Fraser Forum

Capital gains tax reform may mitigate Canada’s damaging demographic trends

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Number of new start-ups per 100 incumbents, various size of firms, 2001-2012.
Number of new start-ups per 100 incumbents, various size of firms, 2001-2012.

Business startups and entrepreneurship drive productivity and economic growth. However, the rate of business startups in Canada is on the wane, falling 16.2 per cent (as a share of existing firms) since 2004.
The decline in business startups for larger firms (measured by the number of employees), was markedly higher. Between 2003 and 2012, for example, the number of business startups with between five and 20 employees declined by 41.3 per cent. While the decline in startups over the same time period for firms with 20 to 50, and 50 to 100 employees was 61.4 per cent and 68.3 per cent respectively. (See accompanying chart.)

Why is this happening?

Like all industrialized countries, Canada’s population is aging; a greater and greater share of the population is over age 65. Statistics Canada expects the portion of those over age 65 as a share of the population to increase by 74.1 per cent between 2008 and 2035.

And there’s increasing evidence of a relationship between entrepreneurship and age. Younger people are less risk-averse than older people, and more prone to question the status quo. These characteristics are fundamental to entrepreneurism.

So how can government influence entrepreneurship to mitigate these demographic effects?

Canada has the 14th highest capital gains tax rate among OECD countries, at 22.25 per cent. Currently, 11 of the 34 OECD countries do not impose a capital gains tax. There’s an opportunity to supercharge the entrepreneurial environment in Canada by reducing the capital gains tax rate, creating a rollover (as has been done in the United States), or simply eliminating the capital gains tax.

What many OECD countries have done, offers Canada—or any interested country—an example of how to strengthen incentives for entrepreneurship and the financing of entrepreneurs. By doing so, countries can improve the environments for entrepreneurship and potentially mitigate some of the damaging demographic trends.

To learn more about this issue, read our study Entrepreneurship, Demographics, and Capital Gains Tax Reform.