Marginal Tax Rates of Canadian Public Firms and the Applicability of Marginal Tax Rates in Corporate Decisions*

ABSTRACT While several US studies demonstrate the importance of using marginal tax rates (MTRs) to study corporate decisions and tax incentives, research using MTR in the Canadian setting is limited. The MTR literature has made several improvements on the estimation process using US firms, but these advances have not been made available for Canadian firms. In this study, we first incorporate the improved MTR simulation procedure based on the US literature for 19,551 firm‐years of publicly listed nonfinancial Canadian firms from 2006 to 2021. We then explicitly test the relation between our simulated MTR and two corporate decisions: debt policy and investment choice. We find that only our simulated MTR shows a positive and statistically significant relation with debt, while other tax rate proxies, including the trichotomous measures, fail to show this theorized relation. We find that both MTR and statutory tax rate show a significantly negative relation with investment, and the negative relation is mitigated by accelerated tax depreciation policies.