May 8, 2025
Donald Trump‘s threats, trade aggression, and economic nationalism have galvanized Canadian leaders. Beyond merely stoking pride, this moment is being seized to finally realize what the framers of our Constitution envisioned: a true economic union within Canada. But our political leaders shouldn’t be content with just tearing down interprovincial trade barriers – they should also unify our federal-provincial tax systems to bolster that economic union.
Rarely have the provinces and federal government been more aligned on dismantling interprovincial trade barriers. More than an aspiration, Prime Minister Mark Carney has set a deadline of Canada Day to remove the measures that restrict internal trade.
While the federal government has the will and constitutional power to eliminate trade barriers, it cannot dictate how provinces levy direct taxes. The result is a patchwork of overlapping sales and corporate income tax systems that create administrative headaches for business, distort economic decisions and ultimately dampens our economy.
Take sales taxes. Most provinces have harmonized their sales tax systems with the federal GST, but not all, and not fully. British Columbia, for instance, reverted to a dysfunctional single-stage retail sales tax after a 2011 referendum, reintroducing complexity and costs for businesses. The GST is charged at 5 per cent across Canada (including in Alberta where there is no provincial sales tax), but provincial sales tax rates vary considerably, from 6 percent in Saskatchewan to 10 percent in New Brunswick, Newfoundland and Labrador, Prince Edward Island.
Now imagine a small business in New Brunswick selling goods and services to another province. It must navigate a maze of “place of supply” rules to determine which taxes to collect. Many business owners decide it‘s not worth the effort, limiting growth and competition. Beyond complexity, this regime fails to yield a fair revenue among provinces that aligns with consumer consumption.
A harmonized national sales tax with a consistent rate across provinces would be simpler, fairer and more efficient. Convincing Albertans to support such a system at a single national rate may be difficult, but imagine the hundreds of thousands of people who could be removed from their income tax rolls with the revenue a harmonized sales tax could generate by piggybacking off the GST, which would add no compliance costs for business.
While provinces would need to adjust their personal income tax rates to offset the change in revenue, the economic payoff would be significant. A streamlined framework, including Alberta and B.C., would free businesses to focus on innovation and expansion instead of navigating tax bureaucracy.
Then there’s the corporate income tax system – an antiquated structure built for a different era. Today, companies owe income tax where they maintain a “permanent establishment,” such as an office, store or factory.
Companies operating on digital platforms (like Airbnb or Netflix) that generate huge sales and profits from Canadian customers without a “permanent establishment” pay no corporate income tax. This is why the government recently imposed a Digital Services Tax on sales (not profits) as a surrogate for corporate income tax. Mr. Trump opposes this tax, but how is it fair that Canadian hotel operators are subject to full corporate income tax while Airbnb is not?
Another antiquated aspect of our dated corporate income tax system is how it applies to companies operating in multiple provinces. If a company has a permanent establishment in only one province, all provincial corporate income tax stays within that province, even if it sells across the country. If a business has “permanent establishments” in multiple provinces, taxable income is allocated using a complicated formula.
Think of the time spent wasted administering such a system and the tax schemes that are used to reduce corporate provincial income taxes paid. Provincial corporate income tax rates on active business income range from 8 per cent in Alberta to 16 per cent in PEI. Like water following gravity, profits flow into lower tax jurisdictions – often with the help of creative accounting.
Our current corporate income system is complicated and influences business decisions solely for tax reasons. It would be better to have a truly national corporate income tax system where revenue is shared fairly among provinces without the need for arbitrary tax rules that are inevitably abused.
There are countless reasons to cling to the status quo of overlapping sales and corporate income tax systems – most of them generating huge fees for tax accountants and lawyers who profit from complexity. But there’s a far more compelling reason to move forward: Donald Trump. Let him be the catalyst to reassess all of our economic structures to build a stronger and more resilient Canadian economy.
