The IMF has recommended that the Canadian Government undertake a "holistic" review of the tax system, to identify areas for improving efficiency while maintaining the country's competitiveness.
The recommendation was made in the IMF's latest Article IV review of the Canadian economy. According to the report, Canada's tax system "has become increasingly complex with a myriad of tax credits, deductions, and exemptions."
The IMF said that the last comprehensive review was carried out in the mid-1980s. It argued that any new review should examine all aspects of the tax system, including taxes on earnings, savings, consumption, businesses, and housing. It should cover not only federal, but also provincial taxes.
The IMF said that the review should "help assess whether there is scope for reducing distortions, minimizing administrative and compliance costs, and enhancing equity, while generating sufficient revenues to cover government spending."
According to the IMF, "Comprehensive reform of the tax system is needed to support the structural transformation of the economy, demographic shifts, adoption of new technologies, climate change, and provincial fiscal sustainability."
The report also examined the likely risks to the Canadian economy.
The IMF noted that while Canada has a competitive tax regime, a sharp reduction in the US corporate tax rate may diminish Canada's attractiveness as an investment destination, and discourage foreign direct investment. The IMF also pointed out that trade accounts for over 60 percent of Canada's GDP, and that a shift toward protectionism would harm Canadian exports and business investment.
The IMF recommended that Canada "should have on stand-by stimulus measures," such as temporary cuts to personal income taxes, and infrastructure and social housing projects. This would help ensure that fiscal policy is able to "react quickly to unanticipated shocks."