Entrepreneurship is declining in Canada due to past policy choices

MONTREAL, Canada – Entrepreneurship has been declining for decades in Canada. This decline is more pronounced in recent years, exacerbated by recent policy choices regarding taxation, regulation, and subsidies, finds an economic note published this morning by the MEI.

“Marginal tax rates that penalise success, government programs that crowd out private capital, and rising compliance costs all work against the entrepreneurial activity that drives job creation and economic growth,” says Charles Lammam, senior fellow at the MEI and author of the study.

The number of self-employed workers with employees—a key measure of entrepreneurship—has been falling in Canada. From around 867,000 in 2005, there were only 716,000 in 2025, a drop of 18 percent despite a growing population. In Quebec, the decline is even steeper, going from 194,000 to 122,000, a decrease of more than a third over the same period.

The data on the creation of new businesses also confirms this concerning pattern. In 2023, new firm creation represented 12.3 percent of active businesses, according to Statistics Canada data. This rate corresponds to around half of the 25 percent achieved in the early 1980s.

“Fewer entrepreneurs launching businesses means less innovation, and ultimately, a less dynamic economy,” explains the researcher.

Hostile tax policy and a heavy regulatory burden

A series of federal tax changes since 2016—including a new top income tax bracket, proposed changes targeting private corporations, and an attempted increase to the capital gains inclusion rate—signalled hostility toward entrepreneurs and discouraged the risk-taking that drives business formation.

In a Research Paper published in 2023, the MEI estimated that the creation of a new tax bracket in 2016 prevented the creation of 9,820 new businesses in Canada, based on the reduction in the business entry rate.

The growth of regulation also contributed to this dynamic. Between 2006 and 2021, federal regulations alone grew by 37 percent, leading to a reduction in the growth of our living standards of 1.7 percent, according to Statistics Canada.

“The evidence shows that when the tax and regulatory environment becomes more burdensome, entrepreneurial activity declines. Entrepreneurs want to build businesses and create jobs, not spend their time on paperwork and compliance,” says Lammam.

Businesses devote 768 million hours a year to complying with bureaucratic requirements, the equivalent of 394,000 full-time jobs, according to data from the Canadian Federation of Independent Business.

Counterproductive subsidies

Canadian studies have shown that businesses funded by subsidies or by government-supported funds, such as labour-sponsored funds, tend to underperform in terms of innovation and wealth creation, and also to crowd out more effective private investment.

Yet, the country’s largest venture capital investor today is the Business Development Bank of Canada.

In Quebec, nearly $800 million in venture capital was invested by Investissement Québec over the past decade.

The share of venture capital in Quebec represented by public and para-public financing grew by 8 percentage points since the 2019-2021 period, reaching 43 percent in 2022 and 2023.

The absence of venture capital exits in Quebec in the first half of 2025 suggests that returns from government-backed investments may have fallen short of expectations, a sign that heavy public involvement in the ecosystem is not generating the dynamism that private capital typically would.

“The proliferation of government programs creates a subtle but real distortion. Entrepreneurs spend time and energy accessing public support rather than focusing on customers and growth,” says Lammam.

Solutions exist

To reverse course, governments need to reduce the tax and regulatory burdens that have accumulated over time and are constraining entrepreneurial activity, explains the researcher.

“Canada has the talent and institutions to support a thriving entrepreneurial economy. What’s missing is a policy environment that matches that potential, one with a more competitive tax structure, lighter regulation, and less displacement of private capital by government programs,” concludes Lammam.

• The MEI is an independent public policy think tank with offices in Montreal, Ottawa, and Calgary. Through its publications, media appearances, and advisory services to policymakers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship.

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