Katja Schmidt
OECD Economic Surveys: Canada 2025
Abstract
Canada’s recent economic growth has been supported by strong population growth. Per capita growth has remained weak. Investment and exports have shown slower momentum, while elevated household debt and higher debt service costs have moderated consumer spending. Monetary policy began easing in June 2024, reducing the policy rate to 2.75% by April 2025, as inflation came down to the target rate. Trade tensions and higher tariffs exert downward pressure on the economic outlook. Further monetary easing should be implemented if the economic situation strongly deteriorates and assuming that tariff-related inflationary pressure remains under control. Public finances are generally sound, which provides fiscal space to accommodate the expected worsening of the fiscal deficit from the trade shock, but medium-term spending pressures could be better managed through more systematic and periodic spending reviews. In the long term, the tax structure could be better aligned with growth and environmental objectives by shifting taxes from income to consumption and environmental taxes. The comprehensive carbon pricing system should be preserved, including the fuel charge which should be re-instated. Finally, while the banking sector is stable and well capitalised, it has high exposure to the domestic mortgage market. The supervisor should remain vigilant and monitor risks carefully.
Canada’s economic growth picked up over 2024 after a period of softness. This was also supported by continued high population growth, and lower interest rates in the second half of the year. Inflation returned to the target rate of 2%. However, since February 2025, trade relations between the United States and Canada have been marked by escalating tariffs and countermeasures. These measures strongly weigh on the economic outlook, given strong trade links with the United States and the interconnectedness of North American supply chains for some products. Uncertainty related to trade policy has also increased on a global scale and is contributing to reduced investment and hiring plans by businesses. Additionally, structural weaknesses continue to weigh on Canada’s economic performance, including a weak productivity growth, a high household debt burden and a strained housing market. Canada should address its structural weaknesses, to continue taking full advantage of its strengths, including a highly skilled workforce, abundant natural resources, and stable economic institutions, in order to sustain long-term growth in an external environment characterised by tensions and uncertainty.
1.1.1. Following trade tensions, the economic outlook has worsened considerably
The Canadian economy is highly exposed to trade tensions with the United States (see Box 1.1 for tariff measures). In 2024, 76% of Canada’s goods exports went to the United States and 62% of its goods imports were sourced from the United States. Trade with the United States accounted for 16% of Canadian GDP and more than 2.6 million jobs in Canada in 2023, considering both direct and indirect effects (Statistics Canada, 2025[1]). Canada accounts for about 14% in goods imports of the United States and about 17% in goods exports of the United States.
While the exemption from tariffs for cross-border trade under the United States-Mexico-Canada Agreement (USMCA/CUSMA) has shielded the Canadian economy from a more severe impact, the economic consequences of these tariff measures will still be significant. They also need to be assessed in the context of tariff increases of the United States on other countries. Higher global tariffs are expected to reduce global trade flows and weigh on global activity, further diminishing Canadian external demand, in addition to the lower demand from the U.S. However, effective tariffs on some countries for U.S. imports have increased more significantly than those on Canadian imports, which could lead to some favourable import substitution effects towards Canada, partially offsetting the overall lower U.S. import demand. The overall impact on the Canadian economy will also depend on how revenues from the countermeasures are recycled back to households and businesses, as well as the response of monetary and fiscal policy. Exchange rate flexibility will likely cushion some negative effects.
Overall, the impact on Canadian GDP of these tariffs is expected to be significantly negative, given the strong trade links of the Canadian economy with the U.S. Estimates vary based on the assumed effective tariff level, which is evolving. The current overall tariff arrangements would reduce Canadian GDP levels by around 2.2% according to simulations by The Budget Lab of Yale with GTAP (The Budget Lab, 2025[2]). This corroborates OECD estimates that find that Canadian real GDP will be around 1¾% lower at the end of 2026 than in a scenario without tariffs, assuming a slightly higher 50% share of USMCA-compliant goods. Export and consumer demand would be most adversely affected, leading to a decline in investment. An increasing share of USMCA-compliant goods would mitigate the negative effect, while a suspension of the USMCA exemption would significantly amplify the adverse impact on GDP. After 2026, the economy is expected to recover as production and supply chains adapt to the new tariff environment. However, tariffs are likely to have lasting negative effects on GDP levels, productivity, and employment due to their distortionary effects (Bank of Canada, 2025[3]).
Regarding the impact on consumer prices, retaliatory tariffs directly increase the cost of imported goods, which in turn affects consumer prices. Approximately 13% of Canada’s CPI basket consists of goods imported from the United States (Bank of Canada, 2025[3]), whereas approximately 5% would be affected by retaliatory tariffs. Higher tariffs on U.S. imports of industrial goods would also affect U.S. export prices and subsequently Canadian import prices, due to highly integrated supply chains. The upward effect of tariffs on prices is anticipated to push inflation higher, particularly when tariffs are introduced.
The impact of tariffs will vary across sectors and products based on their trade reliance relative to total production. Industries heavily dependent on U.S. trade with limited short-term market diversification potential will be most affected. The manufacturing sector was among the sectors with the highest exposure to the U.S. market in 2023, relying on demand from the United States for 42% of its value added (Statistics Canada, 2025[1]). In manufacturing, metal processing and the production of transport equipment, including automobiles, are the sectors most exposed to U.S. demand (Statistics Canada, 2025[1]). With U.S. export dependency ratios of their value added exceeding 60%, they will be potentially the hardest hit.
As of the cut-off date for this Survey, the following additional tariffs affecting United States-Canada trade have been implemented since February 2025:
Tariffs of 25% on goods and 10% on energy resources and potash imported from Canada to the United States for goods that do not fall under the United States-Mexico-Canada Agreement (USMCA/CUSMA)
Tariffs of 25% on steel and aluminium and derivative product imports from Canada to the United States
Tariffs of 25% on non-USMCA compliant automobiles and parts and a 25% tariff on the non-U.S. content in USMCA-compliant automobiles imported from Canada to the Unites States
Determining the share of USMCA compliance of trade is challenging, as it depends on the local content of each product and the completion of relevant rules-of-origin (ROO) reporting. According to data from the U.S. International Trade Commission, 38% of goods imported from Canada to the United States were USMCA compliant in 2023. Most of other goods traded under the World Trade Organisation’s (WTO) Most-Favoured-Nation (MFN) status, with low or zero MFN tariff rates. However, Canadian exporters who previously relied on MFN status without claiming USMCA preference may now have a stronger incentive to fill the ROO requirements and claim USMCA eligibility, increasing the share of trade falling under USMCA over time.
Assuming a USMCA compliance share of 50% means an effective tariff increase for U.S. imports from Canada by about 13 percentage points, rising from a near-zero effective bilateral tariff rate of 0.1% in 2024.
In response to U.S. tariffs, Canada has implemented retaliatory tariffs of 25% on CAD 60 billion worth of imports from the United States, which represents about 8% of total Canadian imports. These tariffs cover a range of products, including food and beverages, cosmetics, appliances, apparel, computers, certain paper products, and steel and aluminium products. In addition, the Canadian government has also implemented a 25% tariff on non-USMCA compliant (fully assembled) vehicles, and a 25% tariff on non-Canadian and non-Mexican content of USMCA compliant (fully assembled) vehicles imported into Canada from the United States, representing about CAD 35 billion worth of imports.
The Canadian government has also implemented several targeted support and liquidity measures for businesses and households. These include exceptional relief on tariffs through remission, deferrals of tax payments for businesses, financing through financial Crown corporations, a loan programme for large businesses (the Large Enterprise Tariff Loan Facility) and temporary changes to employment insurance for workers, such as waiving the one-week waiting period and reducing the hours required to qualify for regular benefits and increasing the weeks of entitlement.
Latest OECD economic projections (see Table 1.1) estimate that GDP growth is set to remain robust in the first quarter of 2025 before declining in the second quarter due to reduced exports to the United States, driven by higher tariffs. Household consumption and business investment are also expected to be adversely impacted by trade disruptions, rising prices, and heightened uncertainty. Imports are anticipated to decrease less than exports, leading to a strong negative net export contribution to GDP growth in 2025. The output gap is expected to widen again in 2025. In 2026, GDP is expected to gradually recover as the economy adapts to the new trade environment. This projection assumes that tariffs will remain at their current levels and the USMCA compliance share will stay close to 50%. Lower interest rates would bolster business investment and household consumption as uncertainty diminishes. However, slower population growth will provide less support for aggregate demand, especially consumption growth. It should, however, result in a more significant expansion of per capita GDP and a better balance in the housing market.
1. Contributions to changes in real GDP, actual amount in the first column.
2. Including statistical discrepancy.
3. Adjusted for pension liabilities.
Source: OECD Economic Outlook database and OECD calculations.
On the consumer price side, inflation has declined from a peak of 8.1% in mid-2022 to rates around 2% in the second half of 2024. Inflation is expected to be pushed upwards by higher tariffs, which will increase import prices. However, starting April 1, this will be partly offset by lower energy prices resulting from the removal of the federal fuel charge. Core inflation is anticipated to increase more significantly in 2025, boosted by higher import prices, before gradually declining in the course of 2026.
The uncertainties surrounding the projections are substantial, particularly concerning trade measures. This includes uncertainties about the tariff levels for Canada themselves, which might be further increased or lowered. Tariffs imposed in addition by the U.S. administration on other countries might increase or remain at their current levels after the 90-day suspension period on July 8, 2025. Additionally, there is significant uncertainty regarding the extent to which tariffs will pass through to the Canadian economy. This is due to the unprecedented magnitude of the tariff shock in recent decades, during which there has been a significant increase in supply chain integration, and the strong interconnectedness of North American economies. Risks also relate to potential stronger effects of trade measures on financial conditions and the volatility of financial markets. However, the outlook is not entirely bleak, as the tariff measures could also accelerate reforms in Canada, particularly in reducing internal trade barriers, which would have positive long-term growth effects.
1.1.2. Beyond trade tensions, GDP per capita has been weak
GDP growth had strengthened in 2024 (Figure 1.1, Panel A). However, with population growth outpacing GDP growth, GDP per capita has trended lower and fallen below pre-pandemic levels (Figure 1.1, Panel B). Canada’s population grew by 3% annually in 2023 and the first half of 2024. The government has adjusted and recalibrated its immigration targets in response and population growth has since begun to slow (see Box 1.2 for details). High population growth has boosted potential growth, over 2023 and 2024 by increasing the working-age population, thereby supporting labour input growth. However, the surge in working-age population has likely weighed on labour productivity growth, exerting downward pressure on the capital stock per worker, as capital adjusts more slowly. The skill composition of recent immigration, which included many students and temporary workers, has also likely reduced average labour productivity, weighing on per capita GDP growth. Per capita real income growth in Canada was broadly in line with other G7 countries during 2023 and 2024, except for the United States (Figure 1.2).
Note: OECD euro area 17 covers all OECD Member countries also Member of the Euro area. In Panel B, 2024 data are compiled using population projections (based on published data).
Source: OECD Economic Outlook database.
Real gross disposable income per capita of households and NPISH
Source: OECD Household indicators dashboard.
Business investment has been very weak from 2022 through 2024 and has not yet surpassed pre-COVID levels (Figure 1.3). Sluggish business investment remains one of the main drivers of the weak productivity performance in Canada (see Chapter 4). With high population growth, the previous decline in investment per worker has been accelerating. In 2023 and 2024, the government has introduced substantial investment tax credits to support investment in green sectors, partly in response to the U.S. Inflation Reduction Act (see Box 1.3).
Note: Real business investment by asset type. This also includes residential structures, not separately shown in the graph.
Source: Statistics Canada.
Canada’s population grew rapidly, by close to 3.0% in 2023 and 2024. This is much faster than in other OECD countries such as the United States or countries in Europe (Figure 1.4). Almost all the population growth in Canada is attributable to international migration, which includes both permanent and non-permanent immigration. For permanent residents (PR), this growth is in line with government targets, fixed in the 3-year Immigration Levels Plan by Immigration, Refugees and Citizenship Canada (IRCC). In 2024, 484 000 permanent residents settled in Canada (Statistics Canada, 2025[4]), for a planned IRCC target of 485 000 immigrants (Government of Canada, 2023[5]). The 2025-27 Immigration Levels Plan foresees a significant decrease in overall permanent resident admissions to 395 000 in 2025, 380 000 in 2026 and 365 000 in 2027 (Government of Canada, 2024[6]), revised downwards from the 500 000 targets in 2025 and 2026 in the 2024-26 plan. The new plan also prioritises admissions of those already in Canada, with over 40% of PR admissions in 2025 expected to come from non-permanent residents.
In 2022, the Immigration and Refugee Protection Act (IRPA) was amended to permit category-based selection within the Federal High Skilled Program (Government of Canada, 2023[5]). This change signified a notable shift in Canada’s immigration framework, which had previously relied almost exclusively on a points-based system evaluating an immigrant’s human capital. The newly implemented category-based selection is designed to meet labour market needs, enabling the selection of immigrants with specific skill sets for industries experiencing labour shortages. Similarly, the Provincial Nominee Program, which has seen a consistent increase in PR numbers, also facilitates the selection of immigrants with specialised skills for sectors facing labour shortages across provinces and territories.
Total population
Note: Dotted lines show population projections according to the OECD.
Source: OECD Economic Outlook database.
A notable recent trend in Canadian immigration was the strong increase in non-permanent residents (NPRs). Their numbers have risen sharply in the past few years and net inflows reached 552 000 in 2022 and 821 000 in 2023 (Figure 1.5). This increase has affected all categories, including asylum seekers, international students, and temporary workers, along with their families. The largest contingents were international students, representing approximately 42% of NPRs, and temporary workers, comprising about 44% (Government of Canada, 2024[7]). The substantial growth in international students can be attributed to various factors, such as the expansion of curriculum licensing arrangements and the removal of the 20-hour weekly limit on off-campus employment. This expansion has subsequently influenced the issuance of post-graduate work permits and spousal temporary work permits, both under the International Mobility Program.
In response to this significant influx of non-permanent residents, the Canadian government, in 2024, announced reforms to the temporary resident programmes, such as an annual cap on international students study permits and tighter eligibility requirements for the post-graduate work programme and work programmes for spouses of non-permanent residents. The 2025-2027 Immigration Levels Plan also introduced – for the first time – targets for NPRs. The overarching goal is to decrease the proportion of non-permanent residents to 5% of the total population by the end of 2026 (Government of Canada, 2024[8]). As a result, the number of non-permanent residents decreased throughout 2024, reaching its lowest level since the first quarter of 2022 by the end of the year.
Number of permanent and (net) non-permanent residents in Canada, 4-quarter moving average
Source: OECD calculations based on data from Statistics Canada.
The federal government has announced six major investment tax credits (ITCs) and production-based support for targeted green sectors in recent years. These initiatives were implemented partly in response to the U.S. Inflation Reduction Act (IRA), amid concerns that the IRA’s green subsidies and tax credits could create competitive disadvantages for Canadian industry, and to support the decarbonisation of the economy. The cross-border effects of climate mitigation policies depend on several factors, including exchange rate flexibility, revenue recycling schemes for carbon taxes, and financing sources for subsidies (especially if they are financed by higher taxes). Fournier et al. (2024[9]) show, using the IMF-ENV model, that the competitive effects of the IRA subsidies would be relatively limited for Canada and confined to energy sectors. Canada would still lose some market share in electricity, iron and steel.
The initiated ITCs support investment in clean energy and other clean technologies: 1) carbon capture, utilization, and storage (CCUS); 2) clean technology; 3) clean hydrogen; 4) clean technology manufacturing; 5) clean electricity; and 6) EV supply chain. Budget 2024 estimates the fiscal costs of all the six ITCs at CAD 93 billion, or 3.2% of 2023 GDP, over 2022-23 to 2034-35 (Government of Canada, 2024[10]). PBO estimates cost slightly higher at CAD 103 billion (Parliamentary Budget Office (PBO), 2024[11]). The IRA allocates approximately USD 400 billion, or 1.5% of 2023 GDP, towards clean energy and climate initiatives according to the initial estimates by the Congressional Budget Office. However, other sources provide higher estimates of the costs of IRA. The Canadian ITCs are comprehensive and come at considerable fiscal costs. Concerning their economic and environmental impact, the Canadian Climate Institute finds that their impact on emission reductions until 2030 will be relatively small (share of 2 to 3 per cent of incremental emissions reductions), but that they will support overall economic competitiveness and attract investment (Canadian Climate Institute, 2024[12]).
The government also offers financial support for electric vehicle (EV) investments, primarily through production subsidies, to align with the Advanced Manufacturing Production Credit (AMPC) included in the IRA. According to PBO estimates, financial support for EV manufacturing reached CAD 52 billion between October 2020 and April 2024 across thirteen projects (Parliamentary Budget Office (PBO), 2024[13]). It is inherently challenging to determine how much of this financial support has resulted in additional investment or how much of the investment would have been undertaken without the support.
Current trade tensions should also be an opportunity to review Canada’s overall export performance. The latter has been relatively weak in the post-pandemic era. Canada has not yet recovered the export market share that it lost during the COVID-crisis (Figure 1.6, Panel A). This appears to be particularly due to the weak export growth of goods other than commodities. The volume of goods exports remains notably subdued for motor vehicles and parts, as well as for aircraft and other transport equipment, compared to pre-COVID levels (Figure 1.6, Panel B). In contrast, goods exports of energy and agricultural products have increased compared to the end of 2019. In fact, crude oil export volumes reached an all-time high in 2023, more than doubling since 2010 (Statistics Canada, 2023[14]). They are expected to benefit further in the coming years from the newly available export capacity of the Trans Mountain Expansion pipeline (see Box 1.4). Natural gas exports should benefit from the liquefied natural gas (LNG) terminal being built in Kitimat, British Columbia, expected to be completed in 2025. This terminal will enable the transportation of LNG by sea to countries other than the United States.
Canada is highly dependent on trade with the United States, its biggest trading partner, accounting for 76% of goods exports and 51% of services exports (Figure 1.7). Further diversifying export markets by developing or strengthening other trade agreements, and further improving export infrastructure, particularly for energy exports, would increase the resilience of the economy. The EU and UK markets are more significant destinations for services exports, together responsible for 15% of market share.
Note: In Panel A, export performance is calculated as the difference between export growth and export markets’ growth, in volume terms. In panel B, merchandise exports, in constant 2017 CAD, seasonally adjusted, are on the Balance of Payment basis.
Source: OECD Economic Outlook database; and Statistics Canada.
Note: Panel A and B: Data coming are collected on the basis of the Harmonised System 2017; Panel C and D: Data coming are collected according to the Balance of Payments methodology.
Source: United Nations Comtrade database; and OECD International Trade in Services database.
The Trans Mountain Pipeline transports crude oil and refined petroleum products from Edmonton, Alberta, to refineries and terminals in British Columbia and Washington State. Crude oil is also shipped to offshore markets in Asia and the U.S. west coast via the Westridge Marine Terminal in Burnaby, British Columbia. The expansion of the pipeline, initiated in 2013, aimed to increase the overall capacity of the pipeline. At full capacity, it will nearly triple from 300,000 barrels per day (bpd) to 890,000 bpd. According to the Canada Energy Regulator, the pipeline expansion will account for 17% of the total pipeline export capacity available to Canadian crude oil shippers, representing a significant increase in capacity. The Trans Mountain Expansion Pipeline officially began operations on May 1, 2024.
The new pipeline is expected to boost Canadian oil production and exports over time, particularly to markets in Asia and the U.S. west coast. It should also help reduce the differential between the benchmark price of North American light crude oil (West Texas Intermediate) and Canadian heavy crude oil (Western Canadian Select). Estimates on the total effect of the pipeline on GDP vary. Ernst & Young projects an impact of operational expenditures (e.g. spending on pipeline maintenance, salaries and benefits) on GDP levels of CAD 9.2 billion (0.3% of 2024 GDP) over 20 years from 2024 to 2043, with a significant boost for the GDP of Alberta and British Columbia (Trans Mountain Corporation, 2023[15]).
1.1.3. The labour market has cooled
The Canadian labour market cooled significantly in 2024. The number of job vacancies declined by almost half from the peaks in spring 2022, bringing the vacancy rate closer to historic norms (Figure 1.8, Panel A). The unemployment rate has trended higher in 2024. Strong population growth, combined with subdued hiring, led to a rise in unemployment. Towards the end of 2024 with economic activity picking up and population growth slowing, labour market conditions started to improve, and unemployment came down. However, this improvement came to a halt in spring 2025, with economic prospects worsening due to trade tensions. Firms reporting labour shortages have decreased compared to the peak in 2021-2022 (Figure 1.8, Panel B). However, shortages in some sectors, particularly in healthcare, construction, and other skilled trades, persist. The total labour market participation rate (15 years and over), after rebounding post-COVID, has somewhat declined since the end of 2023 (Figure 1.9). Fully closing gender gaps in participation and hours worked by 2060 could increase long-term GDP growth per capita in Canada by 0.18% (Fluchtmann, Keese and Adema, 2024[16]). Policies to increase the participation of women in the labour market are discussed in Chapter 4.
Note: In panel A, the unemployment rate refers to the population aged 15 years and over; and the job vacancy rate is the number of job vacancies expressed as a percentage of labour demand; that is, all occupied and vacant jobs.
Source: Statistics Canada; and Bank of Canada, Business Outlook Survey.
Labour force participation rate by gender and age group
Source: OECD Infra-annual Labour Force Statistics database.
Table 1.3 summarises potential medium-term impacts of selected structural reforms proposed in this Survey. They suggest that these structural reforms could lift Canada’s GDP by around 6% over 10 years and by around 16% in the long run. Simulations are realised with the OECD long-term model (except for 5). These quantifications are illustrative. While other reform proposals in this survey have GDP implications, not all can be quantified due to model limitations.
Note: Enhance the business environment by reducing high barriers to foreign investment and public procurement, lowering entry barriers in service and network sectors, and deregulating digital markets (see Chapter 4).
Source: OECD long-term model (Guillemette and Château, 2023[17]), except 5 (International Monetary Fund, 2019[18]).
Table 1.4 shows the illustrative fiscal impact of proposed structural reforms in this Survey. Their impact is overall broadly neutral, except for higher public spending on climate adaptation (Chapter 3). On adaptation, there are trade-offs over time, as higher spending today would lead to lower spending on disasters in the future. The proposed tax reforms (Chapter 1) to improve the tax mix are intended to be revenue neutral. The proposed housing policies (Chapter 2) focus on regulatory policies, and if requiring higher spending (such as for more social and affordable housing), could be financed through savings from existing, lower-benefit programmes. Policies to strengthen productivity (Chapter 4) also focus on regulatory improvements and otherwise, should be financed through budget reallocations.
Note: Regulatory measures (e.g. removing interprovincial non-tariff trade barriers or reforming zoning laws) are treated as fiscally neutral and are not shown. Implementation costs for such measures should be generally offset, in the medium term, by lower operational costs due to efficiency gains. The rollout of affordable childcare is not included in this table as additional fiscal cost as already included in the budget.
Source: OECD calculations.
1.2.1. Monetary policy has eased
The Bank of Canada began lowering its policy interest rate in June 2024 as inflation was moving closer to the 2% inflation target (Figure 1.10, Panel A). Wage growth remains relatively dynamic (Figure 1.10, Panel B). The interest rate was subsequently lowered at each Governing Council Meeting to 2.75% in March 2025 before holding rates constant in the April 2025 meeting (Figure 1.11, Panel A). The nominal neutral interest rate – i.e. the rate to which the policy rate would converge, when output is at its potential and inflation is at its target – is estimated to be in the range of 2.25% to 3.25% according to the Bank of Canada (Bank of Canada, 2025[19]). The policy rate is hence at the midpoint of its neutral range (see Box 1.6 for the monetary policy framework).
Source: Statistics Canada, and OECD Economic Outlook database.
Going forward, the Bank of Canada is set to carefully balance the impact of two opposing influences on consumer price inflation from tariffs: the upward pressure from higher import prices and the downward pressure from lower demand. As long as long-term inflation expectations remain firmly anchored and price increases limited to goods affected by tariffs, monetary policy could look through the inflationary effect of higher tariffs, and lower rates somewhat further to remain in broadly neutral territory. If the growth outlook worsens significantly, additional monetary easing might be needed. However, the Bank of Canada should stay vigilant regarding broader inflationary pressures and be ready to act in the other direction if price increases become more broad-based and inflation expectations are at risk of de-anchoring.
The Canadian dollar has strongly depreciated against the US dollar between September 2024 and March 2025. This development was until November driven by macroeconomic developments – lower inflation and softer growth in Canada relative to the U.S. – with the Bank of Canada reducing rates more quickly than the Federal Reserve and the short-term interest rate gap widening. Following November, high uncertainty related to trade policies and trade tensions have put downward pressure on the CAD and exchange rate risks became the dominant factor (Bank of Canada, 2025[3]). Since March 2025, the value of the Canadian dollar has strengthened again, fully reversing its losses since November, as investors reevaluate U.S. assets given trade policy uncertainty. While this stabilisation limits future inflationary pressures, it will provide less of a competitive boost to sectors hit by tariffs.
In parallel, the Bank of Canada has continued to normalise its balance sheet through quantitative tightening (QT), halting the replacement of maturing Government of Canada (GoC) bonds. This process has proceeded smoothly. The Bank’s total assets have declined by about 48% to about CAD 250 billion between April 2022 and March 2025, mainly reflecting the winding down of Government of Canada bond holdings (Figure 1.11, Panel B). The Bank of Canada announced QT to have ended in early March 2025, at which point central bank reserves (or so-called settlement balances) will have returned to a normal range, allowing for the resumption of routine balance sheet management (Gravelle, 2025[20]; Bank of Canada, 2025[21]). The Bank of Canada intends to resume asset purchases gradually, beginning with term repo operations and purchases of Treasury bills, to replace maturing assets and stabilise the balance sheet within a normal range over the course of 2025. Ending QT in March was appropriate as it aligns balance sheet management with the more neutral stance of the policy rate. Maintaining a clear communication on balance sheet management remains essential.
Canada’s monetary policy framework consists of two elements: the inflation-control target and a flexible exchange rate. First introduced in 1991, the inflation target is set jointly by the Bank of Canada and the federal government and reviewed every five years. The most recent renewal extends the framework to the end of 2026. The Bank of Canada acts independently of the government in the conduct of its monetary policy within this framework. The 2022-2026 framework remains centred on the 2% inflation target, using the flexibility of the 1%–3% control range to actively seek the maximum sustainable level of employment when conditions warrant. Canada’s floating exchange rate provides a buffer, helping the economy absorb and adjust to external and internal shocks.
Lending rates for households and businesses have decreased since their peaks in the beginning of 2024 (Figure 1.12, Panel A). Overall lending conditions have also eased over the last quarters, both for households and businesses (Bank of Canada, 2024[22]). The residential real estate market has ceased its decline, with house prices and home sales experiencing a slight recovery since their trough in mid-2023 (Figure 1.12, Panel B). Chapter 2 covers a more detailed discussion of structural housing issues and affordability challenges in Canada. Commercial real estate markets (CRE), particularly the office sector, have been under pressure in recent years (Bank of Canada, 2024[23]). The office sector has faced very high vacancy rates, especially for offices in large city centres, partly due to the completion of substantial new office space between 2021 and 2023, as well as the ongoing impact of teleworking (JLL, 2025[24]). Office construction has declined since then, reaching a 20-year low by the end of 2024 (CBRE, 2024[25]). The industrial and retail sector have been performing relatively better. Exposure of banks and non-bank financial institutions to the CRE sector are relatively limited for larger institutions but higher for small ones – the CRE sector accounts for 10% of total loan portfolios of large banks and 20% of that of small and medium-sized banks – and not concentrated. However, some pension funds and insurance companies with holdings in the sector had to write down the values of certain CRE assets (Bank of Canada, 2024[23]).
Note: Panel A shows the midpoint of the federal funds target range for the United States and the deposit facility rate for the Euro area.
Source: OECD Economic Outlook database; and Bank of Canada.
Note: New lending (funds advanced) refers to new credit extended, new draws on existing credit facilities, mortgage or term-loan renewals and refinancing for a given month.
Source: Bank of Canada; The Canadian Real Estate Association (CREA); and OECD Economic Outlook database.
1.2.2. Households still face an increasing debt service burden
Household debt, driven mainly by mortgage debt, remains one of the highest in the OECD, standing at just over 171% of household disposable income in the third quarter of 2024 (Figure 1.13, Panel A). However, households have started to deleverage to some extent in recent years. New borrowing by households declined by about half between 2022 and the beginning of 2023 following the past increase of lending rates (Figure 1.13, Panel B). Since then, it has experienced a slight rebound. High household debt results in a significant debt service burden for households. This debt service ratio (DSR) stood at 14.4% on average in the fourth quarter of 2024, close to all-time highs (Figure 1.14, Panel A). For new mortgage loans, the debt service burden is even higher and close to 30% of loans have a DSR exceeding 25%, the threshold used by the Bank of Canada to identify vulnerable households (Bank of Canada, 2024[26]). For some households – especially those with lower incomes and savings – higher debt servicing costs could put pressure on finances, potentially leading to payment arrears and debt defaults.
Some indicators of households’ financial stress have indeed shown some trend increases recently, albeit from very low levels. Rates of mortgage loans in arrears – defined as loans that are 90 days or more past due – increased slightly to 0.17% but remain low in historical comparison (Figure 1.14, Panel B). The rate of arrears for credit card and auto loans, often early warning indictors for households’ financial stress, have shown more significant increases. The situation is manageable but requires ongoing close monitoring.
Over the coming years, many households will need to renew existing mortgages at higher interest rates, as many of these mortgages were taken out when interest rates were very low. Of the mortgages outstanding in the beginning of 2024, more than three-quarters are up for renewal by the end of 2026 (Office of the Superintendent of Financial Institutions (OSFI), 2024[27]). The share of longer-term fixed-rate loans has strongly declined over recent years (Figure 1.15, Panel A). Many borrowers opted for variable-rate loans in 2021 and early 2022, as mortgage rates were substantially lower for these types of loans (Murchison and teNyenhuis, 2022[28]). As interest rates started rising, shorter-term fixed rates (<5 years) became more popular. Variable rate and short-term fixed rates expose households more strongly to interest rate risks. The median percentage increase in mortgage payments for all mortgages was estimated to be 22% in 2024, 25% in 2025 and 32% in 2026 in May 2024 (Bank of Canada, 2024[23]). Since these increases depend on lending rates, and lending rates have come down since May, the actual increases might be somewhat lower than initially expected, but they are still likely to be substantial.
An important risk is posed by variable-rate mortgages with fixed payments (VRMFP), which account for approximately three-quarters of all variable-rate loans. For such loans, the portion of the payment going towards interest changes when interest rates change, while the total mortgage payment remains unchanged. At a certain interest rate – known as the trigger rate –, interest payments might increase so much that total mortgage payments are no longer sufficient to cover the interest portion of the loan. Estimates in 2022 suggested that about half of all variable-rate mortgages – or 13% of all mortgages – had reached their trigger rate by the end of October 2022 (Murchison and teNyenhuis, 2022[28]). When hitting the trigger rate, the mortgage holder may be required to increase monthly payments, given the requirement to remain on contractual amortisation. VRMFP could face high payment increases, unless pre-payments are made to bring down the balance, with a median payment increase at renewal exceeding 50% compared to origination payment in 2025-2026 (Bank of Canada, 2024[23]). Recent lending rate decreases will eventually provide some relief for households, however, in the near-term payments for households at renewal are still expected to rise.
Mortgage loans are also increasingly taken out without mortgage insurance. In Canada, only about 25% of outstanding mortgage lending is covered by mortgage insurance, which heightens the risk for lenders in the event of default. This is a decline from pre-COVID-19 levels, where close to 40% of all mortgage loans were insured. Government-guaranteed mortgage insurance is only required for all federally regulated mortgages when the borrower’s down payment is less than 20% of the home’s purchase price, i.e. for loans with a loan-to-value (LTV) ratio higher than 80%. This decline in the proportion of insured mortgages reflects rising house prices, as homes valued over CAD 1 million were not eligible for insurance, which was the case for an increasing number of loans in a situation of strong house price increases. Households therefore had to forego the house purchase or increase the downpayment to at least 20%. This limit was recently augmented by the government to CAD 1.5 million, facilitating accessibility to mortgages for households with lower downpayments. Non-insured mortgages, i.e. loans with LTV ratios below 80%, have less prescriptive regulation, e.g. no prescribed limits on debt servicing, than insured mortgages (Peterson, 2023[29]).
The amortisation period of mortgage loans has also been lengthening, partly because some banks allowed borrowers to extend the amortisation period to mitigate the rise in debt service costs (Fortier-Labonté and McGillivray, 2024[30]). Nearly 50% of newly issued or renewed mortgages now have amortisation periods exceeding 25 years, compared to roughly one third before the COVID-19 crisis (Figure 1.15,Panel B). This comes along with a measure in Budget 2024 to allow 30-year mortgage amortisations on insured mortgages for all first-time home buyers and to all homebuyers of new builds as of December 2024 (Government of Canada, 2024[10]). Longer amortisation periods, while reducing monthly payments and making homeownership more affordable in the short-term, increase long-term vulnerabilities of borrowers to income and market shocks. Since the new measure applies to the insured mortgage markets, the risks are ultimately borne by the public sector.
Currently, borrower resilience to shocks for uninsured mortgages is primarily addressed through “stress testing” at the individual borrower level (the so called minimum qualifying rate, which is currently the greater of the mortgage contract rate plus 2% or 5.25%), see discussion further below. Additional measures to strengthen borrower resilience and manage debt service costs should be considered. This could include debt servicing limits (DSTI) or debt-to-income restrictions for uninsured mortgages at the borrower level, similar to existing DSTI limits for insured mortgages. Debt service is closely associated with default probabilities and negative effects of high housing debt on consumer demand (Bank for International Settlements, 2023[31]).
Source: Statistics Canada; and OECD Household Indicators Dashboard.
Source: Statistics Canada; and Bank of Canada.
Note: New lending (funds advanced) refers to new credit extended, new draws on existing credit facilities, mortgage or term-loan renewals and refinancing for a given month.
Source: Bank of Canada.
1.2.3. Business profits remain elevated amid higher insolvencies
Non-financial corporations have also diminished their leverage. In 2024, the gross debt of non-financial corporations amounted to 163% of GDP, compared to 172% of GDP before the COVID-19 crisis, still relatively high compared to other OECD countries (Figure 1.16, Panel A). Corporate profit margins, which strongly increased after the COVID-19 crisis, have come down but remain elevated on average relative to pre-crisis years (Figure 1.16, Panel B). Business insolvencies rose sharply from early 2023, surged in early 2024, and have since fallen back somewhat, but remain above pre-pandemic levels. According to analyses by the Bank of Canada, high insolvencies represent mainly catch-up effects from low insolvency numbers during pandemic years, where government support programmes kept businesses afloat (Bank of Canada, 2024[23]).
Note: In panel B, the operating profit margin is defined as operating profits relative to operating revenues and the after-tax profit margin as after-tax income relative to total revenues.
Source: OECD Financial indicators dashboard: Non-financial corporations; and Statistics Canada.
1.2.4. The financial system has proven resilient
The Canadian banking system has remained stable and resilient. Capital and liquidity buffers are above regulatory limits, and credit performance remains strong with an average NPL ratio of 0.6%, despite a recent slight deterioration (Figure 1.17). Funding sources are well diversified, and deposit growth of banks has been robust (Bank of Canada, 2024[23]). The relative strength of Canadian banks was evident during the period of banking stress in the US in 2023, as Canadian banks were relatively unaffected (Bank of Canada, 2023[32]). Bank profitability has, however, declined since 2023 due to increased funding costs, higher loan-loss provisions and slower balance sheet growth (Figure 1.17, Panel D).
Note: The IMF Financial Soundness Indicators database does not include the Liquidity Coverage Ratio (LCR), which is part of Basel III, for Canada, this is why the short-term liquidity ratio is shown. OECD and EU are unweighted averages. In Panel A, OECD average excludes Japan, and New Zealand; in Panel B it excludes Chile, Japan, New Zealand, and Switzerland; in Panel C, it excludes Japan, and New Zealand.
Source: IMF Financial Soundness Indicators database.
A vulnerability for domestic banks remains the substantial exposure to the mortgage market. Chartered banks, which are federally regulated by the Office of the Superintendent of Financial Institutions (OSFI) in accordance with stringent Basel III standards, make up a large share of the mortgage market with slightly more than 80% of market share (Canada Mortgage and Housing Corporation, 2024[33]). They are subject to stringent microprudential guidelines (Guideline B-20 on residential mortgage underwriting), which require, for example, stress testing for mortgage lending. In 2023 and 2024, OSFI further reinforced some of its guidelines. These stringent standards should help protect banks from potential mortgage fallouts. OSFI has also raised the Domestic Stability Buffer (DSB), a capital add-on for domestically systemically important banks, to 3.5% of total risk-weighted assets in November 2023, and introduced a loan to income (LTI) limit of 450% at the institutional level for newly originated uninsured mortgage portfolios in November 2024. These measures are welcome. OSFI should stay vigilant and maintain stringent regulation given the significant mortgage market risks in the financial system (see also discussion further above).
The risk of borrowers shifting to less regulated, non-bank lenders has not materialised so far. While chartered banks are federally regulated, non-banks are either provincially regulated (such as in the case of credit unions) or less regulated. A potential concern is that households shift to non-bank lenders to finance or renew mortgage loans if they do not meet the requirements of chartered banks in situations of higher financial strain. However, this does not appear to be the case. Mortgage lending by non-bank financial institutions increased at a similar rate as the one of chartered banks and the market share of non-banks in mortgage lending has remained low (around 5% for non-bank, non-credit union mortgage lenders) and broadly stable (Canada Mortgage and Housing Corporation, 2024[33]). Past Survey recommendations to strengthen the coordination between federal and provincial regulators and more closely monitor the non-banking mortgage sector remain valid.
Another segment of the non-bank financial sector, the asset management sector (e.g. pension funds, investment funds and insurance companies) has continued to build up leverage. The last Survey highlighted concerns regarding the deterioration in liquidity of the sector, which could entail a destabilising sell-off in fixed-income assets. While there are signs that the asset management sector has increased the holdings of liquid assets in Canada, hedge funds and pension funds have further increased their leverage over the last year, through an increased borrowing in the repurchase agreement (repo) market (Bank of Canada, 2024[23]). This could pose challenges and contribute to market volatility in the case of a rapid unwinding of hedge funds’ positions. Also, hedge funds partly rely on banks for short-term funding. Canada stands out as one of the G7 countries with the largest bank exposure to other (non-bank) financial institutions (which include hedge funds) with a share of more than 4% of total banks’ assets (International Monetary Fund. Western Hemisphere Dept., 2024[34]). This trend highlights the persistent vulnerabilities and risks within the asset management sector and the interconnectedness of the system, necessitating vigilant monitoring.
1.3.1. Deficit and debt levels have decreased rapidly from pandemic-related increases
Canada has reduced its fiscal deficit more rapidly than other OECD countries following the pandemic-related surge. The consolidated budget balance across all levels of government stood at 0.1% of GDP and the primary budget balance at 1.8% of GDP in 2023 (Figure 1.18). General government gross debt (adjusted for pension liabilities) came down by 25% of GDP since the pandemic to 104% of GDP in 2023. In Canada, greater attention is paid to net debt (see Box 1.7), which recorded at 11% of GDP in 2023 (net debt adjusted for pension liabilities). This is close to the level of 15% of GDP observed before the pandemic.
Note: Shaded areas indicate projections. Euro area 17 includes countries which are both Euro area members and OECD members.
Source: OECD Economic Outlook database.
However, new budget measures in 2023 and 2024 implied significantly higher public spending, leading to the opening of a budget deficit in 2024. The consolidated budget balance of the general government widened significantly from 0.1% of GDP in 2023 to -2.1% in 2024, and the primary budget balance from 1.8% to -0.3% of GDP. This significant increase in 2024 is also in part attributable to a one-time payment of CAD 23 billion (0.7% of 2024 GDP) for the compensation for those harmed by discriminatory underfunding of First Nations Child and Family Services (Government of Canada, 2023[35]). General government gross debt (adjusted for pension liabilities) increased to 107% of GDP in 2024, although net debt (adjusted for pension liabilities) declined to 8% of GDP. The significantly higher structural spending in 2023 and 2024 affected both federal and provincial budgets. On the federal side, the last budgets included new spending measures, net of new revenue-raising measures, of CAD 82 billion (2.9% of 2023 GDP) from the fiscal year 2022-2023 to the fiscal year 2028-2029 (Government of Canada, 2024[10]; Government of Canada, 2023[36]). These measures pushed up long-term spending needs, especially as several important multi-year social reform programmes have been implemented – such as the Early Learning and Childcare Program, the Canada Disability Benefit, the National Pharma Care and Dental Care Plan. Effective expenditure control remains crucial.
Reporting of public debt within Canada focuses mostly on net public debt (gross liabilities minus financial assets). This reflects the fact that Canada has important financial assets holdings, also related to its long-term funded pension plans. Countries, like Canada and Norway, are generally better assessed using net debt to account for their ability to offset liabilities. Canada’s debt metrics (both gross and net) include assets and liabilities relating to public-sector employee pensions. This reflects good accounting practice and efforts to ensure long-term fiscal sustainability. In its analyses, the OECD employs gross debt due to the challenges of international comparability in asset valuation – for example, the varied approaches to estimating the assets of state-owned enterprises across different countries. Also, gross debt better reflects the short-term liability burden as many financial assets are not immediately accessible for debt servicing, because they reflect long-term obligations. To maintain the consistency of gross debt figures across countries, gross debt figures are adjusted by excluding unfunded pension liabilities included in some countries’ debt figures. This adjustment enhances comparability with those countries where public-sector pension commitments are not represented on the general government’s balance sheet.
Canada’s gross consolidated general government debt (unadjusted for pension liabilities) stood at 117% of GDP at the end of 2024 and adjusted gross consolidated general government debt at 107% of GDP (Figure 1.19). Net debt of the general government (unadjusted for pension liabilities) recorded at 18% of GDP and adjusted net debt at 8% of GDP at the end of 2024. In unadjusted terms, federal net debt stood at 30% of GDP and provincial and territorial debt at 13% of GDP. Local governments had very low net debt of 2% of GDP. This was partly counterbalanced by the net financial worth of the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP) of 26% of GDP.
In % of GDP, 2024
Note: Data for the general government gross and net debt come from OECD, data for government subsectors from Statistics Canada. Nominal GDP (in local currency) from OECD is used as denominator for government subsectors’ net debt ratios. A negative debt signifies a net financial worth.
Source: OECD Financial indicators dashboard: Government; and Statistics Canada.
Financial assets of the consolidated general government (including pension plans) amounted to 99% of GDP in 2024. In 2023, about 37% of financial assets, or 33% of GDP, were held by public pension plans (essentially CPP and QPP), which are partly earmarked for the payment of future benefits. Pensions plans can invest in a broad portfolio of assets, including public and private equities, government bonds, loans, real estate and other (OECD, 2024[37]). In 2023, they held broadly 65% of their assets in equity. The federal government held financial assets equivalent to about 25% of GDP, while the remaining assets are mostly held by provincial and territorial governments. Of the consolidated general government (including pension plans), a substantial portion of financial assets is invested in equities and investment funds (around 40% of total financial assets). Smaller proportions are held in debt securities (13%), loans (20%), and other accounts receivable (19%).
Several provincial governments have also introduced significant new spending programmes due to high spending pressures from population growth, infrastructure needs, and new social programmes, worsening the provincial budget outlook. Provinces like Ontario, Quebec, and British Columbia have balanced budget rules, which have been either suspended due to “exceptional circumstances”, as in Ontario, or will now be achieved much later, such as in Quebec only in 2029-2030. The provincial budgets did not yet entirely account for the worsening economic outlook due to trade tensions. While some of the additional spending is justified, others, such as the across-the-board tax rebate of CAD 200 in Ontario in 2025 lacked an economic justification. As soon as trade tensions subside, provincial governments should ensure enforcement of balanced budget rules and disactivate the escape clause. Increased spending pressures on provinces should be managed through both enhanced own-revenue generation and sufficient federal government transfers.
The worsening economic outlook due to the trade tensions is expected to further weigh on the fiscal outlook. Given the comparatively favourable fiscal position, Canada should let automatic stabilisers operate to attenuate the negative impact of the trade shock on the economy. Any additional fiscal support that the government may decide to introduce, should be timely, targeted and temporary. If the tariff shock becomes prolonged and has more severe economic consequences, it will be important to allow the economy to adjust to the new environment without safeguarding specific businesses or sectors. Fiscal policy should rather support long-term growth drivers, such as by strengthening investment expenditures or innovation (see Chapter 4). Finally, if the fiscal stance eases, it will be important that is done in good cooperation with monetary policy. This has not always been the case. For example, fiscal policy was expansionary in 2024 while monetary policy has been restrictive in 2023-2024. Consequently, the accommodative fiscal policy has partly counterbalanced the restrictive stance of the Bank of Canada to fight inflation.
1.3.2. Bringing down public debt remains a key objective in the medium term, once trade tensions subside
Successive Canadian governments have placed significant emphasis on maintaining public debt at low and sustainable levels. As a result, both the gross and net debt-to-GDP ratios in Canada are lower than those in many other OECD countries. Risks of sovereign stress are limited. The gross debt level (adjusted for pension liabilities), which receives greater focus in the international context, still has shown a trend increase after the Great Financial Crisis and stands slightly above 100% of GDP (Figure 1.20). While debt levels remain low in international comparison, reducing the government debt in the medium-term can provide additional fiscal space to respond to future economic crises and address long-term fiscal challenges, while maintaining debt sustainability.
Long-term fiscal simulations indicate moderate concerns regarding debt sustainability. The gross debt-to-GDP ratio is expected to broadly stabilise, before slightly increasing again in the outer years, if the primary deficit remains at projected 2026 levels and age-related spending increases are offset (Figure 1.21). Not counteracting age-related spending pressures would, however, lead to unfavourable debt dynamics. Aging-related costs impose a relatively limited burden on Canada’s public finances compared to other OECD countries thanks to long-term funded public pension plans. Spending on health and long-term care, pensions and other areas (excluding the energy transition) would still increase by about 3.1% of potential GDP in Canada by 2060 (Guillemette and Château, 2023[17]). An ambitious decarbonisation of the economy could be an additional source of fiscal pressure, as mitigation costs could be as high as 5% of baseline GDP in Canada by 2050, given currently high per capita CO2 emissions (Guillemette and Château, 2023[17]). Implementing structural reforms, as outlined in Box 1.5, would bring debt levels lower. A stronger consolidation than currently envisaged would set the debt-to-GDP ratio on a downward trajectory. For example, gradually improving the primary balance to 0.25% of GDP – the level achieved before the COVID-19 crisis – between 2027 and 2029 and keeping it at this level would bring the gross debt-to-GDP ratio below 100% by 2035.
Source: OECD Analytical database.
Gross general government debt, in % of GDP
Note: The scenarios are based on the OECD economic projections until 2026 and the OECD long-term model thereafter. The “no-policy-change” scenario (dotted brown) assumes a constant structural primary balance of 0% of potential GDP from 2026 onwards. The scenario with ageing costs (brown) adds spending pressures from health care, long-term care, and pensions from OECD estimations (Guillemette and Château, 2023[17]). The scenario with structural reforms (green) adds the impact of structural reforms elaborated in Box 1.5 (reforms 1, 2, 3a, and 4) to the “no-policy-change” scenario with ageing costs.
Source: OECD simulations based on OECD Economic Outlook and the OECD Long-term Model.
The fiscal framework in Canada is very flexible, without legislated fiscal targets or formal fiscal rules. Fiscal policy is mainly guided by political commitment to self-imposed fiscal anchors. The federal government has committed to keeping federal deficit-to-GDP ratios on a declining path and below 1% from 2026-2027 onwards. Federal debt-to-GDP-ratios should decrease in 2024-2025 and remain on a declining path thereafter (Government of Canada, 2024[10]). Several provinces have similar self-imposed fiscal anchors (Ontario, Québec, British Columbia and Manitoba also have legislation that imposes constraints on fiscal policy). However, some recent fiscal measures have put these fiscal anchors at risk. The government should continue to demonstrate strong commitment to its fiscal anchors in normal times and safeguard overall fiscal credibility. Strong future spending pressures from ageing, greening, defence and other policy priorities can make the current flexible fiscal framework vulnerable to incremental spending increases.
While relatively low debt levels in international comparison suggest that this flexible framework has worked well in the past, a stronger formalisation of fiscal anchors could offer additional advantages to help safeguard these achievements for the future. It could strengthen the commitment to targets, improve accountability on fiscal choices, better inform policy decisions and communicate more effectively on fiscal trade-offs. Empirical evidence has shown that fiscal rules are generally associated with better fiscal outcomes, even if the causal relationship is complex and influenced by the design and implementation of the rules (Caselli and Reynaud, 2020[38]; Heinemann, Moessinger and Yeter, 2018[39]). Monitoring compliance with current fiscal anchors could also be improved. As regards provinces and territories, previous Surveys have made suggestions for more independent oversight of provincial budgets.
1.3.3. The tax structure could be better aligned with growth- and environmental objectives
Canada’s tax revenues as a percentage of GDP align closely with the OECD average, reaching 35% of GDP in 2023. The composition of these revenues is however slightly distinctive, with a higher proportion originating from the taxation of income, while the contribution from the taxation on goods and services remains comparatively low (Figure 1.22). As underscored in previous Surveys, Canada has room to make its tax structure more growth friendly, by shifting a higher proportion of taxation from income to consumption. According to the OECD Revenue Statistics, revenues from VAT/GST represent only about 13% of total tax revenues in Canada, compared to an average of 21% in the OECD. International evidence shows that consumption taxes weigh less on growth than taxes on income or profits (Johansson, 2016[40]). Previous Surveys have recommended starting with gradually phasing out zero-rates for items such as basic groceries, agricultural products, and prescription drugs to expand the GST/HST tax base. This could be offset by increasing income support, for example via increasing the existing GST/HST tax credit, for low- and modest income households. In return, personal income taxes could be reduced to make the measure revenue neutral. For example, taxes for individuals with lower attachment to the labour market could be reduced to increase participation. The temporary removal of GST/HST for qualifying goods from December 2024 to February 2025 moved in the opposite direction and was undesirable both from an economic and tax perspective. The measure lacked proper targeting for low-income households, also applied to non-essential goods including unhealthy food products and alcoholic beverages, and further eroded the consumption tax base.
A notable aspect of the Canadian tax system is the high contribution from property taxation, notably from recurrent taxes on immovable property. Revenues from recurrent taxes on immovable property make up almost 9% of total tax revenues, compared to only 3% for the OECD. Recurrent taxes on immovable property are considered one of the more economically efficient forms of taxation (OECD, 2022[41]). Additionally, these tax revenues primarily go to municipalities, providing a steady and direct source of revenue for local finances. Nevertheless, there is still room for some improvements within the current system. Some municipalities levy higher municipal property taxes on multi-purpose rental properties than on single-detached housing (Dachis, 2024[42]). Harmonising property tax rates across various dwelling types could make property taxation more efficient and support housing affordability (see Chapter 2).
Decomposition of tax revenue, 2023 or latest available, % of GDP
Note: Taxes on income include taxes on profits and capital gains. Unallocable taxes on income refer to receipts that cannot be identified appropriately as income taxes from individuals and corporate enterprises.
Source: OECD Global revenue statistics database.
Canada also has room to raise environmental taxes. Taxation on energy and transportation accounts for a mere 0.8% of GDP (or 2.6% of total tax revenues), a figure that is much lower than the OECD average of 1.3% (Figure 1.23). Most of this revenue – approximately three-quarters – is generated from energy taxes, which include carbon tax revenues. Canada had an extensive and well-designed carbon pricing framework in place. The federal carbon pricing system set minimum federal standards, while granting provinces and territories the flexibility to implement their own carbon pricing system. All direct proceeds from the federal carbon pricing system were returned to the province or territory of origin, which were than redistributed to households, small businesses and indigenous communities. Central to this framework is a minimum carbon price, set at CAD 95 per tonne of greenhouse gas (GHG) emissions in 2025, with a planned annual increase of CAD 15 per year to CAD 170 by 2030 (Government of Canada, 2021[43]; Government of Canada, 2024[44]).
Carbon pricing has played a crucial role in reducing Canada’s GHG emissions and reaching its targets for 2030 (OECD, 2023[45]). However, the integrity of the system was weakened for the first time in 2023 by a temporary three-year suspension on deliveries of heating oil under the federal fuel charge of the federal carbon pricing system, which has subsequently led to rising pressure for additional exemptions. In spring 2025, the government has made regulations that cease the application of the federal fuel charge, i.e. the consumer part of the carbon price, and removed requirements for provinces to have a consumer-facing carbon price. This means that, as of April 1, 2025, the applicable fuel charge for all types of fuels is set to zero. The other component of the carbon price, the Output-Based Pricing System (OBPS) – a regulatory emissions trading system for industry – remains in place. The federal fuel charge was estimated to contribute between 8% and 14% of incremental emission reductions by 2030 (Canadian Climate Institute, 2024[12]). The removal is unfortunate, as it diminishes the carbon price signal to consumers and reverses the previously implemented gradual phase-in. Canada should reapply the fuel charge and improve communication on the benefits of the system. Lump-sum payments to households should continue to be employed to address distributional concerns, such as via the Canada Carbon Rebate (formerly the Climate Action Incentive Payment). Apart from energy taxes, there is also scope to expand congestion and road-use charges as well as other transport taxes in Canada.
Environmentally related tax revenue, 2022 or latest available, % of GDP
Note: CAN: Missing data for pollution and resources tax bases, data refer to 2021; COL: Pollution and resources tax bases are confounded.
Source: OECD Environmental Related Tax Revenue database.
Since the last Survey, the Canadian government has implemented some additional smaller changes to the tax system. Budget 2024 introduced higher capital taxation, by increasing the inclusion rate for capital gains from one half to two thirds for corporations, and from one half to two third on the portion of capital gains that exceed CAD 250 000 for individuals (Government of Canada, 2024[10]). Capital gains from the sale of the principal residence and other protected saving and retirement accounts remain exempt from taxation. In return, a lower inclusion rate for capital gains up to CAD 2 million from lifetime entrepreneurial activity was introduced to encourage entrepreneurship (Government of Canada, 2024[10]). Budget 2023 introduced reforms to the Alternative Minimum Tax (AMT), a mechanism that guarantees a baseline level of taxation for individuals and trusts benefiting from specific exemptions, deductions, or tax credits (Government of Canada, 2023[36]). These reforms encompass an increment in the AMT rate, together with an increase in the exemption threshold. Other recent tax changes aim to stimulate the supply of housing (see Chapter 2).
These recent tax reforms have been mainly driven by the goal of enhancing tax fairness and entrepreneurship. Relevant studies show that Canada’s income tax system is progressive, both in what regards labour and capital income. Effective or marginal effective income tax rates increase along the income distribution (Hourani et al., 2023[46]; Bazel, 2024[47]). However, the increase of effective tax rates is steeper moving from lower to middle incomes than from middle to higher income levels. This could be an area for reform if the goal is to enhance progressivity across the entire income distribution. Regarding the taxation disparity between labour and capital income, Canada, like most OECD countries, imposes higher taxes on labour than on capital (Hourani et al., 2023[46]). However, this difference remains relatively stable across income levels in Canada due to fixed deductions on capital gains. The recent changes in the taxation of capital gains should enhance progressivity slightly at the higher end of the income distribution but will also strengthen incentives to plan capital gains over time to avoid the tax increase.
Canada also moved ahead with the introduction of a Digital Services Tax (DST). It has enacted a 3% tax on digital services revenues in 2024, with the first year of application covering taxable revenues earned since 2022. The tax applies to businesses with more than EUR 750 million in total worldwide revenues and more than CAD 20 million in taxable service revenues in Canada. Canada initially proposed the DST in its 2020 Fall Economic Statement, outlining a 3% tax in the 2021 Budget, which would have applied beginning of 2022. The enactment was deferred until the end of 2023, pending advancements of global discussions on Pillar One of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting. PBO estimates that the DST will generate about CAD 1.2 billion in annual revenues (Parliamentary Budget Office (PBO), 2023[48]). Taxation of digital businesses should be better addressed through a coordinated international approach, and international efforts to implement Pillar One should continue.
1.3.4. Spending reviews could be rendered more systematic and comprehensive
Spending reviews are an important tool for assessing and improving the efficiency and effectiveness of government spending. Several studies show their usefulness to support governments in meeting their fiscal objectives, improve budget allocation for a better alignment with government priorities, and improve spending efficiency and quality over time (Doherty and Sayegh, 2022[49]; Tryggvadottir, 2022[50]; Bova, Ercoli and Vanden Bosch, 2020[51]). Canada conducts periodic spending reviews, at a non-regular interval. A new spending review was announced in Budget 2023 with the goal of reducing the scale of growth in government spending back to a pre-pandemic path. The review is not intended as an overall savings plan but is aimed at reallocating government spending across departments to priority areas.
Most of the ongoing review is on operating expenses, excluding some major transfer programmes. For the first phase, about half of the reductions are intended to come from cutting spending on consulting, other professional services and travel, while the other half are broader “effectiveness gains” not related to specific spending programmes or areas (Government of Canada, 2023[36]).The implementation process is mostly bottom-up and gives departments the opportunity to propose reallocations from across their portfolio, which are then reviewed by the Treasury Board.
The recent initiation of a spending review in Canada is a welcome step to refocus and prioritise government spending, which saw a significant rise during the pandemic. Present and future spending pressures in Canada warrant a thorough analysis of existing spending programmes and priorities. However, the ongoing review process shows deficiencies. In contrast to Canada’s sporadic approach, triggered mainly by political pressure, it is now best practice among OECD countries to conduct more systematic and periodic spending reviews. Countries like the Netherlands and Denmark engage in targeted annual reviews, while Ireland undertakes regular assessments, thereby establishing a robust institutional structure and enhancing the capacities in the Ministry of Finance and respective ministries in executing these reviews effectively (Doherty and Sayegh, 2022[49]).
Given the substantial current and prospective fiscal pressures, Canada’s spending review also warrants more ambitious targets. The savings and reallocations projected at present are relatively modest compared to recent spending increments in budgets. Moreover, the first part of the review concentrates on a very specific spending area – consultancy and other professional services – which has attracted strong media attention in Canada (The Globe and Mail, 2023[52]). For the remaining part, it focuses mainly on ad-hoc budgetary savings within departments, lacking a central theme or objective. A more strategic approach to the spending review, pinpointing two or three overarching, high-priority areas (or areas deemed non-essential), would likely yield more effective fund reallocation aligned with core government objectives (Doherty and Sayegh, 2022[49]; Tryggvadottir, 2022[50]). As it stands, the review in progress is neither exhaustive nor sufficiently focused.
Furthermore, this review could have served as an opportunity to scrutinise fiscal measures and spending initiatives related to the COVID-19 crisis, alongside projections of medium-term fiscal challenges and pressures, adopting a more proactive approach towards expenditure management (Lindquist and Shepherd, 2023[53]). Lastly, there is ambiguity in the communication regarding the spending review, its purpose (achieving savings or reallocations), and the achieved objectives. Transparent communication and clarity about the review process generally improve the understanding and integrity of the process (Tryggvadottir, 2022[50]). A dedicated report detailing the objective, scope, targets, and comprehensive outcomes of the review would be beneficial to better track the achievements of the spending review. This point has been also made by the Canadian Fiscal Council (Parliamentary Budget Office (PBO), 2024[54]). Canada should use the current review to explore how such spending reviews can be integrated into the budgetary framework in a more systematic, recurrent, and comprehensive manner.
References
[31] Bank for International Settlements (2023), Macroprudential policies to mitigate housing market risks, https://www.bis.org/publ/cgfs69.pdf.
[21] Bank of Canada (2025), Monetary Policy Announcement, January 2025, https://www.bankofcanada.ca/2025/01/fad-press-release-2025-01-29/.
[19] Bank of Canada (2025), Monetary Policy Report, April 2025, https://www.bankofcanada.ca/publications/mpr/mpr-2025-04-16/.
[3] Bank of Canada (2025), Monetary Policy Report, January 2025, https://www.bankofcanada.ca/publications/mpr/mpr-2025-01-29/.
[23] Bank of Canada (2024), Financial Stability Report, https://www.bankofcanada.ca/2024/05/financial-stability-report-2024/.
[26] Bank of Canada (2024), Indicators of financial vulnerabilities, https://www.bankofcanada.ca/rates/indicators/indicators-of-financial-vulnerabilities/.
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