Canada faces challenges in maintaining its status as one of the most business-friendly countries in the world, according to a new E research paper sponsored by Accenture.

According to the research findings, which will be presented at The Economist’s Business Roundtable with the Government of Canada in Ottawa, the nation’s business environment will improve only slightly in the years ahead, providing other countries with the opportunity to catch up.

Only two years ago Canada’s business environment was rated the best in the world; now it is in third place, behind Denmark and Singapore, but ahead of the fifth-place United States. Canada’s ranking is unlikely to change much over the next five years, according to the research, as competing countries are expected to undertake only modest reforms.

“Although the Economist Intelligence Unit continues to think highly of Canada’s business environment, there are some obvious areas in need of reform. Unfortunately, the issues come down to a large degree to the very nature of Canada’s federal system”, said Matthew Sherwood, senior economist.

The research report finds that Canada faces challenges in three key areas: political effectiveness (the ability to implement policy), taxation and the labour market.

Canada slipped to 15th among the 60 countries surveyed in terms of political effectiveness – better only than Japan and Italy among the G7 nations. Noteworthy is the finding that Canada is hampered by barriers to internal trade between the provinces. At the same time, other national governments, especially in smaller European countries, are expected to become more efficient.

Companies in Canada face a significant tax burden, shouldering a higher share of government tax revenue than in most other countries. They also pay the highest marginal effective tax rate on capital in the developed world. Hampering reform of the tax system is the complex fiscal relationship between the federal government and the provinces.

The labour environment is expected to deteriorate over the next five years, owing to short-term shortages of highly educated and skilled labour. Canada also scores less well than other developed countries in terms of labour laws, flexibility and costs.

The report includes interviews with Canadian corporate leaders in which they pinpoint the most pressing problems with regard to political, tax and labour issues.

“One of the opportunities for business in Canada is to nurture more competitive markets within our country and to help, promote and applaud the development of high-performing companies with head offices within Canada,” Morris said.