A prominent Canadian tax adviser is calling on the federal government to build a dedicated investment strategy for small businesses, arguing that recent measures aimed at attracting major corporate investment do little for the vast majority of the country’s employers.
The call comes after Prime Minister Mark Carney unveiled the Productivity Mega Deduction at the Canada Investment Summit, a measure that allows businesses to immediately write off the full cost of about 65 per cent of capital assets, up from roughly 15 per cent previously. Tim Cestnick, an author and co-founder and CEO of Our Family Office Inc., wrote in an op-ed that while the deduction is a positive step, it delivers far less value to small corporations, which pay a small-business tax rate of between 9 per cent and 12 per cent depending on the province or territory, than to larger companies taxed at higher rates.
Small Business’s Outsized Role
According to figures cited from Innovation, Science and Economic Development Canada, small businesses — defined as those with between one and 99 paid employees — made up 98.2 per cent of Canada’s roughly 1.1 million employer businesses at the end of 2024. They employed 5.8 million people that year, representing 46.6 per cent of the private-sector work force. When medium-sized businesses, those with 100 to 499 employees, are included, that share rises to 63.6 per cent.
Small businesses also generated 33.2 per cent of private-sector GDP in 2022, with small and medium-sized enterprises combined accounting for nearly half of that output, the figures show.
Cestnick noted that the Productivity Mega Deduction is likely to have limited impact on service-based small businesses, which make up the bulk of new small business creation in Canada. Between 2017 and 2021, an average of 18,480 small businesses were created annually in the goods-producing sector, compared with 62,550 in the services-producing sector, according to the figures cited. Because the deduction applies to capital assets, it offers little benefit to service-oriented firms that are not capital-intensive, and it does nothing to help entrepreneurs raise equity or attract outside investors.
Small Business's Share of the Canadian Economy
Calls for Targeted Tax Incentives
Cestnick argued that government support should not be focused solely on large-scale projects such as pipelines, mines and airports, since most small businesses would see little or no indirect benefit from them. He proposed several tax measures he said could better support small enterprises, including deferring capital-gains tax on proceeds reinvested in Canadian small businesses, a proposal similar to one floated by the Conservatives during the last federal election campaign.
Other ideas he raised include a tax credit for arm’s-length investors who buy newly issued shares in small Canadian companies and hold them for five years, modelled on the United Kingdom’s long-running Enterprise Investment Scheme, and raising Canada’s lifetime capital-gains exemption, currently set at $1.275-million, to better compete with the United States, where qualifying small-business stock can exclude up to US$15-million in capital gains.
Cestnick also called for an update to the small-business income threshold eligible for the lower tax rate, which has remained at $500,000 since 2009, and suggested indexing it to inflation for companies that keep their head office in Canada. He further proposed an enhanced capital-gains exemption for owners who sell their businesses to Canadian buyers, including employees, to discourage sales to foreign buyers that can result in head offices relocating abroad.
Among his other suggestions was a time-limited tax holiday for companies that move their headquarters and operations to Canada, along with incentives for Canadian entrepreneurs returning from abroad, citing Israel’s practice of exempting new immigrants and long-term returning citizens from tax on foreign-source income for a decade.
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