The Canadian Economic Slowdown: What’s Holding Us Back

By Leni Spooner, creator of Between the Lines.

Canada is at a crossroads. Slowing growth, rising inequality, and weakened fiscal capacity point to the urgent need for a renewed focus on nation-building—through productivity, investment, and a more dynamic, sovereign economy.

The Economic Slowdown: Causes and Context

Canada’s real GDP per capita growth has significantly slowed, from over 3% in the 1960s to just 0.8% in the 2020s.

Canada’s economic engine has downshifted over the past six decades. While global trends play a role, structural issues at home have made the slowdown more acute.

This isn’t unique to Canada; most OECD countries have experienced similar declines due to shared structural challenges like aging populations, weak productivity, and underinvestment.

Diagnosing the Slowdown

Several key factors contribute to Canada’s economic slowdown:

• Aging Workforce (~35%): As more Canadians retire, there are fewer workers generating economic activity. This increases pressure on social programs like pensions and healthcare, while contributing less in taxes. Immigration plays a vital role in counterbalancing this trend by adding working-age individuals to the economy, filling labor gaps, and supporting public services through taxes. Without immigration, Canada’s workforce would actually shrink. To maximize this benefit, Canada needs to improve credential recognition, better match skills with job opportunities, and invest more in newcomer support and integration.
• Low Productivity Growth (~30%): Productivity is how much value each worker (or each hour of work) adds to the economy. For example, a bakery with automated equipment produces more bread per worker than one using only manual tools. Productivity is hampered by outdated equipment, weak innovation (when companies stop trying to create better products or ways of working), and limited competition (when rivals don’t push firms to improve). This affects both goods-producing and service sectors.
• Capital Underinvestment (~25%): Capital in this context refers to the tools and resources used to produce goods and services: machinery, buildings, technology, as well as education and training (often called human capital). When businesses and governments don’t invest enough in these areas, productivity suffers. For instance, a carpenter with a power saw can build faster than one with a hand saw.
• Labour Quality Gaps (~10%): This refers to issues like skills mismatches (where workers have skills employers aren’t looking for), regional imbalances (some regions lack enough skilled workers, while others have high unemployment in skilled fields), and a slow shift of the workforce and resources toward complex, innovation-driven industries.

The Productivity Puzzle: Tradable vs. Non-Tradable Sectors

Some Canadian sectors are “punching below their weight,” meaning they have potential but aren’t delivering strong economic returns.

Non-tradable sectors like real estate, retail, food service, and local government services don’t sell goods or services outside the local market. You can’t export a haircut. While essential, these sectors don’t expand our productive frontier, which is the outer edge of what our economy can create with current tools and skills. When too much growth comes from non-tradables, overall innovation and national income can stagnate.

In contrast, tradable sectors sell to other provinces or countries. Because they face global competition, they are constantly driven to innovate, invest, and stay sharp. Examples include manufacturing (like auto parts or aerospace), natural resources (potash, oil, forestry), clean tech, tech platforms (like Shopify), and cultural exports (music, film).

An excellent example of innovation within a tradable sector is Project Arrow—the $20 million Canadian-made electric vehicle prototype that generated over $500 million in contracts for green tech suppliers. It demonstrates how targeted public investment can catalyze private-sector growth, export potential, and technological leadership. Project Arrow also reflects the kind of Canadian innovation strategy that links public R&D support with exportable, IP-rich industries rooted in domestic ownership.

Why tradable sectors matter:

• Lift wages: Competitive firms earn more and can afford to pay more.
• Improve trade balances: Exporting more than we import means more money coming into Canada.
• Create spin-off benefits: A successful tech firm might hire local catering, graphic designers, or accountants, and inspire new startups.

Infrastructure plays a key role here. While a new local road might benefit a grocery store (non-tradable), an upgraded port allows exporters (tradable) to reach new global markets, which has a much larger ripple effect on national income.

Moving from Extraction to Value-Add

Canada has historically followed a “dig it up, ship it out” model, exporting raw materials with little processing. Moving up the value chain means doing more with our resources:

• Instead of just exporting timber, we make furniture or advanced bioproducts.
• Instead of just selling crude oil, we refine it or make plastics and specialty chemicals.

This requires:

• Protecting and monetizing Intellectual Property (IP): Ideas, inventions, designs, and trademarks are economic assets. Keeping their value in Canada builds wealth.
• Supporting Indigenous-led development in resource-rich regions, ensuring sustainability and community benefits.
• Helping scale-ups, not just start-ups. While start-ups are innovative, scale-ups are businesses that are rapidly growing, expanding operations, creating jobs, and entering global markets, anchoring entire ecosystems.

Rethinking Tax and Ownership

Canada’s approach to corporate taxation and ownership has undergone significant shifts since the 1970s, impacting the nation’s fiscal capacity and ability to invest in its future.

Taxing Power Then and Now

The share of federal revenues from corporate income tax has dropped from approximately 15% in the 1970s to about 12% today. This reflects a broader shift: from largely taxing corporate profits to trying to attract them through lower rates and various incentives.

• Federal corporate tax rates have significantly decreased from 36% in 1980 to just 15% by 2012.
• While Canada broadened the tax base by eliminating some deductions, it also introduced many targeted incentives, such as accelerated depreciation (CCA), R&D credits, and sector-specific tax breaks.
• Combined federal and provincial rates generally range from 26% to 31%. However, provinces also offer their own incentives, which often stack on top of federal programs. This layered system means the actual tax burden (the effective tax rate) for some firms can fall well below the official combined rate. In some sectors, especially R&D-heavy or capital-intensive industries, companies might pay a single-digit percentage—or even less—in net taxes after credits and deductions. While these incentives aim to attract high-value investment, they also reduce the government’s ability to collect revenue (fiscal capacity) at both federal and provincial levels.
• Total corporate tax revenues as a share of GDP have not grown significantly despite these incentives, suggesting that generous deductions and credits are reducing the effective tax burden, especially for large firms.
• Tax expenditures, which are revenues the government gives up through various tax credits and deductions, are substantial. According to federal reports, Canada forgoes tens of billions annually through corporate and personal tax credits. The total cost of all tax expenditures can reach 5% to 7% of GDP. For example, the Scientific Research and Experimental Development (SR&ED) credit alone costs nearly $3.5 billion per year federally.
• A significant share of these incentives, estimated at at least 25–35%, goes to large, often foreign-owned firms, especially in sectors like energy, manufacturing, and digital services. This means Canada spends billions attracting investment that doesn’t always stay rooted in the country.

The Digital Services Tax (DST) Dilemma

Canada’s proposed Digital Services Tax (DST), a 3% levy on revenues earned by large tech firms from Canadian users, was expected to raise $1 billion to $2 billion per year and designed for rebuilding fiscal capacity. However, its implementation has been paused due to pressure from the United States and ongoing international (OECD) negotiations aimed at a global consensus on fair taxation of multinationals. This delay puts pressure on domestic revenue options. Without a DST, large digital firms continue to generate billions in Canadian revenue with minimal local tax liability, undermining fairness and fiscal capacity. While the pause may be strategic, a long-term absence of such a tax is likely unsustainable.

Who Owns Corporate Canada?

While only 1% of all Canadian firms are foreign-controlled, they generate over 34% of total corporate profits.

“A small number of foreign-controlled firms account for a disproportionate share of Canada’s corporate profits, raising questions about long-term economic sovereignty and domestic reinvestment.”

This means roughly a third of Canada’s corporate tax revenue flows from foreign-led multinationals. While this helps the federal balance sheet, it raises a deeper question: Are we building a Canadian economy or renting one?

• Foreign-Controlled vs. Canadian-Controlled Firms (2021):
  • Share of Corporations: 1% vs. 99%
  • Share of Profits: 34% vs. 66%
  • Share of Assets: 15% vs. 85%

The Policy Shift That Opened the Gates

In 1985, Canada replaced the Foreign Investment Review Agency (FIRA), which focused on protecting Canadian control, with the Investment Canada Act. This shift signalled a change from “protect Canadian control” to “welcome global capital.” Since then, the number of foreign-led firms has grown modestly, but their influence has significantly increased, especially in high-profit sectors like finance, mining, and digital tech. While Canada has become a magnet for investment, it has also become more dependent on decisions made outside its borders.

Building for the Future: Strategies and Bold Options

To build again without gutting its present or selling itself short, Canada needs more than just austerity measures and tax credits. It requires a renewed agreement (a “compact”) where government, citizens, and corporations all contribute, and where ownership matters. This isn’t a call for economic nationalism like some other countries, but rather about being open to trade and investment while also being intentional and accountable in protecting public value.

1. Should Canada Reclaim Equity Stakes in Subsidized Industries?

Yes—and there’s a historical basis for this. From Petro-Canada to the Wheat Board to the new Canada Growth Fund, public ownership (equity) has long been a tool for shaping markets and ensuring national interest. Instead of pure grants, Canada could adopt a model of public co-ownership or royalty-linked returns, similar to Norway’s sovereign wealth fund or Quebec’s Investissement Québec.

Canada’s experience with Petro-Canada is particularly instructive. Founded as a Crown corporation in 1975 to ensure national control over the energy sector, it was gradually privatized and fully sold off by 2004 for approximately $3.2 billion. Just five years later, in 2009, it merged with Suncor in a deal valued at $43 billion. As of 2024, the combined Suncor entity is valued at over $60 billion—nearly 20 times the final public sale price. This example illustrates a missed opportunity: had the public retained even a partial stake, Canadians, with public vs. private ownership, could have shared in the long-term returns. Instead, the value built over decades was transferred to private hands just before it peaked, serving as a cautionary tale of short-term decision-making sacrificing generational value.

This issue isn’t about one political party; it’s a structural problem. Canada has a history of building valuable public assets only to dismantle or privatize them at undervalued rates. This pattern is seen from the cancellation of the Avro Arrow (a world-leading aerospace project) to the sale of Petro-Canada and the dismantling of the Canadian Wheat Board. It highlights the absence of strong, long-lasting institutional safeguards that prioritize public interest over short-term political cycles.

Protecting these Crown assets from future erosion may require:

• Sunset clauses or supermajority requirements (meaning more than a simple majority vote) before privatization.
• Independent assessments of long-term public value before divestment.
• Legislative frameworks for public ROI (Return on Investment) benchmarks before major sales.

If Canada is to build public assets again, it must be with clear intent to protect what it builds, resisting slow internal erosion through unqualified appointments and insisting on accountability that matches ambition.

2. How Can We Grow More Canadian-Led Multinationals?

Canada can use its procurement policy (how the government buys goods and services), scale-up funding, and intellectual property (IP) protection to foster strong Canadian companies that become leaders on the world stage. Encouraging Canadian-controlled firms to globalize, not just survive, requires:

• Reducing the risk of foreign takeovers.
• Linking tax credits to domestic reinvestment.
• Supporting anchor institutions like universities and export agencies that help businesses grow internationally.

3. Can QDMTT and BEPS Tools Enhance Fiscal Fairness?

Yes. Canada’s implementation of the Qualified Domestic Minimum Top-Up Tax (QDMTT) and broader Base Erosion and Profit Shifting (BEPS) actions are international agreements that allow countries to “claw back” tax revenue lost when large multinational corporations shift their profits to low-tax jurisdictions. These tools must be:

• Enforced rigorously.
• Paired with transparency reforms so that companies can’t hide their taxable profits.

This is how Canada can ensure global firms pay their fair share here, not just somewhere else.

4. What ROI (Return on Investment) Frameworks Can Evaluate Public Investment?

Canada currently lacks consistent methods for measuring the returns on corporate incentives. A rigorous ROI framework would assess not just job creation, but also:

• Wage quality (are they good jobs?).
• Intellectual property (IP) retention (do the innovations stay in Canada?).
• Taxes paid.
• Local reinvestment.

Public funds should generate clear public returns—whether financial, strategic (benefiting national interests), or social.

Conclusion: A Country Is What It Builds

If Canada wants to build for the future without gutting its present, it will need more than just financial cuts and tax credits. It will need a renewed agreement—one where government, citizens, and corporations all contribute, and where ownership truly matters.

A nation that once built transcontinental railways, vast hydroelectric networks, and universal Medicare while experiencing 3% growth is now drifting with just 0.8%. That slower growth means fewer resources to fix what’s broken or to dream big.

But the real issue isn’t just growth—it’s dynamism. Dynamism is an economy’s ability to adapt, innovate, grow, and build. It shows up in strong public institutions, robust export industries, world-class research, fair taxation, and widespread opportunity. It is a shared, intergenerational responsibility that must rise above party lines.

The current Carney government’s stated interest in long-term investment, including a national R&D strategy, a public infrastructure bank with equity tools, reforms to scale Canadian-led firms, a Crown IP commercialization agency, and targeted export support, represents one possible roadmap. Any political party serious about long-term prosperity must grapple with these fundamental issues.

Dynamism means:

• We invest in people and tools, not just patch problems.
• We build resilient supply chains.
• We value knowledge, science, and equity (fairness).
• We stop managing decline—and start designing prosperity.

However, nation-building is not a short-term project. Some investments will yield immediate gains, but many of the most important returns—on infrastructure, innovation, education, and economic diversification—will take longer to materialize.

We, the public, need to stay focused and continue electing representatives at all levels who are committed to building for the long term. This means resisting quick-fix promises and finger-pointing political rhetoric. You can’t turn a large ship like a country’s economy on a dime, and no simple tax cut or sudden slashing of government spending will magically steer Canada into prosperity.

Instead, look for clear, incremental wins and track whether government and opposition leaders are setting—and meeting—realistic benchmarks. The goal is economic resilience. If we allow the public conversation to collapse into partisan scorekeeping, we risk settling for 0.8% growth as the limit of Canadian ambition. We deserve better.

The path back to prosperity is not fast, but it is ours to build—together, across generations and across party lines.

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About the Author

Leni Spooner is a Canadian writer, researcher, and civic storyteller. She is the founder of Between the Lines, a publication focused on the quiet forces shaping politics, infrastructure, and public life. Her work blends historical context with present-day analysis, helping readers see the deeper patterns that shape national decisions.