On April 20, 2026, Build Canada submitted this brief to the House of Commons Standing Committee on Finance as part of pre-budget consultations for the 2026 federal budget. We are publishing it here so the policy ideas can contribute to the broader public conversation on how Canada can compete for founders, investors, and capital.
Recommendations
Recommendation 1: That the federal government modernize Canada’s capital gains tax regime to compete for founders and investors by raising the Lifetime Capital Gains Exemption (LCGE) cap to $15 million per business – matching the recently expanded US Qualified Small Business Stock (QSBS) exemption – changing the cap from a lifetime to a per-business limit, expanding eligibility across all industries and common early-stage investment structures, introducing a capital gains rollover for reinvestment, and pairing all of the above with robust anti-avoidance rules.
Recommendation 2: That the federal government reform the corporate tax system by adopting the Estonian distributed profits model – so that Canadian companies pay zero corporate tax on earnings they reinvest in the business, with tax applied only when profits are distributed directly or indirectly. Calibrate the distributed-profits rate as revenue-neutral per the Mintz specification (16% federal, 11.2% provincial average) so the reform raises the same revenue as the current corporate tax.
Fixing Canada’s Tax System Is the First Step to Fixing Canada’s Productivity
For the first time since comparable data has been available, Canada has fallen below the OECD average in GDP per capita.[1] The OECD projects Canada will rank last among its members in per capita GDP growth through 2060.[2] Business investment per worker has been falling since 2015; Canadian workers now receive only 55 cents of new capital for every dollar their American counterparts receive.[3] The CFIB small business confidence index fell 9.5 points in March 2026 to 55.8 – the sharpest monthly decline in several years – with 57% of small businesses reporting insufficient demand.[4]
Fixing Canada’s productivity crisis will require action across many fronts – regulatory reform, permitting, talent attraction, infrastructure, and trade. But each of these sits downstream of a more fundamental question: is Canada a country where it is worth the risk to invest, build, and stay? Today, the answer is increasingly no – and our tax system is a primary reason why. Canada taxes the formation and retention of capital more heavily than its peers, penalizes reinvestment, and has systematically widened the gap with the United States even as the US has moved aggressively to reward risk-taking.
This submission therefore focuses on the first-principles tax reforms that determine whether every other productivity lever can work. No amount of permitting reform, skills investment, or trade diversification can compensate for a tax system that punishes the people who build. The 2026 budget is the opportunity to fix that – not through new spending, but by removing the structural barriers that prevent Canadians from compounding prosperity at home.
Recommendation 1: Make Canada Competitive for Capital
Canada is bleeding investment. Statistics Canada’s Q2 2025 International Investment Position showed a sharp continuation of the trend: Canadians now send approximately $1.22 abroad for every $1 foreign investors put into Canada.[5] Investment in machinery and equipment has dropped 16% over the past decade, adjusted for workforce size. Venture capital fundraising in 2025 was the worst since 2016, with pre-seed and seed deals down 28%.[6] In the twenty years between 2003 and 2023, the total number of Canadian entrepreneurs decreased by approximately 100,000 – despite the population growing by 10 million.[7]
Capital gains taxation is punishing risk-takers at exactly the moment Canada needs the opposite. Canada has just 33 small businesses per 1,000 adults, compared to 124 in the United States and 73 in Israel. The 2024 proposal to raise the capital gains inclusion rate to two-thirds – since cancelled by the government in March 2025 after nearly a year of investor uncertainty – sent exactly the wrong signal at the wrong time. The uncertainty alone caused lasting damage, and the subsequent cancellation of the Canadian Entrepreneurs’ Incentive in the November 4, 2025 federal budget removed the one partial offset that had been on the table.
The gap with the United States is now enormous – and widening. Canada’s Lifetime Capital Gains Exemption (LCGE) stands at $1,275,000 for 2026 – a lifetime cap, shared across a taxpayer’s qualified small business corporation (QSBC) shares and qualified farm or fishing property. For non-agricultural founders, access hinges on a narrow qualification test. The shares must be those of a Canadian-Controlled Private Corporation, held by the seller or related persons for at least 24 months. Throughout that 24 months, more than half the corporation’s assets by fair market value must have been used principally in active business in Canada – and at the time of sale, substantially all of them must be. These rules disqualify specified investment businesses such as most rental real estate and passive holding structures, and routinely disqualify operating businesses that have accumulated significant passive investments. The rules also fail to accommodate the instruments founders actually raise on today: SAFEs and convertible notes do not qualify until they convert to shares, and the 24-month holding clock then resets – adding years of tax exposure for exactly the early-stage investors Canada most needs.
The US QSBS exemption, by contrast, was just dramatically expanded. The One Big Beautiful Bill Act, signed July 4, 2025, raised the per-issuer cap from $10 million to $15 million (or ten times original basis, whichever is greater), raised the aggregate gross asset threshold from $50 million to $75 million, introduced tiered exclusions (50% at three years, 75% at four years, 100% at five years), and indexed the caps to inflation starting in 2027.[8] While Canada has been reversing course, the United States has accelerated.
The competitive consequence is concrete. A Canadian founder selling their company for $100 million in 2026 would pay approximately $26 million in combined federal-provincial tax at Ontario’s top marginal rate, after applying the LCGE.[9] The same founder selling in Texas or Florida under QSBS – jurisdictions without state income tax, where many Canadian founders now relocate specifically to access QSBS – would pay approximately $20 million, or zero if their original basis was large enough to trigger the 10× rule. US investors now commonly add clauses to term sheets requiring Canadian startups to reincorporate in the United States simply to access QSBS. Canada’s best companies are leaving before they start.
The government should:
- Raise the LCGE to $15 million per business, matching the expanded US QSBS cap.
- Change the LCGE from a lifetime limit to a per-business limit, to reward repeat entrepreneurs who start, sell, and start again – the single most productive pattern of capital reallocation in any advanced economy.
- Expand eligibility beyond QSBC shares: open the exemption to active businesses across all industries; remove the requirement that the active business be carried on primarily in Canada, which currently disqualifies the very Canadian companies that successfully scale globally; broaden the range of permitted holding structures to include management holding corporations and similar vehicles founders commonly use; shorten or eliminate the 24-month holding period; and extend eligibility to SAFEs, convertible notes, and similar early-stage investment instruments.
- Introduce a broadly-accessible capital gains rollover for reinvestment – for example, by substantially expanding section 44.1 of the Income Tax Act, whose narrow drafting has rendered it essentially unused – allowing Canadian founders and investors to defer capital gains tax-free when proceeds are reinvested into new qualifying Canadian businesses within a defined window. This ensures capital recycled into the next generation of Canadian companies is not penalized for moving.
- Pair these expansions with robust anti-avoidance rules – analogous to the associated corporation and specified investment business regimes already in Canadian tax law – to prevent a single economic business from being artificially split into multiple legal entities solely to multiply the exemption.
- Pair the LCGE expansion with companion reform of the Alternative Minimum Tax regime: the 2024 AMT changes materially erode the LCGE benefit. Exempt LCGE-eligible gains from AMT inclusion, restore 0% AMT inclusion for donations of publicly listed securities, and restore full AMT deductibility of stock option benefits and capital loss carryforwards.
A bolder variant, worth consideration, would go further still: eliminate capital gains entirely on primary investments in active Canadian businesses below a $50 to $100 million value threshold, available to founders, employees, and angel investors alike. This framing recognizes that the act of investing in an early-stage Canadian company is itself the reinvestment Canada needs to reward.
The objective is simple: ensure that Canadian founders and Canadian investors who take risk on Canadian companies can build and compound wealth without losing to tax friction. This is how Canada gets a generation of repeat builders.
Canada’s combined federal-provincial general corporate rate of approximately 26% lost its competitive edge when the 2017 US Tax Cuts and Jobs Act dropped the American federal rate to 21%. Canada has not responded. The evidence is unambiguous. OECD research spanning decades confirms corporate taxes are the most harmful tax type for growth. A 10 percentage-point reduction in the corporate tax rate raises the long-run level of GDP per capita by 1–2 percent. Each point of reduction raises foreign direct investment by 3.3%.[10]
Canada does not need to tinker at the margins. It needs structural reform.
Estonia provides the blueprint. Under its distributed profits model, companies pay zero corporate tax on earnings they reinvest in the business – in hiring, equipment, R&D, and expansion. Tax applies only when profits are distributed directly or indirectly – through dividends, share buybacks, bonuses, or any other means of economic extraction from the corporation. This is not a tax cut. It is a redesign that removes the penalty on exactly the behaviour Canada needs: reinvestment.
The results are extraordinary. Estonia has ranked first on the Tax Foundation’s International Tax Competitiveness Index for twelve consecutive years – the longest unbroken run of any country.[11] Estonians start 45 times more tech businesses per person than Canadians. Estonia’s distributed-profits corporate tax, at rates between 14% and 22% over the past 25 years, has funded a functioning government throughout – including NATO and EU membership since 2004 – a direct empirical counter to concerns that the model forfeits fiscal capacity.
Ireland took a different but equally bold approach: a 12.5% headline rate applied simply for decades, which continues to apply to the vast majority of Irish companies – those below the €750M revenue threshold of the OECD global minimum tax. Irish GDP per capita now exceeds Canada’s by a wide margin – though the Irish figure is partly distorted by multinational corporate accounting, the underlying competitiveness gain is real.[12]
The current Canadian approach – chasing companies with targeted subsidies one deal at a time – is expensive, distortive, and unsustainable. It is the economic equivalent of paying people to be your friend. Canada should instead adopt distributed profits taxation: zero tax on reinvested earnings, and a standard rate applied only when profits are distributed directly or indirectly.
Critically, this reform can be revenue-neutral. Economist Jack Mintz – chair of the federal government’s Technical Committee on Business Taxation (1996–97), whose work shaped Canada’s current corporate tax regime – estimates in his proposal “A ‘Big Bang’ Corporate Tax Reform” that a revenue-neutral distributed profits tax would be approximately 16% federal and 11.2% provincial average, matching the $37 billion in corporate tax revenues collected in 2022–23.[13] The reform therefore does not require Canada to forfeit fiscal capacity; it requires Canada to apply its existing capacity more intelligently.
The reform should be legislated as permanent policy and harmonized across provinces to maximize simplicity and certainty. Passive investment income and capital gains realized by corporations should continue to be taxed immediately, following Mintz’s recommendation, to prevent the structure from being used for personal tax avoidance.
References
- Fraser Institute, “We’re Getting Poorer: GDP Per Capita in Canada and the OECD, 2002–2060”.
- OECD Long-Term Economic Projections, as reported by the Business Council of British Columbia (2025).
- Build Canada, “Build Canada’s Business Future” (2026), citing Statistics Canada.
- CFIB, Monthly Business Barometer, March 2026.
- Statistics Canada, International Investment Position, Q2 2025.
- “Canadian Venture Capital in 2025: The Full Picture” (2026).
- Build Canada, “Reward the Risk Takers who Build Canada” (2025), citing Industry Canada.
- One Big Beautiful Bill Act, Pub. L. 119-21 (July 4, 2025); Holland & Knight, “One Big Beautiful Bill Act Increases Tax Benefits for Qualified Small Business Stock” (July 2025).
- Build Canada illustrative calculation: 2026 Ontario top marginal rate (53.53%), 50% capital gains inclusion rate, LCGE of $1,275,000 applied.
- OECD, “Tax Policy Reform and Economic Growth”, Working Papers No. 620 (2008).
- Tax Foundation, International Tax Competitiveness Index 2025 (Estonia ranked first for twelve consecutive years); Fraser Institute, entrepreneurship comparison data.
- World Bank, GDP per capita – Ireland and Canada (2024).
- Jack Mintz, “A Proposal for a ‘Big Bang’ Corporate Tax Reform,” SSRN (2022).
