Incentives needed to unlock private capital to invest in private Canadian businesses

July 13, 2020

Article originally published in The Star
By Susan McArthur
Contributors Betsy Hilton and Dennis Matthews

It’s called sticker shock: That moment of honesty and dismay when the final bill arrives. We’re not even close to that moment when it comes to Ottawa’s COVID-19 spending, but that feeling is starting to set in.

So far, deficit spending has reached $343 billion this year covering everything from wage subsidies and unemployment benefits to money for seniors, students, rent relief and loans to business.

It may look like some politicians believe we can spend our way out of the economic shock, recession, and, perhaps, depression headed our way.

But what if tax dollars aren’t the only way to free up much needed investment dollars? What if there was a way to encourage Canadians to use their own capital to provide stimulus and support Canadian business?

Wealthy Canadians and corporations are holding cash and there are few incentives for them to invest in private Canadian businesses.

While the 2008 global economic crisis hit the big banks hardest, today’s calamity has struck a death blow to small business with little in the way of assistance coming from Ottawa.

That’s not to say a few small loan programs haven’t been helpful; they just haven’t moved the needle, and many small business owners have been reluctant to take on the risk of additional debt.

A recent survey by the Canadian Federation of Independent Business found that 25 per cent of small businesses will close their doors if they sustain a 50-per-cent drop in revenue for a month.

Many Canadian business owners are already well past that point. This is a tragedy. Small businesses are the heart and soul of the Canadian economy.

If you are a successful small business owner who has built a nest egg over many years, it is unlikely you will double down during a pandemic and reinvest your savings to keep your business afloat.

If you are evaluating an investment in, for example, a tech company looking for additional capital, the risks have increased significantly.

Unlocking private capital would provide additional support from Canadians who are not only looking for a return, but are also emotionally invested in the business’s success.

We’ve seen grassroots, microscale economic support for small business in communities across the country, including from community crowdfunding platform Distantly.ca, which enables individuals to send funds directly to local businesses.

The platform was conceived to make sure Mainstreet was still open post lock down.

Businesses such as restaurants, salons and gyms, which are closing their doors daily, would benefit greatly from an incentive for Canadians to make a much bigger commitment with that support.

Small businesses have a desperate need for capital to invest in digital transformation, working capital, personal protective equipment and other modifications required to comply with new pandemic regulations.

If Canada is going to emerge from this crisis stronger and more resilient, we need tax policy to encourage Canadians to invest in our small businesses.

We are not looking for anything unique or groundbreaking here. A handful of Canadian provinces have tax policy that encourages private investment in small business. New Brunswick has the Small Business Investor Tax Credit program, the most generous in the country.

If you live in New Brunswick and invest in a small business, you get a personal income tax credit of 50 per cent of your investment up to maximum of $125,000 annually. Corporations, trusts, co-ops and local economic development agencies are entitled to similar benefits upon investment. In the last five years, the program has generated almost $450 million of investment, supporting 2,200 small businesses in New Brunswick.

The federal government needs a bold, game-changing tax policy that will encourage Canadians with capital, including small business owners, to step off the sidelines and invest in small business.

We must establish qualifying parameters that encourage small businesses to grow. We must set the bar high in defining “small business,” so we don’t discourage growth.

The U.S. does this well. Section 1202 of its tax code allows for tax-free capital gains of up to $10 million or 10-times the investment if it is in a private business with up to $50 million in assets.

It’s a bold idea. That is easy to implement, were Ottawa so inclined.

As New Brunswick did, the federal government could provide an income tax credit to Canadians for investment in small- and medium-sized businesses. Business owners who double down and reinvest in their own business, could get a tax holiday on income earned, or charge no tax on dividends paid, for up to three-times the invested capital. For investors looking to back potential high-growth entrepreneurs, the program could provide tax-free capital gains — up to tenfold.

Ottawa has the power to do all of the above.

High-income earners in Canada pay more than half of their income to the government, not including municipal and sales tax.

Why not create a plan where Canadians can choose to provide private stimulus and invest in the small businesses and entrepreneurs so vital to the Canadian economy?

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