A truck with vehicles crosses the Blue Water Bridge border crossing into the United States from Sarnia, Ontario, Canada on April 3, 2025. (Photo by Geoff Robins / AFP)
Canada is quietly falling victim to “brain drain,” a trend marked by the ever-increasing exodus of well-educated young professionals to other countries, particularly the United States, a new report suggests.
Canada has a strong record of educating and training globally competitive workers and entrepreneurs, but struggles to retain them because of higher personal and business taxes as well as a lack of venture capital for startups compared to the United States, according to a new report by TD Economics titled, “Canada’s Silent Brain Drain.”
Modern brain drain is harder to measure than the more visible exodus of the 1990s because many workers now leave through temporary visas and semi-permanent work arrangements, the report says. No single data point quite captures it. Still, the report points to multiple indicators that suggest a growing loss of highly educated Canadians to the United States.
“The flows are quieter, more selective, and harder to measure—but potentially more damaging,” the report says. “Canada is not hollowing out; it is spilling out at the top.”
Research from Statistics Canada and Canadian universities shows graduates in engineering, computer science and mathematics are disproportionately likely to leave the country within the first five years after graduation. The report also says roughly half of Canadians applying for U.S. labour certification—a key step toward obtaining employment-based green cards—work in high-skilled fields such as computer science, engineering, mathematics, architecture, or technical management.
Here are the top three reasons the report identifies for why many of Canada’s brightest young people are leaving the country to work in other markets.
Canada’s ‘Missing Middle’
Canada educates world-class talent and efficiently selects skilled immigrants, but it lacks the scale and consistency necessary to encourage the establishment of larger, globally competitive businesses, the report said.
The country’s core challenge is not about attracting workers but in “anchoring” them, the authors said.
The organizational framework of businesses in Canada resembles that of the United States. Roughly 98 percent of businesses are classified as small, less than 2 percent are medium-sized enterprises, and a tiny portion are large enterprises. The difference is found in the distribution of employment.
Canada is heavily dependent on a limited number of large companies for the majority of its employment—fewer than 3,500 firms are responsible for more than 4.5 million jobs, which represents 36 percent of total employment. The United States’ share is half of Canada’s, coming in at just 18 percent.
Small and medium-sized enterprises (SMEs) in Canada account for 46 percent and 17 percent of employment shares, respectively, compared to 57 percent and 25 percent in the United States.
“This aligns with longstanding concerns about Canada’s SMEs being extremely small because they struggle to grow, either due to a lack of capital, compliance and regulatory challenges that grow with firm size, or, in the case of some small businesses, by choice,” the authors said. “Hyperscalers and high-growth 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.”
Income and Personal Taxes
Evidence suggests the average pre-tax income for technology professionals in the United States is 46 percent greater than that of their Canadian peers, the report said, noting that figure does not take into account the significant drop in the value of the Canadian dollar over the past year.
American technology companies are also more inclined to distribute a larger segment of total compensation in equity, meaning the potential benefits offered by U.S. firms are significantly greater than those offered in Canada, the report said.
“That compensation gap, along with the growth potential on offer in the U.S., is and will be an ongoing challenge to Canada in retaining top talent,” the authors wrote, noting that personal tax rates are also a factor.
“Canada’s personal tax system does itself no favours from a competitiveness perspective,” they added. “Not only do Canada’s top marginal tax rates tend to be higher than even the highest tax U.S. states, income thresholds are also far lower.”
The top marginal tax rate in Ontario sits at 53.53 percent, followed by 53.5 percent in British Columbia, and 53.3 percent in Quebec.
Even in the most heavily taxed areas of New York City and California, the highest marginal tax rates are lower, at 51.78 percent and 50.3 percent, respectively. In “high-growth” Florida and Texas, there are no state income taxes, which means individuals are only subject to the highest federal income tax rate of 37 percent.
California and New York have both lost out on business investment and workers due to their higher tax rates as well. Several high-profile corporations have relocated their headquarters to Texas in recent years where they can benefit from the state’s more lenient regulatory environment and its capacity to leverage an influx of skilled labour. Notable examples include Oracle, Tesla, Dell, Chevron, and X/SpaceX.
Meanwhile, California has experienced a net population decline of nearly 300,000 since 2020 due to relocation to Texas and Florida. New York has also lost 217,000 to these two states.
Even high-tax states like California and New York have lower personal tax thresholds than Canada, however, the report noted.
Canada’s top marginal tax rate applies at the highest federal income level of $258,482 for the tax year 2026. In California, the 2025 peak tax rate was not activated until an income of $1 million was reached, whereas in New York City, the maximum rate was only applicable once income hit $25 million.
“This is where Canada’s taxes become highly demotivating, because high marginal rates in high-tax U.S. states tend to hit at commensurately high levels of income,” the authors wrote.
“Were we to compare Canada’s and the U.S.’ tax rates at Ontario’s top income threshold, the marginal tax rate in California and New York City fall to about 45.”
Even taking average expenditures for high health care premiums in the United States into account, the gap in the after-tax take is “too large to ignore, particularly over an entire career for recent graduates,” they said.
Business Taxes
The complex corporate tax framework in Canada applies higher statutory rates in comparison to the United States, the report said.
The United States has a flat 21 percent federal corporate tax rate but the overall U.S. average is approximately 25.6 percent when combined with state-level corporate taxes. In comparison, Canada’s general combined federal and provincial rate averages roughly 26.5 percent, giving the United States a lower headline rate advantage.
However, Canada’s regime permits a substantial deferral advantage through the Small Business Deduction and tax-sheltered surplus retention, yielding tax deferrals of up to 43 percent. This means business owners who maintain after-tax income within their corporation can have significantly more capital at their disposal compared to if they received the income personally.
“This complexity incentivizes tax-driven financial engineering rather than productive investment, allowing sophisticated owners to navigate the labyrinthine corporate tax system through strategic tax planning,” the authors said.
“The key advantage of these tax planning techniques is not usually permanent tax avoidance, but tax deferral—keeping funds inside the corporation for years or decades, allowing compounding at lower effective tax rates.”
Aggressive tax planning directly conflicts with the principle of horizontal equity because identical incomes by employees should logically face the same tax burden, the report noted. However, these strategies help to counter the high marginal rates that cause entrepreneurial brain drain to more the United States and other more competitive markets.
“Still, the fact that tax planning strategies are a thriving business is a strong indicator that the tax system simply is not fit-for-purpose,” the authors wrote. “Realigning the incentive structure to better reward labour outcomes could have a tangible impact on many of the issues discussed above.”
Conclusions
Canada risks continuing to function as a “feeder economy” unless these issues are addressed, the authors argue.
The tax system by itself cannot completely address the issue comprehensively. Instead, it exacerbates these pressures by enforcing significantly high marginal tax rates at comparatively low income levels, which heightens behavioural reactions among high earners and promotes either aggressive tax strategies or relocation to other countries.
“The core policy implication is that we must focus on anchoring talent in Canada which excels at producing it,” the report said. “That requires improving the domestic returns to skill through stronger innovation performance, deeper capital markets, and firms capable of scaling globally.” It also suggested realigning the personal tax system, such as by reducing distortions at the top, to “meaningfully improve incentives while simplifying compliance.”