a peak of 68 per cent in 1995–96 to 39 per cent in 2004–05, and the Government is on track to meet the goal set out in the 2004 budget of reducing the debt-to-GDP ratio to 25 per cent by 2014–15. The federal effort to put its fiscal house in order has been complemented by similar efforts by the provinces and territories. As a result, Canada was the only G7 country to record a budget surplus for the government sector in 2004. Canada has gone from having the second highest debt-to-GDP ratio among G7 countries in the mid-1990s to the lowest last year. This improved fiscal record laid the groundwork for a more productive allocation of savings by keeping interest rates low and stimulating private investment.

With the aging of Canada’s population, the country will face increases in aging-related expenditures, such as elderly benefits and health care. In order to meet these future pressures, it is critical that the Government maintain a steady focus on fiscal discipline and debt reduction over the next several years, before the major impacts of population aging are felt.

Establishing Sound Fiscal Policy Is Crucial to Canada's Prosperity

To ensure that the debt burden continues to fall, the Government is announcing a new objective of reducing the debt-to-GDP ratio to 20 per cent by 2020. Reducing the debt-to-GDP ratio to 20 per cent would mean that less than 10 cents of every revenue dollar would go to service the debt compared to about 17 cents in 2004–05 and 39 cents in 1990–91.

Monetary Policy

Inflation targeting is the cornerstone of monetary policy in Canada. Since 1991, the Government and the Bank of Canada have jointly agreed to target inflation— first with the goal of reducing it to progressively lower levels and then, once a low level of inflation was achieved, to keep it low. This strategy has been very successful. Inflation expectations are well anchored at low levels and have remained so even in the face of significant external shocks to the economy. This has provided consumers and businesses with the confidence they need to make long-range plans. By keeping inflation low, stable and predictable, Canada’s monetary policy has encouraged businesses to make productivity-enhancing investments, thereby strengthening the growth of the economy and its capacity to generate new jobs.

Broad Policy Directions
Maintaining Canada’s Macroeconomic Advantage
  • Maintaining sound macroeconomic conditions is a key ingredient to ensure a continuing increase in our standard of living. To that effect, the Government reaffirms its commitment to a balanced budget or better and to achieve its debt target.
  • Keeping the federal debt-to-GDP ratio on a downward track will create future fiscal flexibility and help to address the pressures associated with an aging population. Accordingly, the Government of Canada is setting a new objective of reducing the federal debt-to-GDP ratio to 20 per cent by 2020.
  • Canadians have seen the benefits of prudent fiscal planning and a balanced approach that allocates annual fiscal surpluses between debt reduction, tax relief and investments in key economic and social priorities. To maintain this balanced approach, the Government recently introduced legislation to allocate any unanticipated surplus in excess of the $3-billion Contingency Reserve equally to further investments, tax relief and debt reduction. The annual Contingency Reserve is set aside to guard against unforeseen circumstances. If not needed, it is used to reduce the federal debt.
  • In order to maintain the institutional framework that has delivered low, stable and predictable inflation, the Government intends to extend its inflation target agreement with the Bank of Canada for a further five years in 2006.

2. Improving the Competitiveness of Our Tax System

Taxes finance Canada’s strong social safety net, our roads and other public infrastructure, our universal health care system, environmental protection, public safety, the Canadian Forces, and countless other social and economic imperatives, all contributing to our high quality of life. Taxes also have important consequences for economic growth, job creation and our standard of living through their impacts on the incentives to work, save and invest.

Highly skilled and productive workers are critical for success in a knowledge-based global economy. Taxes lower the rewards from investing in new skills, and they can discourage skilled workers from choosing to work and live in Canada. Personal income taxes may also discourage low-income Canadians from working as much as they might want, especially when working more may mean a reduction in, or loss of, income-tested benefits, such as social assistance and the Canada Child Tax Benefit.

Savings are important for growth and prosperity because they provide a pool of investment capital for new and growing businesses. Savings also help Canadians achieve other financial aspirations such as a comfortable retirement, home ownership or higher education. However, personal income taxes can erode the returns to saving outside of registered pension plans (RPPs) and registered retirement savings plans (RRSPs), making it more attractive to consume today rather than to save for tomorrow.

The creation and expansion of enterprises is central to creating more and better jobs for Canadians. In today’s global economy, where capital is highly mobile internationally, creating a tax advantage to attract and retain investment is vital. Canada must have a competitive business tax system to encourage the investment that helps workers become more productive and efficient, the cornerstone of higher wages and better living standards. A tax system that is easy for businesses to understand and comply with, and is harmonized among different levels of government, allows businesses to focus on growing their companies and investing in the future.

The Tax Burden and Mix

The economic costs imposed by taxes depend on overall tax levels, as well as the sources of these revenues—the tax mix—because some types of taxes slow growth more than others. Some types of business taxes (e.g. sales taxes on capital goods and capital taxes) and personal taxes on savings are more damaging to Canadians’ living standards. Taxes that reduce savings and investment particularly undermine our long-term prosperity.

Overall, Canada is at the G7 and OECD averages in terms of how much revenue is raised as a proportion of GDP. Canada raises more of its revenue as a share of GDP from personal and corporate income tax than any other G7 country (see table below).

Canada Relies More on Personal and Corporate Income Taxes Than Do Other Countries

International Tax Burden Comparisons for Different Revenue Sources as a Percentage of GDP, 2003

 Security and 
Payroll Tax



G7 average 8.9 2.6 10.5 9.0 3.7 34.6
OECD average 9.4 3.4 9.9 11.5 2.1 36.3

Canada 11.7 3.5 5.9 8.8 3.9 33.8
United Kingdom 10.2 2.8 6.6 11.6 4.4 35.6
United States 9.0 2.1 6.7 4.6 3.2 25.6
Japan 4.4 3.3 9.7 5.1 2.8 25.3
France 7.6 2.5 17.5 11.1 4.7 43.4
Germany 8.5 1.3 14.4 10.4 0.9 35.5
Italy 10.8 2.9 12.7 11.1 5.6 43.1

1 Includes primarily property tax revenue, withholding taxes and provincial capital taxes.

Source: OECD, Revenue Statistics—1965–2003 (2004 edition).

Personal Income Taxes

Since eliminating the deficit in 1997, the Government has significantly reduced personal income taxes, particularly those of low- and modest-income Canadians. Comparing today’s tax system with the one in place in 1997, Canadians face lower marginal tax rates, earn more tax-free income, receive more significant family benefits, and are protected against paying more tax due to inflation.

The $100-billion Five-Year Tax Reduction Plan, introduced in 2000, reduced federal personal income taxes by 21 per cent on average, and 27 per cent for families with children. To date, about 1 million low-income Canadians have been removed from the tax rolls and the tax system has been improved for students, persons with disabilities, registered charities and others (see box).

Tax Relief for Canadians

In 2000, the Government introduced a plan to reduce federal taxes by $100 billion over five years—the largest tax cut in Canadian history. The plan provided $81 billion in tax relief for individuals, over 60 per cent of which went to low- and middle-income Canadians.

Budget 2003 built on that five-year plan by enhancing support for Canadian families, bringing the estimated annual support delivered through the Canada Child Tax Benefit to over $10 billion in 2007, an increase of more than 100 per cent since 1996.

Budget 2005 increased the basic personal amount—the amount that all Canadians can earn without paying federal income tax—to at least $10,000 by 2009. It will provide about $7.1 billion in tax relief for all taxpayers over five years, with most of the benefit going to those with low and modest incomes, and remove 860,000 low-income taxpayers from the tax rolls.

Overall, the majority of personal income tax relief since 2000 has gone to low- and modest-income Canadians. For example, a two-earner family of four earning $60,000 paid about 37 per cent less net federal income tax in 2005 than it would have paid without the 2000 tax plan. A similar family earning $100,000 paid 18 per cent less.

Past tax relief efforts helped reduce the burden of personal income taxes as a proportion of GDP from 8 per cent in 1999–2000 to 7 per cent in 2004–05 (see chart below).

Personal Income Tax Burden Has Fallen

The Government will make further progress as fiscal resources allow. One important area of focus will be the interaction of the tax and benefit systems. Lower personal taxes would help more low- and modest-income Canadians to achieve their aspirations of greater workforce participation. Currently personal income tax rates, combined with income testing for government support programs for individuals and families, have together resulted in high marginal tax rates that make working less attractive. This is true not only for the lowest-income families facing the "welfare wall," but also for many working families with modest incomes (see chart below). Reducing these barriers will require coordinated action between the federal and provincial governments.

Reduction in Benefits and Increase in Taxes for Each Additional Dollar Earned Can Create Disincentives to Work at Low Incomes

For social assistance recipients, in particular, moving into the workforce often means facing a series of obstacles that may make them financially worse off. They may lose thousands of dollars in social assistance and related benefits such as access to subsidized prescription drugs and housing. They also must incur work-related expenses, pay income taxes, employment insurance premiums and Canada Pension Plan/Quebec Pension Plan contributions, and if they have children, find affordable child care.

These can be significant barriers to paid employment. A typical single parent at the low end of the income scale could lose almost 80 cents for each dollar earned to taxes and reduced income support by entering the workforce, and potentially more if the loss of in-kind benefits, such as subsidized housing and prescription drugs, and work-related expenses are taken into account.

Progress has been made in lowering the welfare wall in recent years. For families with children, the federal-provincial-territorial National Child Benefit initiative has contributed significantly to reducing financial disincentives to leave social assistance, by gradually replacing child-related benefits that were tied to social assistance with benefits paid to all low-income families. This includes child care subsidies, income support programs and prescription drug coverage. Many provinces and territories have also made changes to their social assistance and other programs that have improved work incentives. While progress has been made, more needs to be done.

Lower personal taxes would also provide greater rewards and incentives for middle- and high-income Canadians to work, save and invest. Although Canada’s personal income tax burden on middle-income earners compares favourably to that of several European countries, it is higher than in other dynamic economies such as the United Kingdom, the United States and Ireland.

Reducing the Burden on Middle-Income Taxpayers

A more competitive personal income tax system would encourage more Canadians to invest in their skills and to remain in Canada, where their talents will help build a stronger, more prosperous economy. It would also make Canada an even more attractive destination for highly skilled workers from around the world, fuelling workforce renewal at a time when today’s workforce will start retiring in ever-greater numbers.

Canada's Taxes Reduce Our Attractiveness to Highly Skilled Workers

In a world where people have more options of where to live and work, taxes may be a significant consideration for highly skilled Canadians or potential immigrants: Canada has high marginal and average tax rates on higher incomes.

Putting these differences in context, a specialized software engineer emigrating from India may have her choice of destinations. Many factors may influence her decision, such as Canada’s combination of high standards of living, strong social safety net, universal public health care, personal security and our respect for cultural diversity. She may also be persuaded, perhaps significantly, by the fact that she will pay almost $11,000 more in income tax in Canada each year than, for example, in the United States or the United Kingdom. Further, she will pay more tax in Canada on each additional dollar she earns than in many other industrialized countries.

Taxes on Savings

The Government has also improved the tax system to encourage savings, entrepreneurship and innovation. Recent actions include increasing the limits on contributions and benefits under RRSPs and RPPs, reducing the capital gains inclusion rate to one-half from three-quarters, and creating a tax-free rollover from one small business investment to another.

Through the personal income tax system, Canada still imposes a relatively high level of taxation on savings. Compared to the United States, Canada taxes individuals at higher rates on all types of investment income. Canada also has lower limits for RPPs and RRSPs, meaning fewer opportunities for tax-deferred retirement saving.

In addition, in Canada, some forms of investment income are taxed more favourably than others on a combined corporate-personal income tax basis. In particular, dividends paid to individuals by large corporations are subject to an element of double taxation (corporate- and personal-level tax). To address this problem, other countries have taken steps to lower the effective tax rates on dividends. For example, the U.S. recently reduced the top federal tax rate on dividends for individuals to 15 per cent.

Business Tax System

Creating an internationally competitive tax system for businesses has been, and continues to be, a key part of the Government’s plan to build a stronger economy and improve living standards. Businesses undertake many of the investments that are crucial to our long-term prosperity, so it is vital that incentives to invest are not undermined.

The Government’s approach to improving the competitiveness of the business tax system has been to reduce corporate income tax rates while improving the tax structure. Corporate tax reductions since 2000 have created a corporate tax rate advantage for Canada, relative to the United States. The tax structure has also been improved by phasing out the capital tax, establishing a common tax rate across all sectors, and bringing capital cost allowance rates more into line with the useful life of assets. These improvements in the efficiency of the tax system have laid the foundation for improved prosperity and have not reduced corporate tax revenues, which have remained robust, growing on average 7.3 per cent per year from 2001–02 to 2004–05.

Ensuring the competitiveness of Canada’s business taxes vis-à-vis the United States is particularly important because our economies are so highly integrated. In 2004, the United States legislated a plan to significantly reduce its corporate tax rate on manufacturing income. The corporate tax reductions proposed in Budget 2005 would maintain Canada’s corporate tax rate advantage over the United States.

However, Canada must be vigilant. Other countries recognize that an internationally competitive business tax system is important to improving living standards. The clear trend among industrialized countries has been to reduce statutory corporate income tax rates. Since 1997, 25 of the 30 countries that are members of the OECD have reduced their corporate tax rates, in some cases quite substantially. These countries include all G7 countries and countries that maintain extensive social safety nets, such as Denmark and Finland (see chart below).

Other Countries Are Reducing Their Corporate Tax Rates

While it is still too early to see the full impact of recent corporate tax reductions, an initial assessment of the relative changes in capital intensity suggests that the tax cuts did encourage investment in new capital. Capital intensity (as measured by the capital-to-labour ratio) in the service sector—a sector that benefited from the reduction in the general corporate income tax rate—accelerated relative to that of the manufacturing sector, which already enjoyed a tax rate of 21 per cent and therefore did not benefit from the reduction in the general corporate income tax rate announced in 2000. In the United States, growth in the capital intensity of the service sector was below that of the manufacturing sector, which further suggests that factors specific to the Canadian economy were at play. This conclusion is consistent with the results of research on earlier tax cuts in other countries, which found evidence that taxes affect investment decisions, and that investment location decisions of multinational companies are particularly sensitive to corporate taxes.

Lower statutory tax rates encourage investment and are an important signal for investors, but other aspects of the corporate income tax system—capital cost allowances, for example—also affect Canada’s attractiveness for new investment.

What Is the Marginal Effective Tax Rate on Business Investment?

Taxes imposed on businesses affect the rate of return on investment, and hence the amount of investment undertaken. While the statutory corporate income tax rate is a key indicator of how the tax system affects investment, it does not convey the complete picture. The effective tax rate on investment can differ because of deductions and credits available through the corporate income tax system as well as other taxes paid by corporations, such as capital taxes.

These considerations have led to the development of what are known as marginal effective tax rates (METRs) in order to provide a comprehensive indicator of the impact of the tax system on the decision to invest. METRs can also give a perspective on how the tax system is affecting the allocation of investment by type of asset and by industry. Finally, a comparison of METRs in various jurisdictions provides an indicator of how taxes are affecting the distribution of investment within Canada, and of the international competitiveness of the Canadian tax system.

It is important that Canada have not only a statutory tax rate advantage, but also an overall tax advantage. Legislated corporate tax reductions, along with those proposed in Budget 2005, would result in Canada’s METR being reduced from 44.6 per cent in 2000 to 32.6 per cent in 2010 and create about a 2-percentage-point METR advantage over the United States (see chart below).

Federal tax reductions account for 80 per cent of this improvement in Canada’s overall tax competitiveness, and there is considerable scope for provincial action to contribute to further improvements.

Overall Corporate Tax Competitiveness Compared to the United States

Provincial Taxes and Intergovernmental Cooperation

Provinces raise almost as much tax revenue as the federal government and so have an important impact on the economy. As mentioned above, some of the provincial taxes—capital taxes and retail sales taxes on capital goods—are taxes on investment and are among the most detrimental to economic growth.

While there has been some progress, further reductions of provincial capital taxes and sales taxes on capital goods should be made a priority in order to boost business investment and economic growth. Eliminating these provincial taxes would increase our METR advantage over the United States to almost 10 percentage points by 2010.

Beyond the general economic costs that the tax system imposes, it also entails administrative and compliance costs on individuals, businesses and governments. This is why it is important to continually seek ways to simplify the tax system, and why the federal and provincial governments have also entered into tax collection agreements under which federal and provincial taxes are levied on a common tax base, with a single administration. These agreements have worked well. The federal and Ontario governments have announced their intention to enter into a tax collection agreement for Ontario’s corporate tax. More work with provincial governments is needed to better harmonize federal and provincial taxes (e.g. as has already been done with Nova Scotia, New Brunswick, and Newfoundland and Labrador in the area of value-added consumption taxes) and administration agreements, and to streamline and simplify tax measures and systems.

Broad Policy Directions
Improving the Competitiveness of Our Tax System

The Government is committed to a fair, efficient and competitive income tax system for individuals and corporations.

  • The Government will reduce personal income taxes at all income levels to make it more attractive for Canadians to join the workforce, to stay working and to save. In particular, the Government will focus on reducing marginal tax rates to improve incentives.
  • The Government will also consult with provinces and territories to design and introduce a new Working Income Tax Benefit to make work pay for low-income Canadians.
  • The Government will ensure Canada has an internationally competitive corporate tax system. In particular, it will establish a meaningful overall, or marginal effective tax rate, advantage vis-à-vis the United States, our largest trading partner.
  • The Government will further improve the efficiency of the tax structure for Canadian business by making it as neutral as possible with respect to business structure, financing and investment, and by continuing to review capital cost allowance rates to ensure that they reflect useful lives of assets.
  • To encourage Canadian investment abroad and foreign investment in Canada, the Government will continue to enhance its tax treaties with other countries, including the United States. It will also continue to strengthen Canada's anti-money laundering and terrorist financing regime, in line with evolving global standards, to ensure that domestic and international capital flows serve lawful and productive purposes.

3. Promoting Regulatory and Financial Market Efficiency

Regulations help to protect the health and safety of Canadians, support a clean environment and underpin a well-functioning market system.

Regulation as a Tool of Policy

"Regulation, in its broadest sense, is a principle, rule, or condition that governs the behaviour of citizens and enterprises. Regulation is used by governments, in combination with other instruments, such as voluntary standards and taxation, to achieve public policy objectives. Regulation has an impact on virtually every aspect of our lives: the products and services we use, the medications we consume, and the foods we eat. Canada’s regulatory system helps advance the quality of life for current and future generations."

Government of Canada, Smart Regulation:
Report on Actions and Plans, March 2005

Smart Regulation

While the OECD has concluded that Canada has one of the most effective regulatory systems in the world, it is still important that governments in Canada subject regulations to constant review given the dynamic nature of the domestic and global economies. Our regulatory system must be an advantage.

The federal government’s Smart Regulation initiative has already yielded concrete results:

  • The review backlog for pharmaceuticals has been eliminated and review times substantially reduced, improving Canadians’ access to safe and effective new drug therapies. Between January and August 2005, 54 per cent of completed reviews of pharmaceutical submissions were within time targets, up from 13 per cent in 2003. The target for 2006 is 90 per cent on-time reviews.
  • A pilot project of new chemical substance assessment with Australia, Japan and the United States will make best use of international expertise and high common standards, as an assessment by one of these countries will be recognized by the other three.

Additional Smart Regulation reforms are being developed. One example is the Government’s work on a Canada-U.S.-Mexico trilateral Regulatory Cooperation Framework that will allow Canada to anticipate trans-boundary risks to health, safety and the environment through early cooperation. The Framework will also eliminate testing and certification duplication, and unnecessary regulatory differences, creating more favourable cross-border business conditions, while meeting its fundamental objective of protecting Canadians.

Complying with regulations imposes costs on business, with a greater burden falling on small and medium-sized firms. Canadian Federation of Independent Business members consistently identify government regulations and paper burden as having a significant effect on their operations. Their concern was confirmed by the OECD, which estimated that the burden of complying with administrative requirements averages about 4 per cent of business sector GDP across OECD countries.[1]

The Role of Competition Policy

Competition policy has an important role in promoting rivalry between firms in domestic markets, creating incentives for firms to become more efficient and innovative. Competition also helps ensure fair prices for consumers. The Government has introduced amendments to the Competition Act to deter anti-competitive practices, and will strengthen these provisions by empowering the Competition Bureau to assess the state of competition and the functioning of markets in any sector of the Canadian economy. Ensuring fair and vigorous competition among firms creates incentives for continuous upgrading of capabilities, which will position Canadian companies to compete more successfully in the international marketplace, while creating a more efficient and dynamic economy.

In order to ensure that regulatory objectives are achieved at the lowest cost, the Government created the Paper Burden Reduction Initiative. The mandate of the Initiative is to develop a plan for measuring and reducing administrative costs. The Advisory Committee on Paper Burden Reduction, which is co-chaired by Industry Canada and the Canadian Federation of Independent Business, includes equal representation from the public and private sectors. One promising pilot project being monitored by the Advisory Committee is BizPaL, which will allow businesses such as restaurants and hotels to access all municipal, provincial and federal permit requirements in several jurisdictions through one integrated service available on the Internet, saving time and money.

Efficient Financial Markets

World-class capital markets and financial institutions are essential to creating the right environment for saving and investment. The federal government supports their development through a dynamic and effective regulatory framework.

Canadians depend on the financial sector to safeguard their savings and enable them to prepare for retirement; finance their homes; insure themselves against risks; provide start-up, operating and growth capital for small and medium-sized enterprises; and raise equity and/or debt to fund business investment, infrastructure development, or the financial needs of the public sector.

Government must ensure that the regulatory system responds to domestic and global change, creates the right conditions for competition and growth, fosters soundness and market integrity, and helps meet the needs of individuals, businesses and the Canadian economy.

Review of the Regulatory Framework for Financial Institutions. Driven by globalization and the expanded use of technology, the financial sector has expanded internationally and become more competitive. Over the years, the Canadian regulatory environment has adapted to encourage innovation and facilitate the entry of new institutions in the Canadian financial services industry. Individuals and businesses have benefited through access to a wider range of financial products and services.

The Government of Canada’s commitment to conducting regular reviews of the regulatory framework has been key to Canada’s success in ensuring that its financial services sector is efficient and competitive and that it serves individuals and businesses well. Most recently, Budget 2005 launched the consultation process associated with the 2006 review of the financial institutions statutes. The Government will issue proposals shortly in the form of a white paper.

Full Spectrum Financing for Canadian Businesses. Investment is a critical ingredient for growth. In particular, venture capital (VC) is the lynchpin for bringing innovative ideas into commercial fruition. The Government has played an important role in the development of the Canadian VC industry through its tax policy initiatives and through direct investment. Still, the level and performance of VC investment in Canada remain below comparable U.S. measures (see chart below). The Government must continue to assess the reasons for these differences, review its existing programs and further its efforts to promote the availability of full spectrum financing for businesses in Canada.

Venture Capital Investment Levels and Performance Are Lower In Canada Than in the United States

Integrity and Efficiency of Canada’s Capital Markets. Investor confidence in the integrity of capital markets is critical for an efficient and well-functioning economy. The federal government has worked closely with provincial governments, regulators and industry in recent years to strengthen the integrity of our capital markets, enhance governance and bolster investor confidence. While collective efforts have resulted in significant improvements, all governments recognize that much work remains to be done to develop a system of securities regulation that best meets the following objectives set out in Budget 2005:

  • An efficient regulatory system that is world-class.
  • A system that ensures timely policy innovation and development.
  • A system that leads to improved investigation and enforcement.
  • A system that provides Canada with a stronger international voice.
  • A system that fosters better coordination with other Canadian financial sector regulation.

In Budget 2005, the Government noted that a single securities regulator would best achieve these objectives. The Government of Canada will continue discussions with the provinces and territories on this and other approaches to achieving a new, enhanced system of securities regulation.

Effective securities regulation also requires sound and modern laws to govern the holding and transfer of securities. In this regard, Canada has not kept pace with the move to electronic trading: there is overlap and lack of uniformity. This results in legal uncertainty and competitive disadvantage. Efforts are underway at both the provincial and federal levels to address these shortcomings.

Strong and Secure Pensions. Canadians have a strong interest in ensuring that their pensions are secure and well invested. Owing to bold reforms undertaken by the federal government in cooperation with provincial governments in 1997, the Canada Pension Plan is on a solid footing (see Chapter 3).

At the same time, financial market developments over the past few years have affected the solvency position of many private pension plans, and together with other factors created uncertainty about the security of benefits and the viability of defined benefit pension plans. The Government has a responsibility to establish the right set of rules and incentives to enhance pension security while maintaining funding flexibility and allowing sponsoring businesses to invest and grow. The Department of Finance Canada issued a consultation paper in May 2005 to solicit views on how to strengthen the current federal framework for private defined benefit pension plans. Proposals stemming from that consultation will be issued in the coming months. Several provinces are also pursuing initiatives to serve similar objectives for plans under their jurisdiction.

Broad Policy Directions
Promoting Regulatory and Financial Market Efficiency
  • Implement a comprehensive reform of the Government’s regulatory system based on the principles of Smart Regulation.
  • Reduce the paper burden on business by working with the private sector and other levels of government to minimize regulatory complexity and duplication facing business, and report regularly on progress.
  • Ensure that the regulatory framework governing the financial sector, capital markets and pensions promotes soundness, efficiency and competitiveness, and serves the needs of individuals, businesses and the economy.
  • Continue to discuss with the provinces and territories a single securities regulator and other approaches to achieve a new, enhanced system of securities regulation.

4. Strengthening Our Economic Union

The free movement of people, goods, services and capital across Canada is vital to a strong and competitive economy. The core issue is the mobility of individuals. All Canadians should have the right to compete for the best-quality jobs, wherever they may be found, and have their professional and trade qualifications recognized in all provinces and territories. This is not only a right of citizenship, but ensures that companies can remain competitive by hiring the most qualified people. The free movement of goods and services within the country also means consumers pay a fair price for goods and services. Eliminating internal barriers is also an important element in building a climate that fosters investment.

In 1994, the Agreement on Internal Trade, the cornerstone document governing the free flow of goods, services, labour and capital within Canada, was signed by the Government of Canada and the provinces and territories. Since this agreement came into effect in 1995, many restrictions on the movement of workers and on trade in goods and services have been eliminated. The Government of Canada will work with the provinces and territories in making further progress on internal trade for the benefit of Canadians.

As mentioned earlier, the provinces and territories also have a role to play in ensuring that Canada has a world-class system of securities regulation and an efficient taxation system. The federal government will endeavour to work with the provinces and territories to make progress on these fronts too.

The Government also remains committed to working with provinces and territories to implement the recommendations of the Agreement on Internal Trade Review Panel on the harmonization of cost of credit disclosure requirements. For this purpose, the Government would be prepared to amend the federal Cost of Borrowing Regulations to reflect a common approach for all jurisdictions, if agreed to by the federal/provincial/territorial Consumer Measures Committee and endorsed by Consumer ministers later this year.

Governments have also been examining the regulation of payday lenders to ensure effective levels of protection for consumers of this industry. In response to provinces that wish to regulate the industry, the Government has indicated that it is prepared to propose amendments to the Criminal Code that would provide interested provinces and territories with the flexibility to regulate the business practices of payday lenders and set limits on the cost of borrowing.

Broad Policy Directions
Strengthening Our Economic Union
  • The federal government encourages provinces to implement tax reforms that will enhance productivity including elimination of provincial capital tax and reforming productivity-reducing provincial retail sales taxes.
  • The federal government will work with provinces to strengthen Canada’s economic union through the Agreement on Internal Trade.
  • The federal government will work with provinces to enhance workplace-based skills development, including literacy, essential skills and apprenticeships (as described in Chapter 4).

5. Driving Greater Productivity in Government

Creating an economic and regulatory climate that is conducive to private sector investment and ultimately to Canada’s prosperity is a key challenge for government. Achievement of this goal depends on having a professional public service committed to bringing forward the best policy advice and carrying out policies efficiently, while being transparent in its operations so that the Government can be held to account. The Government is committed to continually enhancing the efficiency of public service delivery, particularly by focusing on outcomes as the central aim of policy rather than focusing solely on inputs. It is also putting in place improved governance of public services and is reforming institutions to reflect the importance of clear objectives, appropriate incentives and good performance information in the achievement of higher productivity.

Strengthening Public Sector Management

The Government of Canada will strengthen and modernize public sector management by enhancing the responsiveness, efficiency and accountability of its activities—all with the objective of serving Canadians in the best way possible, while earning their trust as sound financial managers. The Government has made substantial progress on implementing these approaches over the past two years, particularly with respect to improved accountability and governance. Over the medium term, it will accelerate and institutionalize public service reform.

Responsiveness. Good management requires system-wide responsiveness. It requires a public service that is focused on the interests of Canadians and that is committed to providing Canadians with up-to-date services and programs that meet their needs.

Individual departments across government have made good use of the Internet both to provide information and to consult with Canadians. At the same time, it is clear that more work is needed to ensure that Canadians do not have to deal directly with multiple departments to get information and services. The Government’s decision to create Service Canada is a significant step forward in this regard.

Service Canada: Providing One-Stop Access to Canadians

The Government of Canada is introducing a single point of contact for Canadians seeking access to government services.1 Over time, Service Canada will reach over 30 million Canadians, serve 1.3 million employers, and provide one-stop service to Canadians by phone, on the Internet and in person for social benefits, passport applications, skills development and many other programs. It will increase the service Canadians receive at the first point of contact and improve the efficiency of service delivery across government.

When completed, over a three-year period, Service Canada will:

  • Deliver seamless service that is integrated, easy to access and simple to use. For example, Canadians will be able to get benefit payments without having to complete a number of forms.
  • Ensure that each Canadian receives the right service or benefit at the right time and for the intended purpose.
  • Make government more accountable—to citizens and to Parliament—for delivering better service and more effective use of hard-earned tax dollars.

The service transformation will also reform how government works by:

  • Becoming citizen-centred and achieving better social outcomes.
  • Strengthening access to federal points of service and relevance in regions and communities.
  • Materially reducing red tape.


See www.servicecanada.gc.ca or call 1 800 O-Canada (1 800 622-6232), TTY for the speech and hearing impaired: 1 800 926-9105.

Efficiency. Towards improving efficiency, in December 2003, the Government undertook a review of its expenditures aimed at shifting spending from lower to higher priorities. To that end a new Cabinet Committee on Expenditure Review was created with the mandate to undertake a rigorous review of all government programs and expenditures. As a result of this process, the Government identified savings of $11 billion over a five-year period beginning in 2005–06, to be reinvested in higher priorities. This marks a shift to a permanent culture where an ongoing review of programs will be a core part of the Government of Canada’s commitment to improving program efficiency.

Accountability. On accountability, important steps have been taken to ensure that the Government, through its ministers, is more accountable to Parliament. Measures have also been implemented to improve managerial accountability in the public service and strengthen governance in Crown corporations.

  • The accountability of individual ministers to Parliament for spending has been enhanced through greater emphasis on results-based reporting, centred on measurable indicators of progress. For example, the publication Canada’s Performance[2] provides Parliament with information on how the Government’s programs and expenditures help improve the quality of life for Canadians. Parliament’s ability to provide oversight on the financial state of the Government and its spending decisions has also been strengthened by the adoption of full accrual accounting and greater consistency of information in the Estimates.
  • Canada is among a small group of nations that present their annual financial statements and budget on a full accrual basis, in recognition that it provides improved information for decision making and accountability and a more comprehensive picture of government finances. Moreover, Canada is among an even smaller group to receive unqualified audit opinions on their consolidated accrual-based financial statements.
  • In November 2004, the Government received an Award for Excellence in Reporting from the Public Sector Accounting Board of the Canadian Institute of Chartered Accountants, in recognition of the adoption of full accrual accounting and a clean opinion from the Auditor General.
  • Furthermore, in Governing Responsibly: A Guide for Ministers and Ministers of State, the Prime Minister has given clear guidance to ministers regarding ministerial responsibility and conduct. The Government has also strengthened its guidelines for deputy ministers in order to clarify their responsibilities and accountabilities relative to those of ministers.
  • Within the public service, financial accountability has been strengthened through the establishment of the Office of the Comptroller General of Canada, which is developing specific criteria for the review of spending proposals within departments by chief financial officers (CFOs). These CFOs, supported by professionally qualified financial officers, will be able to give deputy ministers reliable financial advice and provide the due diligence that is required for sound financial management.
Broad Policy Directions
Driving Greater Productivity in Government
  • The Government will further strengthen its management by updating its expenditure management system to better link spending to achievements and improving the quality of information for Parliament.
  • The Government will further professionalize the public service by investing in learning, starting with mandatory orientation for new public servants, managers, and executives, and core learning for key professional groups.
  • The Government will strengthen internal audit and evaluation capacity across the public sector. Departments will establish audit committees that include a majority of members with professional expertise outside of the public service. In addition, professional certification standards will be required for internal auditors.
  • The Government will continue to perform ongoing reviews of major policy initiatives that cut across government as part of its commitment to creating a culture of expenditure review. These reviews will ensure that resources are reallocated between measures and across government in a manner that promotes program efficiency, effectiveness and value for money. To that effect, the Government will move forward on changes to its information structures and systems.

6. Promoting Energy Efficiency and Environmental Sustainability

Since 1997, the Government of Canada has dedicated more than $13 billion in new funding for the environment, including measures to improve air quality; design, implement and enforce framework legislation such as the Canadian Environmental Protection Act and the Species at Risk Act; clean up contaminated sites; and support the development of environmental technologies.

Budget 2005 was the greenest budget in history. It outlined the Government of Canada’s framework for making environmental investments and evaluating environmental tax proposals. It included strategic investments and tax initiatives to address climate change; minimize the risk of invasive alien animal and plant species damaging our environment and economy; improve the ecological integrity of the Great Lakes ecosystem and of national parks; and support scientific assessments and research under the Canadian Environmental Protection Act.

In April 2005, the Government of Canada released Moving Forward on Climate Change: A Plan for Honouring Our Kyoto Commitment, which will be used to guide the federal government’s approach to implementing measures to reduce greenhouse gas emissions. Budget 2005 targeted over $4 billion in investments over the next five years for key initiatives included in the Climate Change Plan. These measures include:

  • An innovative $1-billion Climate Fund to encourage the most 
    cost-effective projects to reduce greenhouse gas emissions by Canadians and industry and projects in other countries that benefit Canada.
  • A Partnership Fund to deliver targeted support for large strategic projects that are jointly agreed priorities for the Government of Canada and provinces and territories.
  • The expansion of the Wind Power Production Incentive and the establishment of a Renewable Power Production Incentive to encourage the production of electricity from clean, renewable power sources.
  • A quadrupling of the number of homes to be retrofitted under the EnerGuide for Houses Retrofit Incentive by 2010.
  • Enhanced tax incentives in the form of accelerated capital cost allowance to encourage investment in equipment that produces energy from renewable energy sources or through the efficient use of fossil fuel.
  • A plan to develop, by the end of 2006, a Sustainable Energy Science and Technology Strategy with provinces and territories.

The Plan employs an innovative combination of regulations, market-based instruments and partnerships to reduce greenhouse gas emissions and promote the transformational change necessary to move Canada towards a low-carbon economy.

These mechanisms will create a market for carbon credits, providing economic signals to reduce greenhouse gas emissions and stimulate innovation, in particular:

  • An Offset System will provide economy-wide incentives to develop and apply environmental technologies or adopt processes to reduce or sequester carbon emissions.
  • The Large Final Emitter (LFE) System will regulate emission intensity targets for covered activities in LFE sectors. Among other options, LFE companies will be able to invest to reduce their own emissions. If LFE companies were to go beyond their regulated targets, they would receive tradeable credits that they could sell or use for future compliance.
  • LFE companies will also be able to purchase compliance units from the domestic Offset System or green credits internationally and contribute to an approved technology investment fund that will invest in emission-reducing technologies.

Further, through competitive purchases of credits from the Offset System and international compliance units, the Climate Fund will help to establish a market value for carbon reductions and removals that will stimulate technological innovation and aid in the development of domestic and international carbon markets. Its investments in international emission-reduction projects will, among other things, increase the application of Canadian technology in projects around the world.

The Climate Change Plan will also help forge partnerships to develop and implement new technologies. Through the Partnership Fund, the Government will cost-share investments in the deployment of new technologies and infrastructure, contributing to significant reductions in greenhouse gas emissions. For example, the Government is working with provinces, territories and the private sector to develop options for an integrated system to capture and store significant amounts of carbon dioxide. The Government is also working with these partners to demonstrate the use of clean coal technology. Canada’s hydro resources could also play an important role in reducing greenhouse gas emissions, while contributing to prosperity and competitiveness. Further use of these resources would be aided by strengthening Canada’s east–west electricity transmission systems.

The Partnership Fund is currently resourced at $50 million per year for the next five years. Taking into consideration the potential emission reductions and the likely timing of the projects, the size of the fund could grow to $2 billion to $3 billion through investments in Budget 2006 and future budgets.

In recognition of the important role that energy efficiency plays in reducing greenhouse gas emissions, making the environment more sustainable, and protecting Canadian consumers and industry against high energy prices, the Government of Canada announced in October 2005 a further set of energy efficiency initiatives which will support Canada’s Climate Change Plan. These measures include:

  • A new $550-million EnerGuide for Low-Income Households program to help over 130,000 low-income Canadians make energy-efficiency retrofits.
  • A $227-million enrichment of the EnerGuide for Houses Retrofit Incentive program to increase the total number of homes retrofitted under the program to over 900,000 by 2011.
  • A $129-million High Efficiency Home Heating System Cost Relief Program to provide financial incentives for Canadians to install modern, energy-efficient heating systems.
  • A $252-million renewal and expansion of programs targeting existing buildings, which includes incentives for energy-saving retrofits in community buildings and hospitals, schools, universities and other institutional buildings.

Taken together, these measures will fundamentally shift our economy to be more efficient in its use of energy resources and increase the sustainability and international competitiveness of the Canadian economy.

Going forward, Canada will continue to demonstrate leadership in international fora, such as the United Nations Framework Convention on Climate Change and the G8, to address issues of importance to the global community in respect of climate change, including the promotion of technology adoption, market development and international cooperation.

The Climate Change Plan is the first phase of Project Green, a set of policies and programs aimed at supporting a sustainable environment and a more competitive economy. Project Green will also address a range of environmental issues, including biodiversity, contaminated sites, and water and air quality.

Going forward, Budget 2005 set out the following principles, which will guide the Government of Canada’s environmental investments:

  • Balance. Investments must balance the need for short-term action to protect our natural environment and long-term measures to spur transformational change in public behaviour in business practices.
  • Competitiveness. While building sustainable economic growth is an essential component of Canada’s long-term international competitiveness, the transition to a sustainable economy must also weigh carefully the impact on short-term competitiveness.
  • Partnership. To the greatest extent possible, investments in the environment should lever outside funds and encourage responses from industry, citizens and other orders of government.
  • Innovation. Investments should promote innovation and support new technologies. Innovation feeds economic growth, creates new opportunities and provides long-term improvement in our environmental performance.
  • Cost-effectiveness. Initiatives should achieve environmental goals at the lowest possible cost.
Broad Policy Directions
Promoting Energy Efficiency and Environmental Sustainability
  • Encourage the development and adoption of energy-efficient and environmentally sustainable technologies, situating Canada’s industries at the forefront of a growing global market.
  • Use market mechanisms to tap greenhouse gas reduction potential across the Canadian economy, spurring innovation at a national level.
  • Encourage energy-efficiency improvements and other competitive structural changes for Canadian consumers, industry and governments.
  • Use the Government of Canada’s purchasing power to improve its environmental performance.
  • Provide leadership in international fora to promote technology adoption, market development and international cooperation.
  • Pursue additional opportunities to use the tax system and other incentives to support environmental objectives.

1 OECD, "Business Views on Red Tape: Administrative and Regulatory Burdens on Small and Medium-Sized Enterprises" (Paris: OECD, 2001), p. 8.[Return]

2 Available at www.tbs-sct.gc.ca/report/govrev/04/cp-rc_e.asp.[Return]

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