Policy Choices and the Decline of Entrepreneurship in Canada

Economic Note showing how hostile tax policy, well-intentioned government programs, and costly and protective regulations have discouraged entrepreneurship for decades

Appendix

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Canadian entrepreneurship in ‘sharp decline,’ warns think tank (National Post, April 23, 2026) Déclin des entreprises d’ici (Le Journal de Montréal, April 23, 2026)	Interview with Charles Lammam (The Jas Johal Show, Global News, April 24, 2026) Interview (in French) with Gabriel Giguère (Trudeau-Landry, FM93, April 24, 2026) Interview (in French) with Gabriel Giguère (Couture dans le mid, Radio X, April 27, 2026)

This Economic Note was prepared by Charles Lammam, Senior Fellow at the MEI, in collaboration with Emmanuelle B. Faubert, Economist at the MEI. The MEI’s Regulation Series aims to examine the often unintended consequences for individuals and businesses of various laws and rules, in contrast with their stated goals.

Canada’s policy conversation has lately focused predominantly on nation-building megaprojects like pipeline construction, critical minerals development, and LNG terminals. These projects matter; Canada needs to build infrastructure at scale and faster.

But while Ottawa and the provinces debate resource extraction, entrepreneurship—the heartbeat of innovation, job creation, and economic growth—is in sharp decline. Indeed, as we shall see below, entrepreneurship has been declining for decades in Canada.

While the causes are complex, recent policy choices have exacerbated the structural trend, particularly since 2018. This includes 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.

Declining Entrepreneurship

In 2000, self-employment accounted for roughly 16.1% of total employment in Canada. By 2025, that share had fallen to 12.9%, the lowest in decades. For Quebec, the story is similar: self-employment accounted for roughly 14.8% of total employment in 2000, but had fallen to 11.0% by 2025.(1)

Self-employment includes everyone from ambitious founders building scalable firms to professionals working solo gigs. What matters for economic dynamism is primarily the former: businesses with employees, growth ambitions, and the capacity to challenge incumbents.

A sharper measure thus focuses on self-employed Canadians with paid employees.(2) As a share of the working-age population (ages 15–64), this rate stood at 3.9% in both Canada and Quebec in 2000. By 2025, these rates had fallen to 2.6% and 2.1%, respectively(3) (see Figure 1).

In absolute terms, the number of self-employed Canadians with paid help peaked in 2005 at approximately 867,000 but had dropped to 716,000 by 2025, a decline of nearly 18%, despite a growing population. Over the same period, Quebec saw its self-employed with paid help fall from around 194,000 to 122,000, a decline of more than a third.

Business entry and exit rates tell the same story. In 2023, new firm creation sat at 12.3% of all active businesses, around half the 25% Canada achieved in the early 1980s.(4) Exits have also declined, pointing to an economy where creative destruction—the process by which innovative new firms challenge and replace existing ones—is not happening at robust rates.

The number of self-employed Canadians with paid help peaked in 2005 at approximately 867,000 but had dropped to 716,000 by 2025.

This matters because new businesses challenge incumbents, push adaptation, and move resources to more productive uses. Without this competitive pressure, economies stagnate.

The reasons for Canada’s entrepreneurial decline are complex. An aging population, cultural attitudes toward risk, and housing affordability all play a role.(5) The decline reflects policy frameworks built up over decades, but recent policy choices have made things worse.

Hostile Tax Policy

The decline in entrepreneurship became more pronounced after 2018, coinciding with a series of federal tax changes that raised costs and showed hostility toward entrepreneurs.

In 2016, the Trudeau government raised the top federal income tax rate from 29% to 33% for income over $200,000.(6) Combined with provincial rates, entrepreneurs in Quebec now face a marginal rate of 53.3%,(7) fifth highest among OECD countries.(8) This matters for entrepreneurship: Canadian evidence finds that increasing the top income tax rate reduces the entry of new employer businesses.(9)

In 2017, Finance Minister Bill Morneau proposed sweeping tax changes targeting private corporations, accusing entrepreneurs of exploiting “loopholes” and engaging in tax avoidance.(10) Business owners and innovators felt singled out for what amounts to standard tax planning. Although the proposals were later modified, the episode signalled that government viewed entrepreneurs with suspicion rather than seeing them as drivers of economic growth.

When a small firm crosses the $500,000 taxable income threshold, its marginal tax rate on corporate income increases dramatically.

More recently, the 2024 federal budget proposed raising the capital gains inclusion rate, again framing entrepreneurs as tax cheats. The move triggered strong pushback from the entrepreneurial community, as such taxes discourage long-term investment and entrepreneurial activity.(11) Economist Douglas Cumming estimated that raising the inclusion rate would have reduced venture capital deals by 20% and private equity investment by over 48%.(12) The government fostered prolonged uncertainty through 2024–2025, delaying implementation before Prime Minister Carney finally cancelled the measure in March 2025. By then, much damage had been done.(13)

Since 2018, the federal government has increased other costs for entrepreneurs by raising carbon and payroll taxes.(14) The effect has been to discourage entrepreneurship and divert resources that could otherwise support hiring or expansion.

Paradoxically, Canada’s tax system also discourages scaling.(15) When a small firm crosses the $500,000 taxable income threshold, its marginal tax rate on corporate income increases dramatically. In Quebec, a small firm’s business tax rate more than doubles from 12.2% to 26.5%. The gap varies across the provinces, and is most significant in Prince Edward Island where the large business tax rate is 30%, triple the small business rate of 10%.(16) Unsurprisingly, Canada has a disproportionate share of micro‑firms compared with the U.S.(17)

Crowding Out Capital and Talent

Well-intentioned government programs often crowd out private capital and distort entrepreneurial incentives.

Canadian research shows that firms financed by government‑sponsored venture capital underperform their privately backed peers in value creation (measured in likelihood and size of Initial Public Offerings and Mergers and Acquisitions) and innovation (measured in terms of patent generation).(18) Government‑backed funds not only invest in lower‑quality firms; they also displace more effective private investment.(19)

The Business Development Bank of Canada illustrates the scale of government involvement. It is the country’s largest venture capital investor with more than $6 billion in assets under management,(20) yet according to an analysis of a shelved government report by a media publication specializing in the Canadian innovation ecosystem, private investors increasingly view it as a competitor rather than a support.(21) When entrepreneurs can access subsidized government funding, private fund managers struggle to raise capital.(22)

Firms financed by government-sponsored venture capital underperform their privately backed peers in value creation and innovation.

Investissement Québec follows a similar pattern. In 2003, the “Brunet report” examined Quebec’s venture capital market and found that excessive government involvement was displacing private capital, recommending the province reduce its direct role in venture financing.(23)

Two decades later, a report from Réseau Capital found the ecosystem had reduced its reliance on public funding from around 70% to 40%, though recent years have seen this trend partially reverse.(24) The report notes funding “remains fragile and highly dependent on public and para-public financing, with the exception of a few managers who finance themselves mainly from private sources.” Over the past decade, the provincial agency has deployed $800 million in venture capital.(25)

In the first half of 2025, no exits of venture capital-backed companies were publicly disclosed in Quebec(26)—a sign that government-backed ecosystems may not be generating the returns that would attract sustained private capital. Exits, such as initial public offerings or acquisitions, are the primary mechanism for returning capital to investors. Without these events, the flow of recycled capital back into the ecosystem stalls, leaving investors with less cash to fund the next generation of high-growth firms.

When government provides subsidized capital, it disrupts price discovery and weakens the discipline that typically develops between entrepreneurs and investors. Instead of focusing on customers and scaling operations, entrepreneurs learn to navigate bureaucracy and meet grant criteria. The proliferation of overlapping programs—federal accelerators, provincial innovation funds, municipal entrepreneurship centres—compounds this dynamic, rewarding those skilled at accessing public support rather than building sustainable businesses.

Exacerbating the challenge is the crowding out of entrepreneurial talent. As the public sector in Canada and Quebec has grown in recent years relative to total employment, self-employment has fallen(27) (see Figure 2). This shift represents a reallocation of talent and ambition away from entrepreneurial activity toward government employment. Public sector jobs offer stability, benefits, and defined career progression—attributes that can attract capable individuals who might otherwise build companies.

Costly and Protective Regulations

Regulation affects entrepreneurship on two fronts: compliance costs that make operating a business more expensive, and regulatory protection of markets and incumbents that reduces competitive pressure.

On compliance costs, the scale of the burden is substantial. The Canadian Federation of Independent Business estimates the total regulatory cost for small business across all government levels at $51.5 billion in 2024, a 13.5% jump from 2020.(28) Of that total, $17.9 billion represents pure “red tape” attributable to unnecessary or duplicative compliance.

Businesses are burning through 768 million hours annually on regulatory paperwork, the equivalent of roughly 394,000 full-time jobs. For the average business owner, that means losing 32 working days a year to red tape alone. Small firms with fewer than five employees are hit hardest, paying over $10,200 per employee in annual compliance costs. These regulatory demands shape the advice entrepreneurs give aspiring business owners: only 18% recommend starting a business right now.(29)

Statistics Canada documented the impacts of a 37% rise in federal regulatory restrictions between 2006 and 2021.(30) This surge was directly associated with a 1.7-percentage-point decline in GDP growth, alongside drops in business investment, productivity, employment, and the rate of new business formation.

Small firms with fewer than five employees are hit hardest, paying over $10,200 per employee in annual compliance costs.

The second regulatory challenge involves protection of incumbents. According to one estimate, over 20% of Canadian economic activity is shielded from competition as a matter of deliberate policy choice.(31) Through foreign ownership restrictions and other mechanisms, Canadian policy limits entry and competition in many key sectors.(32) The regulatory barriers outlined above reinforce this protection, insulating incumbents while discouraging new firms from entering the market.

Professional licensing regimes fragment labour markets across provinces.(33) While there has been some progress recently, qualified professionals licensed in one province routinely face months of additional requirements before they can work in another, leaving them idle, and employers underserved.

The potential economic gains from increased competition are significant. A Competition Bureau-commissioned study analyzing 15 OECD countries over 25 years estimates that aligning Canada’s regulations in energy, transport, retail distribution, and professional services with international best practices could boost GDP by anywhere from 6.5% to 10% over the long run.(34) Meanwhile, the IMF estimates that eliminating internal trade barriers—currently equivalent to a 9.5% national tariff—could raise real GDP by roughly 7%, or $210 billion in today’s dollars.(35)

When regulations protect established players from new entrants, entrepreneurship becomes less attractive. Aspiring entrepreneurs face not just the normal challenges of building a business but artificial barriers that favour those already in the market. The result is less innovation, less competition, and less dynamism.

Conclusion

Canada possesses world‑class universities that produce exceptional talent, and our institutions offer a strong foundation for national prosperity. Yet these advantages do not automatically translate into economic success; they require the support of sound public policy. The current reality is clear: entrepreneurship is in retreat, and well‑intentioned government policy has played a direct role in this decline. Reversing course will require a fundamental shift in our policy choices.