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Canada needs a small-business investment strategy that targets tax and equity incentives at firms that actually form the economy’s backbone. Innovation, Science and Economic Development Canada defines a small business as a company with one to 99 paid employees, and there were roughly 1.1 million employer businesses in Canada at the end of 2024; small firms employed 5.8 million people. As first reported by The Globe and Mail, Tim Cestnick argued the federal government’s recent Productivity Mega Deduction helps capital buyers but leaves many service-sector firms and early-stage ventures unrewarded.
Key takeaways
- There were about 1.1 million employer businesses in Canada at the end of 2024, and 98.2 per cent of them were small businesses.
- Small firms employed 5.8 million Canadians and accounted for 33.2 per cent of private-sector GDP in 2022.
- The Productivity Mega Deduction allows write-off of about 65 per cent of capital assets, up from roughly 15 per cent, but small-corporation tax rates run from 9 per cent to 12 per cent.
- Between 2017 and 2021 an average 18,480 small businesses were created annually in the goods sector and 62,550 in services-producing industries.
Table of contents
- Key takeaways
- Why small firms should be central to investment policy
- Why the Productivity Mega Deduction misses many smaller firms
- Equity, exits and keeping head offices in Canada
- Design principles for a targeted small-business package
- What could move this either way
- What to be careful about
- Frequently asked questions
Why small firms should be central to investment policy
Small businesses are not an afterthought; they are the bulk of Canadian employer firms and a major source of jobs. Innovation, Science and Economic Development Canada counts a small business as a firm with one to 99 paid employees, and small firms made up 98.2 per cent of the roughly 1.1 million employer businesses in Canada at the end of 2024. In employment terms, those companies hired 5.8 million people, and in output terms small firms accounted for 33.2 per cent of private-sector GDP in 2022. That scale means broad-based policy moves—tax credits, equity incentives and updated thresholds—move decisions about hiring, investment and head-office location for thousands of owners.
Why the Productivity Mega Deduction misses many smaller firms
The Productivity Mega Deduction (PMD) announced at the Canada Investment Summit increases the immediate write-off on many capital purchases and thus favours capital-heavy businesses. The Productivity Mega Deduction allows write-off of about 65 per cent of capital assets, up from roughly 15 per cent, and that jump benefits firms that buy machinery, equipment or structures. But a deduction’s value is scaled by the taxpayer’s rate: small Canadian-controlled private corporations pay between 9 per cent and 12 per cent, so the deduction reduces tax far less for them than for larger companies paying higher rates. Service-sector start-ups, which represent the bulk of new small businesses, gain little from a capital-focused deduction.
Equity, exits and keeping head offices in Canada
Tax measures matter for whether entrepreneurs and investors back small firms and whether founders sell to Canadian buyers. The lifetime capital-gains exemption is $1.275-million for qualifying small-business shares, a level the piece highlights against the US exclusion of up to US$15-million on certain qualifying small-business stock. That gap creates an incentive for founders and investors to consider relocation or foreign structuring. The article proposes a 30 per cent tax credit for arm’s-length investors who buy newly issued shares and hold them for five years, modelled on Britain’s Enterprise Investment Scheme, and enhanced relief when owners sell to Canadian buyers or employees to keep head offices here.
Design principles for a targeted small-business package
A practical package combines measures that help low-margin service firms, reward private risk capital, and remove relocation incentives. That means raising and indexing the first $500,000 small-business income threshold so the small-business rate covers a larger slice of growing firms; offering a time-limited tax holiday or staged rate for companies that move head office and operations to Canada; and a targeted equity credit to attract arm’s-length investors to new share issues. One concrete suggestion in the piece is a tax credit of 30 per cent for arm's-length investors who buy newly issued shares and hold them for five years, which would make backing early-stage Canadian ventures more attractive without distorting capital allowances for capital-intensive incumbents.
| Measure | Target | Current number | Proposal in the piece |
|---|---|---|---|
| Small-business income threshold | Eligibility for small-business rate | $500,000 | Raise and index the $500,000 threshold |
| Capital allowances | Immediate write-off | About 65% under PMD (up from roughly 15%) | Keep PMD but add non-capital credits for services |
| Lifetime capital-gains exemption | Exemption on eligible shares | $1.275-million | Raise exemption meaningfully for Canadian-headquartered firms |
| Investor incentive | Encourage equity for small firms | No equivalent federal credit named | 30% tax credit for arm's-length new-share investors who hold 5 years |
What could move this either way
The case for
- A targeted credit for new equity would lower the practical cost of backing scaling small firms and could increase the supply of patient capital for service-sector startups.
- Raising and indexing the $500,000 small-business threshold would let more growing firms keep the lower rate, supporting domestic head-office retention and incremental hiring.
The case against
- Generous gains exemptions or credits risk revenue loss that would have to be offset elsewhere or increase deficits unless tightly designed and time-limited.
- A package that privileges equity could miss low-margin service businesses unless paired with measures that do not rely on capital purchases to deliver value.
What to be careful about
- A bigger capital-gains exemption for qualifying shares could prompt tax-planning and relocation if eligibility rules are not strictly tied to Canadian headquarters and substance.
- A 30 per cent investor credit would need anti-abuse rules; without them the credit may subsidize investments that would have occurred anyway.
- Indexing the $500,000 threshold raises long-term fiscal cost and requires careful phasing to prevent sudden revenue shortfalls.
The bottom line
Canada’s growth story cannot rest on a handful of large projects alone. The figures in the piece underline that small businesses—about 1.1 million employer firms employing 5.8 million people—move jobs and output across the country. A set of targeted measures—raising and indexing the $500,000 threshold, a carefully designed investor credit, and sale-time incentives to keep head offices here—would address gaps the Productivity Mega Deduction leaves open. Any package needs precise drafting to limit revenue loss and abuse, but policymakers who ignore equity and exit rules risk seeing founders and capital flow away rather than building domestic capacity.
What to watch
- Watch for the federal budget measures that could implement or amend the Productivity Mega Deduction; no date has been set.
- Watch for any new legislative text or technical notes that set the parameters for an investor tax credit; no date has been set.
- Watch for government announcements on indexing the $500,000 small-business threshold or on enhanced capital-gains relief for Canadian buyers; no date has been set.
Frequently asked questions
What counts as a small business in Canada?
Innovation, Science and Economic Development Canada defines a small business as having one to 99 paid employees; that definition appears in the cited analysis and underpins the 98.2 per cent share of employer businesses figure.
How does the Productivity Mega Deduction affect small firms?
The Productivity Mega Deduction raises immediate write-offs to about 65 per cent of capital assets from roughly 15 per cent, but since small corporations pay between 9 per cent and 12 per cent tax the deduction delivers smaller tax savings to them than to higher-rate large firms.
Why change the lifetime capital-gains exemption?
The current lifetime capital-gains exemption is $1.275-million for qualifying small-business shares; the piece argues raising that amount for Canadian-headquartered firms would reduce incentives to relocate and to sell to foreign buyers.
Related reading
This article is information, not financial advice. Anyone acting on it should do their own checks.
