Entrepreneurship in Canada is on the decline and has been so for decades.
In a recently released report, the Montreal Economic Institute (MEI) notes that, despite the fact that Prime Minister Mark Carney seems determined to focus on promoting major new nation-building economic projects, federal policymakers desperately need to focus on how to revive entrepreneurship in Canada, which has been suffering under the weight of poor choices out of Ottawa and provincial capitals.
The MEI report points to tax policies that discourage entrepreneurship, government programs and employment that crowd out private capital and entrepreneurial talent, and regulations that increase costs and protect incumbents from competition, all of which have worsened in particular since 2018.
Back in 2000, self-employment accounted for roughly 16.1 per cent of total employment in Canada, a number that has dropped to 12.9 per cent, which is the lowest it has been in decades. The importance of self-employment is that it promotes economic dynamism and leads to businesses with employees, growth ambitions, and the capacity to challenge incumbents. Without the competitive economic pressure that new businesses create, economies stagnate.
Why is entrepreneurship struggling so much in Canada of late?
One reason has to do with taxation policy. For example, the Trudeau government in 2016 increased the top income tax rate from 29 per cent to 33 per cent for income earned over $200,000. In many provinces, that means top income-earners are now paying more than 50 per cent of their overall income in taxes. Why start a business, or stay in Canada, if more than half of your income has to be handed over to the government?
The Trudeau government also proposed increases to the capital gains tax, which economists estimated could decrease private equity investment by nearly half. The implementation of the tax hike was delayed and ultimately cancelled by the Carney government, but much of the damage was still done due to years of taxation uncertainty.
Canada’s tax system also discourages scaling, because, in most provinces, when a small firm crosses the $500,000 taxable income threshold, its marginal tax rate on corporate income increases dramatically. For example, in Prince Edward Island, the large business tax rate is three times as much as the small business tax rate.
Then there’s the issue of crowding out investment.
Regulation impacts entrepreneurship on two fronts: compliance costs, which make operating a business more expensive, and regulatory protection of markets and incumbents that reduces competitive pressure.
The Canadian Federation of Independent Business (CFIB), for example, estimates the total regulatory cost for small businesses across all levels of government was $51.5 billion in 2024, a 13.5 per cent jump from four years prior. Of that total, nearly $18 billion represents duplicative red tape that could easily be scrapped. The average business owner loses 32 working days a year to red tape alone. This has led to an environment where only 18 per cent of business owners recommend starting a business right now.
The other major regulatory challenge has to do with the protection of incumbent businesses. One huge issue is the restriction on foreign ownership in Canada, as well as other mechanisms, which limits competition in many key sectors. Professional licensing regimes also fragment labour markets across the provinces, with Canada presently being very far from one national regulatory and labour environment.
The potential economic gains from increased competition are profound. A recent study shows that aligning Canada’s regulations in energy, transport, retail distribution, and professional services with international best practices could boost GDP by up to 10 per cent. Similarly, eliminating internal trade barriers could, according to the IMF, raise real GDP by about seven per cent. Canada’s governments are leaving a lot on the table by refusing to adopt sensible policies that work abroad.
Canada has a lot of potential, but government policy is holding the country’s entrepreneurial possibilities back. Instead of thriving, entrepreneurship in Canada is in decline. At a time in which Canada’s economy is facing profound challenges, policymakers should be laser focused on turning this situation around. That starts with better taxation and regulatory policy, as well as tearing down barriers to investment from abroad.
Jay Goldberg is the Canadian Affairs Manager at the Consumer Choice Center. He previously served as the Ontario Director at the Canadian Taxpayers Federation and a policy fellow at the Munk School of Public Policy and Global Affairs. Jay holds a Ph.D. in Political Science from the University of Toronto.
