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Slashing capital gains tax rate will uplift small businesses – study

Governments across Canada may seem to have exhausted all the means to spur activity amongst would-be entrepreneurs but a study by Fraser Institute found that getting rid of capital gains tax would ultimately do the trick.

The study, as part of the book entitled, Demographics and Entrepreneurship: Mitigating the Effects of an Aging Population, said the abolishing, or at least lowering, of Canada’s uncompetitive tax rate on capital gains is the best way to go to encourage entrepreneurial financing.

York University Schulich School of Business and book co-author Douglas Cumming said the preferential tax rate for small businesses does not fulfil its job in boosting business activity. Instead, it actually becomes a barrier for small businesses to develop into medium and large businesses, as doing so would result in a substantial tax increase.

Meanwhile, the Labour Sponsored Venture Capital Corporations (LSVCC), which was reinstituted by the federal government, has found no success so far. Cumming said these corporations are utilized largely for their generous tax credits and not for the potential financing they can provide for entrepreneurs.

“With the rate of small business start-ups on the decline and venture capital near anaemic levels, Ottawa and the provinces should lower capital gains tax rates to improve entrepreneurial finance,” Cumming said.

One interesting finding by the study is that other developed countries like New Zealand, Switzerland and Belgium do not impose capital gains tax while Australia, the United Kingdom, Germany, and Japan have lower tax rates than Canada. In fact, Fraser Institute fiscal studies director Charles Lammam said Canada managed to have the highest personal marginal capital gains tax rate of 26.5% in FY 2015/16, lower than the OECD average of 25.5%.

Lammam said a lower rate also frees up capital and encourages investment in business start-ups by similarly increasing the potential reward for investors if a new company is a success

“Instead of pursuing policies, such as lower capital gains tax rates, that are proven to encourage entrepreneurial activity, the federal government is doubling down on failed policies that actually hinder business growth,” he said.