This week, Ottawa shared the details of a new Canadian Entrepreneurs’ Incentive that will reduce the amount of tax some entrepreneurs pay when they sell their businesses.
The incentive will mitigate the effects of Ottawa’s controversial capital gains tax inclusion rate increase that was introduced this spring. That increase has frustrated many entrepreneurs and professionals, who say Canada was already not doing enough to foster entrepreneurialism and innovation.
“Message from a friend: ‘Canada has heard rumors about innovation and is determined [it] will leave no stone unturned in deterring it’,” Tobias Lütke, the CEO of Canadian e-commerce giant Shopify said on X the day the federal budget was announced.
Unfortunately, the Canadian Entrepreneurs’ Incentive is a tepid effort to support a beleaguered startup industry. It is a far cry from the kind of bold action and messaging we need to see from Ottawa.
A study released last year by the Université de Montréal and BDC, the government-backed bank for Canadian entrepreneurs, revealed troubling trends.
Canada had 100,000 fewer entrepreneurs in 2023 than in 2000 — despite having about 10 million more people. One of the factors the study identified as contributing to the decline was a complex business environment.
This is an area where the government could do more by doing less. The entrepreneurs’ incentive is but the latest example.
Once the incentive is fully in effect, there will be no fewer than four tiers of capital gains inclusion rates applicable to entrepreneurs. The first $1.25 million of gains will be subject to a complete tax exemption; the next $2 million to a one-third inclusion rate; the next $250,000 to a one-half inclusion rate; and any gains beyond that to a two-thirds inclusion rate.
On top of this, the incentive will only be available to certain entrepreneurs and founding investors, depending on the industry, transaction type and level of their business involvement.
In a press release, the industry group Canadian Federation of Independent Business made clear it is not impressed.
“It appears hundreds of thousands of small businesses will continue to be specifically excluded [from the incentive], including owners of restaurants [and] hotels,” it said. “It makes no sense to have a different tax treatment between a retail shop and a local restaurant.”
We agree. It is difficult to discern a principled approach to the government’s policy-making in this area. The end result is an added layer of rules that increase complexity, distort decision-making and encourage businesses to devote valuable resources to non-productive tasks like tax planning and corporate structuring.
And the issue of unnecessary complexity is not isolated to this measure.
Recently, Ottawa quietly shuttered its Digital Adoption Program, which was initially slated to award $4 billion to small businesses to help them upgrade their technology. The program is reported to have had low uptake because it was cumbersome and complex.
In addition, Ottawa offers a suite of programs designed to support certain types of sectors and businesses. These include the Scientific Research and Experimental Development tax incentive, a new fund to support AI and a Venture Capital Catalyst Initiative. This latter initiative aims to increase the capital available for “high-potential innovative firms, including those in the life sciences sector and for entrepreneurs from underrepresented groups, such as women and racialized communities,” the government’s website says.
Instead of trying to pick and choose winners, which governments are notoriously bad at doing, Ottawa should focus on leveling — and simplifying — the playing field for entrepreneurs and investors alike and creating incentives for them to take smart risks.
Here, the United Kingdom may provide a model to follow. Since 2012, it has offered broad-based tax incentives and loss relief provisions to encourage angel investors to support startups and small businesses. If data show these measures have spurred entrepreneurship and broader economic growth, it could be worth implementing similar measures here.
When the CEO of Canada’s most successful tech company broadcasts the view that Canada is inhospitable to entrepreneurship, Ottawa should pay attention. It suggests the current playbook is not working. A lukewarm measure like the Canadian Entrepreneurs’ Incentive is unlikely to move the needle.
What is needed is bold action. Ironically, this “action” this should be as much about doing less as it is about doing more.
