Canada's outdated capital gains policies are driving entrepreneurs and investors away. We need competitive tax reform to keep talent and investment here, building the businesses of tomorrow.

We have just 33 small businesses per 1,000 people vs 124 in the US. Fixing our capital gains system could help us close this gap with the US and create hundreds of thousands of new jobs.

Modern capital gains reform will unleash Canadian innovation, create more high-paying employment, and ensure our world-class graduates build their companies here, not elsewhere.

Goals

To ensure a prosperous, sustainable, and growing economy, Canada needs a thriving private sector that invests in new businesses. A strong environment for entrepreneurship creates jobs, drives GDP growth, and ensures economic mobility for all. In recent years however, entrepreneurship, and consequently private sector employment, has been slow despite an increasing population.

One factor driving this change is that Canada’s capital gains tax policies make it significantly less rewarding to start a business compared to other jurisdictions. To reverse this trend and reinvigorate our private sector, we must revise our outdated policies to align with global standards.

Our targets:

* Increase SMBs per 1000 people over the age of 18 from 33 to 62 to get half of the US rate of 124.

* Increase the number of early-stage financing rounds (Pre-seed, Seed, Series A, and Series B) for new businesses from 482 in 2024 to over 1000+ per year.

* Increase investments in new businesses through industry-agnostic venture capital financing to 0.5% of GDP, up from 0.35% of GDP, to get closer to the USA’s figure of 0.72% of GDP.

Background and Motivation

New business formation and growth relies on people taking huge risks with their time and money. However, today in Canada the people that take these risks – entrepreneurs, early stage employees, and investors – are rewarded less than in other countries.

As a result the country’s best talent is driven to leave and start businesses elsewhere, where they can find easier access to funding1 and keep more of the upside if they succeed.

We need to reverse this systematic issue. By rewarding investors that put their capital at risk and supporting entrepreneurs who put their livelihoods on the line to create new companies we can create a strong and resilient economy.

All companies begin as small and medium businesses (SMBs) and the formation and growth of these SMBs is essential to a country’s economic success both through driving the quality of the labour market and creating opportunities for productivity growth.

In Canada, SMBs accounted for ~64% of private sector employment and contributed to half of all net new jobs added last year2. These work opportunities support upward income mobility, lead to more capital being reinvested into local communities, and are particularly valuable for traditionally disadvantaged populations3 4 5.

In addition, SMBs represent a significant portion of the economy and have high potential for productivity improvements6. Between 2017 and 2021, SMBs contributed almost half of Canada’s GDP7. As these businesses grow and scale their operations they improve efficiency and drive productivity-led growth that can be equivalent in impact to roughly 5% of a developed nation’s GDP8 9.

Perhaps most importantly, SMBs turn into global winners. Growing these companies into sizable businesses is how a country can win an unfair share of global markets, by creating the large, export-focused corporations that contribute an outsized value to GDP and productivity growth. To ensure the next trillion dollar companies - the equivalent of Google, Microsoft, or Meta - are built in Canada, founders must be convinced to start their companies here.

So, having a healthy ecosystem of SMBs is essential to creating a strong economy, but the data shows Canada is falling behind our global peers. In the 20 years between 2003 and 2023, the total number of Canadian entrepreneurs decreased by ~100K, despite the population growing by 10 million10 11. Today, for every thousand people over the age of 18 the US has ~124 SMBs12 13. Israel, a country with less than a quarter of Canada’s population, has ~7314 15, while Canada has just ~3316.

A significant driver of this stagnation is outdated and uncompetitive capital gains policies that have low limits, exclude large categories of business, and contain many restrictions compared to global peers - especially the US. It is less valuable for investors to put money into Canadian businesses, making capital more scarce and it discourages entrepreneurs who know that in most cases they could receive more reward by building the same company elsewhere. This makes it difficult for any SMB to get started let alone scale.

Today, Canada has two capital gains policies, to try and encourage SMB creation, the Lifetime Capital Gains Exemption (LCGE) and a proposed Canadian Entrepreneur’s Incentive (CEI) announced in Budget 2024 but not yet implemented. Combined, the LCGE and CEI would allow shareholders to reduce the inclusion rate of capital gains from the current 50% down to a range of 33.3%-0% to a cap of $3.25M 17 18.

These policies simply can’t compete with the US. The USA’s Qualified Small Business Stock (QSBS) policy has a capital gains cap of $15M or ten times the original investment amount, five times higher than Canada’s LCGE and CEI limit. In addition the QSBS is active today, while Canada’s CEI cap has a phased approach only coming into full effect in 2029 if the policy is passed. Today in 2025, LCGE and CEI’s true combined cap is only $1.25M. And while QSBS shields 100% of gains up until the policy cap for individuals and corporations, Canada’s CEI would only shields 66.7% of gains for individuals.

To illustrate how restrictive this is, we could imagine a company where the business is owned between founders, early employees, and various investors (see the first example below). If this business was started in 2018 and sold 7 years later today in 2025 for $100M, these risk-takers would have to pay a combined $14.7M in taxes. However, that same business with the same structure would pay no taxes in the US.

The good news is that at larger scales of exit like $250m (see the second example below) the gap between Canada and the US decreases due to a more competitive basic capital gains inclusion rate in Canada. This means that if we match the QSBS’s capital gains limit it could actually give the Canadian policy an edge driving more investment in the country and supercharging our SMB ecosystem. However, if we leave the policy as it stands right now companies can never get started because investors and entrepreneurs are scared away.

The reason is that the QSBS rewards smaller exits - the majority of SMB outcomes - with the maximum capital gains tax value. This makes it easier for entrepreneurs, early employees, and investors to take on the risks of building a business. In fact, early-stage US investors are currently increasing their investments into new Canadian businesses, and adding in clauses that would require the Canadian b...