A Case for Investment in Canada

Last week, Canada held its inaugural Investment Summit in Toronto, led by Prime Minister Mark Carney. The gathering included Canadian business leaders, pension funds, and some of the largest investment managers in the world.

But perhaps more interesting was who else was in the room.

Former Prime Ministers Stephen Harper and Jean Chrétien both participated in the conference. Just days earlier, Conservative Leader Pierre Poilievre was in New York meeting with business and investment leaders and appearing on U.S. financial networks to promote Canada and closer economic ties with the United States. His trip was given the blessing of the Prime Minister’s Office.

Despite significant political differences between the parties, there’s does seem to be common ground on one issue: Canada needs more investment.

And that’s important.

Canada has struggled with weak productivity and relatively poor levels of business investment for years. However, Canada has incredible advantages: enormous natural resources, an educated workforce, a sophisticated financial system, and major institutional investors. The problem hasn’t necessarily been what Canada has. The problem has been our ability to turn those advantages into actual investment and economic growth, especially considering our relatively stable geo-political environment.

A $1 Trillion Goal

The government’s goal? Attract more than $1 trillion of investment into Canada over the next five years, targeting areas such as energy, critical minerals, infrastructure, artificial intelligence, defence, and transportation.

The summit included investment managers from nearly 30 countries representing $100+ trillion in assets. Approximately $500 billion in investment and financing commitments were associated with the conference, including almost $100 billion from Canadian pension funds, insurers, and other institutional investors.

Those are obviously very large numbers.

However, the $500 billion should not be interpreted as $500 billion of projects ready to break ground. Some represent financing capacity and future investment commitments. Nevertheless, the amount of capital represented at the conference suggests strong interest in investing in Canada.

Making Canada More Competitive

One of the more interesting announcements received considerably less media attention.

The government introduced the Productivity Mega Deduction, which significantly changes how business investment is taxed. Companies will be able to immediately deduct a much broader range of capital investments, including machinery and equipment, technology, research and development, mining properties, pipelines, fibre-optic networks, railways and roads.

Currently, approximately 15% of investment assets qualify for accelerated tax treatment. That figure is projected to more than 65%, while immediate expensing will become permanent.

Perhaps the most interesting number is the estimated impact on Canada’s tax competitiveness. The government expects the marginal effective tax rate on new business investment to decline from approximately 13% to 6.4%.

To put simply, the goal is clear: make it less expensive for companies to invest in Canada than anywhere else in North America.

From Consumption to Investment

This represents a potentially important change in direction.

A meaningful portion of Canadian economic growth in recent years has come from housing, population growth and consumption. Those things aren’t inherently problematic, but they haven’t delivered enough improvement to Canada’s longer-term productivity.

Investment can change that.

Building electricity grids, mines, pipelines, ports, data centres, transportation infrastructure, and manufacturing facilities creates productive assets that can contribute to the economy for decades.

Still, taxes represent only part of the challenge.

Canada has earned a reputation for taking far too long to approve and construct major projects. The government’s new objective for qualifying projects is straightforward:

One project. One review. One year.

From the perspective of a portfolio manager, there are a few sectors that could benefit, if even a portion of this plan moves forward successfully: Energy and pipelines, mining and critical minerals, power generation, and electricity infrastructure companies would be among the more obvious beneficiaries. Engineering and construction companies will be needed to design and build these projects, while transportation, equipment suppliers, and financial institutions could benefit from the increased capital spending.

The opportunity isn’t simply in the resources themselves, but also in the businesses required to build the infrastructure around them.

The Hard Part Starts Now

Announcing hundreds of billions of dollars of potential investment is one thing. Getting projects approved, financed, and built presents an entirely different challenge.

Canada will require improved coordination between the federal government and the provinces, particularly for large energy, mining and infrastructure projects that span multiple jurisdictions. If “one project, one review, one year” becomes the same multi-year approval process we’ve experienced in the past, enthusiasm could disappear pretty quickly.

There are other challenges. Indigenous consultation and economic participation will remain essential. Canada will need enough skilled labour to build these projects, and undertaking this much construction at once could increase costs. Interest rates and commodity prices also play a role. At the end of the day, private investors still need projects to generate an adequate return.

 Investors also need confidence that the rules won’t materially change halfway through a project. A mine, pipeline or power facility can work for decades, so predictability around taxation, regulation and permitting is vital.

 This is where the political cooperation surrounding the conference may prove valuable. Harper and Chrétien collaborating with the current government, while Poilievre promoting Canada to U.S. investors, doesn’t suggest everyone suddenly agrees on economic policy because they plainly don’t.

 But there does appear to be broader agreement that Canada must become a more attractive destination to invest and build.

Why This Matters

Canada already has much of what the world increasingly requires: oil and natural gas, uranium, copper and other critical minerals, abundant electricity, an educated workforce and access to global markets.

 The real question has always been whether we can take advantage of it.

 If Canada can combine those resources with lower taxes on new investment, faster project approvals, and a greater willingness to build infrastructure, it could help improve business investment and productivity over time. Higher productivity, in turn, is among the key drivers of higher wages and improving standards of living.

 There are certainly reasons to remain skeptical. Canada has announced ambitious economic initiatives before, and ultimately, we must see projects move from announcements to construction.

 However, reasons to be encourages also exist.

 The investment commitments are meaningful. The changes to business taxation appear significant. And perhaps most importantly, unusual agreement across business, institutional and political circles that improving Canada’s competitiveness should be a priority.

Bottom Line

Canada doesn’t necessarily need to convince the world that we have valuable resources or operate attractive businesses.

We need to convince investors that Canada is a smart place to put their money to work.

Last week’s conference was a good start. Now we must build on it.

Hill Medeiros Jones Wealth Management Group

RBC Dominion Securities Inc.

519-337-6033

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