Sounding the alarm on small business

Can a smart policy proposal from IIAC save the small business sector from collapse?

Sounding the alarm on small business
Last week IIAC released its recommendations for the federal budget of 2015. At the head of the list of policy recommendations: A proposal to help out a moribund Canadian small business sector.  

Speaking to WP, the always thoughtful head of IIAC, Ian Russell, explained the challenge and the proposal.  “The number of small businesses being started is not growing. The situation in Canada is poor. Small business is important for growth. But it really hasn’t grown at all in the last couple years. The economy is growing slowly, but small business is not growing at all,” says Russell.  

This is worrying. There are one million businesses with four or more employees in Canada today. The sector is a major source of job growth in the country. But stats released along with the IIAC pre-budget submission highlight the scale of the problem. According to the document equity capital for small business accessed from public and private capital markets in the past two years is almost half the amount in the same period five years earlier, despite a larger economy and record low interest rate. “Over the past year or so, financing activity in venture markets has collapsed to near-record levels. The amount of capital raised by TSX-V companies over the past three years has fallen 63% from $10.1 billion in 2011 to $3.8 billion in 2013. Over the same period new listings on the venture exchange have declined by two-thirds to just 76 listings in 2014,” according to IIAC. The lack of available equity capital has translated to record low business start-ups in Canada and to declining productivity levels and is a “crisis” according to the document.

“This is serious. The February 2015 federal budget must confront this,” says Russell.

The IIAC recommendation is a tax-free rollover that would see the capital gains taxes due on mature investments be allowed to be shifted into a small business without triggering the capital gains tax. The tax-free rollover provision would unleash large amounts of existing capital now trapped in mature investments and re-deploy this capital to productive opportunities in small and mid-sized businesses across the country.

“There are many investors today holding on to mature investments. Sometimes people are reluctant to sell these because of the capital gains," says Russell. "This proposal would allow those people to sell it, take the proceeds, and put that capital in a new investment. Someday there will be a capital gain triggered. There will be a capital gain tax paid down the road. But the immediate effect would be to unleash a lot of money. This would be an effective vehicle to reinvigorate the small business sector. Allow individuals to sell mature real estate or investment assets without triggering capital gains if reinvest that money in a small business.”

The recommendation from IIAC is a smart, practical solution. The marketplace is making the call on how the money gets reinvested, a better approach than having the government or labour sponsored venture capital funds do the choosing. “We think the potential here is massive. Here is a mechanism that could release huge amounts of capital. It’s doable, practical…and you’re relying on marketplace to make decisions,” says Russell. The capital exiting existing investments is re-invested in eligible operating small and mid-sized businesses. The flood of new capital would re-vitalize the sector. Significant amounts of capital tied-up in low-return investments would re-directed to more productive investments. Allowing individual investors to sell real and financial assets, without incurring capital gains taxation, as long as the proceeds are re-invested in small business shares, is the answer to the cratering of the small business sector accoridng to Russell 

IIAC recently hired a 3rd party to study the economic success of similar policy in other countries. “We’re going to provide that study to Ottawa,” says Russell. Let’s hope the government listens this time. This idea has surfaced before. It showed up in a 2006 Tory platform. “We thought in Jim Flaherty was going to bring this in. But that never happened, and we never got a clear idea of why,” says Russell. Let’s not repeat the mistake. The small business sector, that is, the Canadian economy, needs this.