Negative tax rates, punishing regulations and over-reaching government subsidy programs are all harming the growth of small business, according to a new report.

“Measured entrepreneurship is falling in Canada, and it has been falling for some time now. If for instance, just the sheer number of entrepreneurs in the country, they are declining,” said Charles Lammam, senior fellow with MEI, and the report’s co-author, who spoke with PeopleNX.

The organization bills itself as an independent public policy think tank, and has offices in Montreal, Calgary and Ottawa. It is a registered Canadian charity, according to its website.

Entitled Policy Choices and the Decline of Entrepreneurship in Canada, the economic note was also written in collaboration with Emmanuelle B. Faubert, economist at the MEI.

According to the report, the drop in entrepreneurship is stark: in 2005, there was a peak of 867,000 self-employed persons but by 2025, that number reached 716,000.

“Despite having a growing population, we have fewer self-employed Canadians with employees today, than we did 20, 25 years ago. That’s pretty stunning: an 18 per cent drop in the number, and then when you adjust for population, it’s even worse,” Lammam said.

Organization decries government tax decisions

While some of this decline can be attributed to an aging population, “there’s some other metrics, like a reduction in the number of businesses entering the economy, the share of all workers that are self-employed. They’re all falling too and so across all these different metrics, there’s a clear trend,” he said.

A part of the reason for the failing numbers is a series of decisions first proposed in 2016, according to Lammam.

“Just before this precipitous drop, the federal government raised the highest marginal tax rate in the country. Research shows that entrepreneurs are sensitive to rates at the top end so if you make it less attractive to take risks, you’ll get less entrepreneurship.”

In Ontario, the combined federal and provincial marginal tax rate is 53.5 per cent, which is not something these governments should be proud of, Lammam said.

“That puts us among the highest tax jurisdictions in the entire developed world.”

And because they kick in at “relatively low levels of income” versus other countries, this was the “first salvo against entrepreneurship.”

But it wasn’t the only damaging tax measure “there’s even more: there have been payroll tax increases, taxes on production, and so altogether, these tax changes have been very hostile to entrepreneurship.”

Even though the federal government backed down in March 2025 on a promise to increase the capital gains inclusion rate (which was first floated in 2017 by then finance minister Bill Morneau) it left some business people with a bitter taste.

“There’s policy that matters but there’s also the language that government uses, and those signals impact the environment for entrepreneurship. Even if you don’t put out a policy, just a sort of adversarial, anti-entrepreneurship narrative can have its own deleterious impact on innovators and job creators,” Lammam said.

High cost of regulations

When it comes to regulations, the numbers are eye-opening. Citing data from the Canadian Federation of Independent Business, companies are putting in 768 million hours each year to accommodate overly onerous regulations, argued Lammam.

“Some of them prevent resource development, but some of them are smaller things that are not related to protecting health safety. They’re irritants that do little in terms of protecting but they add up and they’re cumulative, and impose a fairly significant burden on small businesses.”

Besides representing excess red tape, according to the report, sometimes this is exacerbated when provincial governments enact similar regulations to federal rules already in place.

“In our report, we cite that for small businesses, the regulatory cost is about $52 billion each year. Of that $18 billion is pure red tape. They’re spending 32 working days a year complying with red tape.”

This number represents a cost of $10,000 per employee, Lammam said. This “hidden tax” is providing downward pressure on future entrepreneurial growth.

“When you build a regulatory apparatus, which makes it very hard to just start a business and grow, you’re going to get less entrepreneurship. There’s been a ton of research that finds that when these regulations grow, you get lower economic growth. You get lower employment creation. You get fewer businesses starting up.”

Not only does a heavy tax burden and onerous regulatory environment harm small business growth, there is a “well intentioned” support system that depresses growth.

“The Business Development Bank of Canada is the country’s biggest venture capital investor, and research has found that while well intentioned, when governments get involved, what they’re doing is they’re displacing private sector venture capital. That is actually the type of capital that is more likely to create successful IPOs, M&A’s, and just various exits,” Lammam said.

Ways to reduce burden on SMEs

So what should be done to address this concern? Lammam laid out four main areas for governments to pay attention to.

“First, we have to bring attention to these declining levels of entrepreneurship, because it’s not really on the policy agenda,” he said.

The MEI economic note also would like to see a “more competitive tax structure” enacted for income, corporate and capital gains taxes.

A “lighter regulatory burden” would also go a long way to relieving pressure on small enterprises, said the report.

“We need a full review of all of the different regulations. We need to do away with all the ones that are duplicative, that are irritants; that add cost but don’t add value,” Lammam said.

Finally, he advises governments to “be very careful” with excessive “interventions in industrial policy,” when it comes to grants and subsidies.

“Instead of having knee-jerk reactions to fund this or that thing, they need to be mindful of what the unintended consequences are for when they step into these subsidy schemes.”

“We want Canada to grow small firms into big ones. We want them to scale. We want them to be world beaters. There are features in the tax system that, unfortunately discourage the very activity that we want more of.”