A Steep Exit Tax Won’t Solve Canada’s Brain Drain

For some critics of American immigration policies, Canada’s system, which focuses on admitting educated, experienced workers who can support themselves and bolster the national economy, should be a model for U.S. reforms. About six in ten new residents whom Canada admits are classified as members of the “economic class” of immigrants, granted entry based on their education, work experience, and ability to speak one of the country’s official languages. While America’s legal immigration regime is heavily weighted toward family unification, those admitted to Canada based on familial ties make up less than one-quarter of migrants.

Yet despite this attention to attracting highly educated professionals, Canada is also suffering from a deep “brain drain.” The country faces “a disproportionate loss of high-earning, highly educated Canadians, particularly to the United States—the entrepreneurs, scientists, engineers, and financiers whose economic contributions far exceed their numbers,” according to a recent report. That drain includes both native-born Canadians and, especially, recent immigrants. Summarizing another report provocatively titled “The Leaky Bucket,” the Institute for Canadian Citizenship said, “Canada’s immigration system is doing a good job of attracting talent, but not keeping it.” Among the causes of this drain: high taxes, regulations that stymie entrepreneurs, and wage growth that has fallen far behind that of the U.S.

Now Canadians are debating whether a steep “exit” tax on those who want to leave, combined with a sharp reduction in special visas that allow Canadians to migrate to the U.S., are answers to their problems. Ironically, one of their most successful expatriates, former Google Chief Financial Officer Patrick Pichette, who left Canada for the U.S. in 2008 and now resides in London, sparked the debate. At a Liberal Party convention in Montreal earlier this year, he proposed that those educated in Canadian institutions should pay a whopping half-million-dollar “exit penalty” to leave for the U.S. He also argued that Canada should shut down a visa system created through the North American Free Trade Agreement that allows educated Canadians and Mexicans to establish residence in the U.S. with relative ease—a program he took advantage of after getting an offer from Microsoft. Of those leaving, Pichette said, “Keep them in Canada, or make them pay their half a million so that if they leave, I’m OK with that.”

There’s no arguing with the problem Pichette outlines. Outmigration from Canada has reached an all-time high. It’s not just the number of emigrants, moreover, but who they are. The Bank of Canada found that 40 percent of Canadians whose income would rank them in the top 1 percent of the country’s earners have departed for the U.S. More than a third of those leaving, Pichette suggested in his speech, are educated Canadian citizens using the NAFTA-expedited visa program. Shutting that down, he said, would “save” the country some $5 billion to $10 billion in education expenses that he said are lost when they migrate to America. Or, as an alternative, he argued for taxing them $500,000 on exit to recoup that investment.

Native-born Canadians exiting represent only part of the problem. Canada is also losing the skilled foreign arrivals who have long been considered the gems of its immigration system. The more credentialed they are, the more likely they’ll flee. Some 34 percent of those with doctorate degrees who’ve entered the country eventually leave—a rate twice as high as those without bachelor’s degrees. Those with master’s degrees or at least some graduate study are nearly as likely to go. Some of these immigrants barely settle in Canada before they head for the door. About 10 percent with doctorates or master’s degrees are gone within five years of arriving.

Research suggests the country’s emigration problem arises from Canada’s heavy tax and regulatory regimes, which stifle innovation and economic growth. For the past 20 years, per capita GDP in Canada has averaged well below 1 percent a year. Wages have stagnated, even for the talented. One study estimates that pre-tax median wages for technology workers in Canada are 46 percent lower than in the United States. Meanwhile, personal income taxes on what Canadians do earn can be steep. In Ontario and Quebec, top tax rates match those of California and New York, but Canada’s highest rates kick in at much lower levels of income. Moreover, the gains in both workers and investment by low-tax American states like Texas and Florida, to which many companies have migrated, have amplified the tax disadvantages of living in Canada. Canadians hate the notion of being “America’s 51st state,” but the flight from Canada resembles the outmigration of talent and capital from high-tax blue states to business-friendly red ones.

Critics also attribute the nation’s steep and complex business taxes, combined with onerous regulations, for suppressing innovation. Despite Canada’s strong reputation for research and development, innovative start-ups have trouble scaling up in Canada to match the kind of blockbuster growth of tech companies one sees in the United States. That’s one reason large companies account for a significantly smaller share of jobs in Canada. “Hyperscalers and high-growth small and medium-sized enterprises (SMEs) are at the centre of more successful countries’ innovation and productivity agendas, notably the U.S., and without progress on that front, Canada risks losing much of its most sought-after talent, hobbling our own innovation economy,” a recent TD Bank report noted.

Canada is already one of few countries with an exit, or departure, tax that applies to those who want to change their permanent residency. It is a levy on the capital gains of assets accumulated while in the nation, including a tax on the unrealized capital gains of assets like stocks. Pichette’s proposal involves extending it and making it even more burdensome. Advocates of these levies consider them an “adhesive residency” because they cling to individuals’ wealth even as they leave a tax jurisdiction. But critics suggest they may prompt highly educated individuals to leave before they accumulate too many assets. That may be one reason so many high-talent immigrants leave the country within five years. “Proposals such as Pichette’s don’t solve the talent and capital exodus; they concede it,” a former Chair of the Canadian Tax Foundation said.

Even as Canada has debated Pichette’s proposals, controversy over its current exit tax has exploded thanks to social-media posts by Concordia University marketing professor Gad Saad. Saad announced that he decided to emigrate due to rising anti-Semitism in Canada but was “numb” and “speechless” after discovering the exorbitant price he would have to pay to go, including on the royalties he received from several best-selling books. He posted on X:

I’ve worked night and day for decades; nearly all of my money was generated outside of Canada, yet the provincial and federal governments felt that they are owed more than 55% of my earnings even though my taxes on my professorial salary is already more than what most Canadians pay in taxes. It is a criminal exercise bereft of fairness or morality.

Saad’s complaints have divided the country, with some critics pointing out he’s unwilling to pay his “fair share” to a country that welcomed him as a refugee from Lebanon some five decades ago. Others, however, argue that exit taxes are a form of “indenture.” That issue is especially pertinent given that Saad is fleeing Canada because of anti-Semitism that he attributes to the government’s refugee policy, which has accepted immigrants from countries rife with hatred of Jews and Israel.

As an economic issue, perhaps the most significant observation is that this kind of taxation is exactly what a country with a “leaky barrel” cannot afford. “The policy argument is easy enough to understand. Canada wants to tax gains built up while someone lived here,” former Canadian MP Ryan Williams said. “But the bigger issue is what this says about the country. When successful people increasingly want to leave over taxes, safety and a loss of confidence in the future, the answer is not to shrug and say good riddance,” former Canadian MP Ryan Williams observed.

To some in Canada, like Pichette, the answer apparently is to tax them even more.