Investment in plant and equipment per worker by business in Canada has long lagged that in the United States and other major developed countries, likely contributing to disappointing productivity growth in Canada. Fiscal and regulatory changes that would increase the rewards to investment and enhance competitive pressures to innovate would help ensure that Canadian workers in all provinces have the tools to keep pace with rivals abroad and achieve high and growing incomes in the years ahead.Fiscal and Tax Competitiveness, Economic Growth and Innovation, Canada, Canadian provinces, business investment, capital spending, new investment per worker, OECD countries

Colin Busby

William B.P. Robson

English

Research Papers in Economics

e-brief
FISCAL AND TAX COMPETITIVENESS
The Retooling Challenge: Canada’s Struggle 
to Close the Capital Investment Gap
December 6, 2011
 Investment in plant and equipment per worker by business in Canada has long
lagged that in the United States and other major developed countries, likely
contributing to disappointing productivity growth in Canada.
 Canada’s relative performance has improved since the mid-2000s, but the
outsized contributions of Alberta, Saskatchewan, and Newfoundland and
Labrador to Canada’s uptick suggests that other provinces need to raise 
their game.
 Fiscal and regulatory changes that would increase the rewards to investment and
enhance competitive pressures to innovate would help ensure that Canadian
workers in all provinces have the tools to keep pace with rivals abroad and achieve
high and growing incomes in the years ahead. 
Business investment in plant and equipment is a foundation for raising output and living standards over time. 
It both complements and reinforces the investments in education and training that explain why Canadians
enjoy standards of living so much higher than their ancestors did and that we hope will raise living standards
for generations to come.
1 From the perspective of the average worker, the amount of new physical capital that
businesses create every year is a tally of the new tools with which he or she is equipped. Comparing how
Canadian workers are faring on this scale relative to their counterparts abroad is a key indicator of Canada’s
competitiveness and relative prospects for higher productivity and economic security in the future. (Box 1
describes our data sources and methods.)
By
Colin Busby and William B.P. Robson 
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Institut C.D. HOWE Institute
 Essential Policy Intelligence  |  Conseils indispensables sur les politiques  
This e-brief updates similar surveys in previous years: see Robson and Goldfarb (2004, 2006); Goldfarb and Robson (2005);
Banerjee and Robson (2007, 2008); and Busby and Robson (2009, 2010). We thank the reviewers of those papers for comments
and questions that have improved the analysis and presentation of these reports.
1 Empirically, growth in capital stock has been correlated to growth in real wages across Canadian jurisdictions. A simple
regression of capital stock per worker and real wages, by province, from 1991 to 2010 yields a significant positive relationship
between the two variables: provinces with more capital spending also experience higher wage growth. In an oft-cited international
examination of the issue, Sala-i-Martin (1997) demonstrates the positive spillover effects from investment in equipment and
other capital structures on national economic growth. e-brief | 2
Canada’s Struggle to Match Investment per Worker Abroad
In general, Canada’s investment figures per worker have told a discouraging story for decades. Throughout the 1990s, the
average amount of new plant and equipment per worker consistently lagged the average of Organisation for Economic 
Co-operation and Development’s (OECD) member countries, and the gap with the United States was worse still. In the early
2000s the picture darkened further: for every dollar of new investment per worker on average in OECD countries from
2000 to 2004, only about 92 cents was invested per worker in Canada, and for every dollar of new investment per worker in
the United States, new investment in Canada was only about 77 cents per worker. (Table 1)
The picture brightened somewhat later in the decade. From 2005 to 2009, new investment per worker in Canada was
about 97 cents for every dollar of new investment per worker in OECD countries, on average, and about 87 cents for each
dollar of new investment per US worker. In 2010, new investment per Canadian worker remained relatively steady at 96 cents
for every dollar of new investment per worker in OECD countries on average and 86 cents relative to new investment per
worker in the United States.
Canadians can take some satisfaction from these numbers. Canadian employment was more robust during the slump and
recovery than in many other countries, a happy circumstance that somewhat dampens the relative per-worker figures. As
has often been remarked, relatively sound macroeconomic policies made the recession in Canada less severe; longer term,
moreover, structural changes such as lower taxes on business investment should be helping Canada’s performance.
A Mixed Picture Coming Out of the Slump
Closer examination of the numbers in Table 1, however, suggests there is more work to do, both for Canada as a whole and
for some provinces in particular. First, preliminary figures for 2011 suggest that Canada might be failing to make ground
against the average of OECD countries, with the relative tally falling from 96 cents in 2010 to 95 cents in 2011 for every
dollar invested, and even more against our southern neighbour, with the relative tally there falling from 86 to 83 cents per
dollar invested. To the extent that Canada’s better performance over the 2008-10 period simply reflected worse collapses
elsewhere, it is less promising as a sign for the future.
Pointing in the same direction, and heightening the concerns, is the fact that so much of Canada’s recent robust
performance comes from just three provinces – Alberta, Saskatchewan, and Newfoundland and Labrador – that have
enjoyed booming prices for their fuel and non-fuel minerals. By contrast, Quebec’s story is one of low-level stagnation: from
2005 to 2009, for every dollar of new investment per worker in the OECD and in the United States, new investment per
E SSENTIAL P OLICY I NTELLIGENCE
Box 1: Measuring and Interpreting Investment per Worker
We use data on business capital formation – that is, investment in machinery and non-residential structures – and employment
from the OECD’s Economic Outlook database for countries abroad, and the Provincial Economic Accounts for Canada and the
provinces. We use Statistics Canada’s Capital Repair and Expenditure Survey to obtain the most recent estimates for Canada. The
OECD and Statistics Canada investment numbers include private businesses and government business enterprises functioning in
a commercial environment.
We convert foreign investment figures into Canadian dollars using purchasing-power parity (PPP) exchange rates from the
OECD. The purchasing-power adjustment allows more meaningful comparisons of the “bang per buck” of investment spending
in different countries than market exchange rates would do, since – especially at a point in time – market rates will reflect
relative domestic price levels very imprecisely. We use capital-goods-specific adjustments using OECD’s 2008 PPP figures for
gross fixed capital formation, and then construct time series from economy-wide PPP measures for each country.| 3 e-brief
E SSENTIAL P OLICY I NTELLIGENCE
worker in Quebec was 62 and 56 cents, respectively; in 2010, the figures were 63 and 57 cents, and for 2011 the
preliminary figures are 62 and 54 cents. Ontario’s record is also poor, registering 71 and 63 cents relative to the OECD
average and the United States, respectively, from 2005 to 2009, then 70 and 63 cents in 2010; with the dismal preliminaries
for 2011 being 67 and 58 cents.
2
Data limitations prevent our extending a precise comparison of private investment per worker in Canada to that in the
emerging giants of India and China.
3 However, while income per person in those two countries is much lower than that in
Canada, their high investment rates and rapid growth mean that Canada’s lead over them is shrinking. 
Equipping Canadian Workers to Compete at the Next Level
Notwithstanding credit constraints in parts of the economy since 2008, it is clear that lack of funds is not holding Canadian
business back – businesses as a whole, which historically were net borrowers from the rest of the economy, have been net
lenders for the past decade. Moreover, with interest rates at historic lows – sustaining robust residential investment – the
cost of funds is not an obvious problem. And while nervousness about the world economy undoubtedly is helping to keep
Canadian business leaders’ ambitions in check, business leaders in many other countries are no less concerned. 
The search for ways to improve Canada’s relative performance reasonably turns, then, to other aspects of the environment
that might be holding private investment back. Among promising policy levers to improve Canada’s showing, we highlight
several for early action:
￿ The domestic tax environment has improved markedly in recent years, but the recent rejection of sales tax harmonization in
British Columbia is an unhappy reminder that Canada can still do much to reduce the tax bite on capital investment. Ontario’s
success in sales tax harmonization proves that those provinces that have not yet switched can yet improve their position.
￿ On the international tax side, Canada has recently reduced or eliminated withholding taxes on certain types of interest paid
abroad generally and to US investors particularly. Reducing or eliminating remaining withholding taxes on interest and
dividends, and tax measures to encourage repatriation and reinvestment of Canadian firms’ earnings abroad should
encourage fresh investment from both foreign and domestic sources.
4
￿ Loosening ownership restrictions in key industries such as transportation, telecommunications, and finance should sharpen
incentives to invest and innovate (Canada 2008b).
￿ Finally, on innovation, the many government-led research and development programs that operate across Canada – about 60
in 2011 – provide a wealth of lessons about what works well and less well, with corresponding scope to expand the better
ones at the expense of the worse ones (Canada 2011). 
2 While high resource prices have driven the Canadian dollar higher, it is difficult to determine the extent to which this phenomenon has made
the exports of non-resource-based provinces less competitive by making them more expensive to buy. The rise in commodity prices corresponds
to falling import prices from emerging economies, requiring manufacturing industries, particularly in Ontario and Quebec, to respond – either
by cutting labour or by expanding capital – to become more productive. The data show that some manufacturing industries are proving more
resilient than others, and we find it implausible that rising resource prices are the sole reason for Ontario’s and Quebec’s relative investment
underperformance (MacDonald 2008). 
3 We are unaware of up-to-date data from emerging economies that are easily comparable with those from Canada. In past comparisons, we used
data on investment and purchasing-power-parity exchange rates from the International Monetary Fund’s International Financial Statistics
database, but we do not think these data are sufficiently comparable to warrant numerical estimates. 
4 The standard withholding-tax rate for non-resident investors who repatriate interest, dividends, royalties, and other payments from Canada is
25 percent. Bilateral tax treaties normally reduce the rate to around 10 percent, and sometimes lower. Offering national (or non-discriminatory)
treatment similar to the treatment that applies to Canadian corporations operating in many foreign countries would boost inbound investment
(Cockfield 2008). Treating all foreign active business income as exempt surplus would encourage repatriation and reinvestment (Canada 2008a). | 4
Table 1: Private Non-Residential Gross Capital Formation per Worker in Canada (by Province), the OECD, and the United States, 2000 to 2011
n.m. = not meaningful.
Data for 2011 are forecast. Sources: OECD; Statistics Canada; authors’ calculations.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Average:
2000–04
Average:
2005–09
(Canadian dollars)
Alberta 19,100 20,300 18,900 19,800 22,100 28,100 31,300 31,700 33,100 23,100 23,400 24,500 n.m n.m
British Columbia 6,900 7 ,500 7 ,100 7 ,300 7 ,900 8,600 9,900 10,100 11,000 9,200 10,800 11,200 n.m n.m
Manitoba 7 ,100 7 ,400 7 ,200 7 ,000 7 ,300 7 ,200 7 ,900 8,300 9,500 9,100 9,600 9,600 n.m n.m
New Brunswick 8,000 6,100 5,900 6,600 6,900 7 ,400 9,500 9,500 10,800 9,100 7 ,200 7 ,100 n.m n.m
Newfoundland & Lab. 11,800 10,900 10,000 11,600 13,900 15,400 13,500 11,600 13,900 12,800 17 ,000 22,700 n.m n.m
Nova Scotia 7 ,800 8,000 8,200 7 ,500 7 ,000 7 ,100 7 ,000 7 ,200 6,300 6,700 6,500 6,600 n.m n.m
Ontario 8,000 7 ,700 7 ,400 7 ,200 7 ,300 7 ,800 8,300 8,200 8,400 7 ,500 7 ,700 7 ,600 n.m n.m
Prince Edward Island 5,300 5,100 5,000 5,100 5,500 5,300 5,700 7 ,500 7 ,100 4,800 4,900 4,700 n.m n.m
Quebec 7 ,100 6,500 6,300 6,400 6,900 6,800 7 ,000 7 ,300 7 ,500 6,800 6,900 7 ,100 n.m n.m
Saskatchewan 11,900 11,700 10,600 11,400 11,200 13,500 15,400 16,900 20,400 21,900 22,900 23,800 n.m n.m
Canada 9,000 9,000 8,600 8,600 9,200 10,300 11,300 11,500 12,100 10,100 10,500 10,800 n.m n.m
OECD 9,800 9,700 9,300 9,500 9,900 10,600 11,300 12,000 12,200 10,600 10,900 11,400 n.m n.m
United States 12,300 12,000 11,000 11,100 11,600 12,200 12,900 13,600 13,500 11,600 12,100 13,100 n.m n.m
Relative to OECD
Alberta 195 209 202 209 223 265 276 264 271 217 214 214 208 259
British Columbia 71 78 76 77 80 82 87 84 90 87 99 98 76 86
Manitoba 73 76 77 74 74 68 70 69 78 86 88 84 75 74
New Brunswick 81 63 63 70 70 70 84 79 89 84 66 62 69 81
Newfoundland & Lab. 120 112 107 123 141 145 119 97 114 121 156 199 121 119
Nova Scotia 80 82 88 79 71 67 62 60 52 63 59 58 80 61
Ontario 81 80 79 76 74 74 73 68 68 70 70 67 78 71
Prince Edward Island 54 52 53 54 56 50 51 63 58 45 45 41 54 53
Quebec 73 67 68 68 70 64 62 61 61 64 63 62 69 62
Saskatchewan 121 121 114 120 113 128 136 140 167 206 210 208 118 155
Canada 92 93 92 91 93 97 100 96 99 95 96 95 92 97
Relative to 
United States
Alberta 155 169 172 179 190 231 242 234 244 199 192 187 173 230
British Columbia 56 63 65 66 68 71 77 74 81 80 89 86 64 77
Manitoba 58 61 66 64 63 59 61 61 70 79 79 73 62 66
New Brunswick 65 51 53 60 60 60 74 70 80 78 59 54 58 72
Newfoundland & Lab. 96 91 91 105 120 126 104 86 103 111 140 174 101 106
Nova Scotia 63 67 75 68 61 58 54 53 47 58 53 51 67 54
Ontario 65 65 67 65 63 64 64 61 62 65 63 58 65 63
Prince Edward Island 43 43 45 46 48 43 44 55 53 42 40 36 45 47
Quebec 58 55 57 58 60 56 54 54 55 59 57 54 57 56
Saskatchewan 96 98 97 103 96 111 119 124 150 189 188 182 98 139
Canada 73 75 78 78 79 85 87 85 89 87 86 83 77 87
e-brief
E SSENTIAL P OLICY I NTELLIGENCEConclusion
Canada now equips its workers with new plant and equipment relatively better than it did in the early 2000s. Its reputation as
a good place to work and invest has stood higher both at home and abroad since 2008. It has more fiscal and political
room to improve its tax and regulatory environment than do many other countries. The critical importance of capital
investment to productivity and income growth means that Ottawa and the provinces should reinforce their efforts to ensure
that Canadian workers get better tools with which to earn their living so that Canadians will live better in the future than 
they do today.
e-brief | 5
E SSENTIAL P OLICY I NTELLIGENCEReferences
Banerjee, Robin, and William Robson. 2007. “Give Canadian Workers the Tools to Do the Job! Why Canada Needs More Robust Capital
Investment.” e-brief no. 44. Toronto: C.D. Howe Institute. May.
–––––––––. 2008. “New Tools for a Richer, Greener Future: Why Canadian Workers Need More Robust Business Investment.” e-brief no.
60. Toronto: C.D. Howe Institute. July.
Busby, Colin, and William Robson. 2009. “Equipping Ourselves in Tough Times: Canada’s Improved Business Investment Performance.”
e-brief no.83. Toronto: C.D. Howe Institute. June.
–––––––––. 2010. “Disarmed and Disadvantaged: Canada’s Workers Need More Physical Capital to Confront the Productivity Challenge.”
e-brief no.107. Toronto: C.D. Howe Institute. October.
Canada. 2008a. Advisory Panel on Canada’s System of International Taxation. “Enhancing Canada’s International Tax Advantage.” Ottawa. 
–––––––––. 2008b. Competition Policy Review Panel. Compete to Win. Ottawa: Industry Canada.
–––––––––. 2011. Innovation Canada: A Call to Action. Ottawa: Industry Canada. 
Cockfield, Arthur J. 2008. Finding Silver Linings in the Storm: An Evaluation of Recent Canada-US Crossborder Tax Developments.
Commentary 272. Toronto: C.D. Howe Institute. September.
Goldfarb, Danielle, and William B.P. Robson. 2005. “Canadian Workers Need the Tools to Do the Job and Keep Pace in the Global
Investment Race.” e-brief no.17. Toronto: C.D. Howe Institute. May.
MacDonald, Ryan. 2008. “Terms of Trade in Central Canada.” Cat. 11-624-M – No. 022. Ottawa: Statistics Canada. 
Robson, William B.P., and Danielle Goldfarb. 2004. “Tools for Workers: How Canada Is Faring in the Competition for Capital
Investment.” Backgrounder 87. Toronto: C.D. Howe Institute. December.
–––––––––. 2006. “Canadian Workers Need Better Tools: Rating Canada’s Performance in the Global Investment Race.” e-brief no.30.
Toronto: C.D. Howe Institute. June.
Sala-i-Martin, Xavier. 1997. “I Just Ran Two Million Regressions.” American Economic Review 87 (2): 178-83.
This e-brief is a publication of the C.D. Howe Institute.
Colin Busby is Senior Policy Analyst, C.D. Howe Institute.
William B.P. Robson is President and Chief Executive Officer of the C.D. Howe Institute.
This e-brief is available at www.cdhowe.org.
Permission is granted to reprint this text if the content is not altered and proper attribution is provided.
| 6 e-brief
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The Retooling Challenge: Canada's Struggle to Close the Capital Investment Gap

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