The federal government has a number of programs to support entrepreneurship in Canada, but a new report shows the rate of business start-ups has been falling and proposes a major policy change to fix the problem.
It says benefits of the tax are slim for government, but come at a “considerable economic cost” for entrepreneurs.
The tax reduces the return both entrepreneurs and investors receive from the sale of a business, “which is the return to them for risk-taking, innovation, hard work, and low early stage compensation,” the report states.
That discourages the creation of new ventures, which in turn hampers economic growth across Canada.
The report says Canada has an opportunity to “supercharge its entrepreneurial environment” by reducing the capital gains tax rate, creating a rollover similar to what happens in the U.S., or dropping the tax entirely.
It notes that 11 out of 34 OECD countries don’t have a capital gains tax. What’s more, Canada has the 14th highest capital gains tax rate in the world.
The authors crunched some numbers showing the rate of business start-ups fell by 16.2 per cent in 2012 compared to its peak in 2004.
Canada’s aging population
They also cite a correlation with the aging population, showing that the number of Canadians over age 65 has risen 15 per cent between 2004 and 2015.
The reality is, older people are less likely to take on many of the risks required to start a business from scratch, not to mention the intense workload. Even many older entrepreneurs that started a business in their younger years are also more likely to invest in another startup, rather than launch one of their own.
“A great deal has been written about the positive link between entrepreneurship and economic growth. What’s being ignored, however, is the increasing evidence of a relationship between entrepreneurship and age,” states Fraser Institute vice president Jason Clemens, co-author of the report.
The report also cites Statistics Canada forecasts showing the proportion of the population that will be over age 65 is expected to increase by 74 per cent between 2008 and 2035.
“If governments wish to encourage entrepreneurism, reforming our current capital gains tax regime would be a good first step,” the Fraser Institute argues.
The federal government made a handful of recent announcements supporting small business growth, ahead of the next election.
For example, earlier this year, the government extended its Futurpreneur Canada program that helps entrepreneurs launch a business, while also broadening its Canada Small Business Financing Program that offer loans.
Two years ago, the government introduced the Start-Up Visa program to try to lure more foreign entrepreneurs to live, work and hire workers in Canada.
According to federal government statistics, small businesses represent 99 per cent of all businesses in Canada and account for about 50 per cent of jobs in the private sector.