Quebec’s tax and regulatory burdens deter the creation of new businesses, according to the Montreal Economic Institute

Montreal, December 1, 2005 – In an Economic Note published today, the Montreal Economic Institute (MEI) points to a sluggish entrepreneurial environment in Quebec, and identifies the twin encumbrance of high taxes and heavy regulation as its chief cause.

“As a fundamentally risk-taking activity, entrepreneurship can flourish only in a context where risk-taking is valued, encouraged and rewarded,” explains the MEI’s Research Director, Valentin Petkantchin.

The onerous tax and regulatory regime in Quebec, however, has created an environment where risk is greater, achievement more difficult, and reward less certain for entrepreneurs.

Suffocating red tape

Not only does a complex and labyrinthine regulatory regime inhibit would-be entrepreneurs from launching ventures, it also represents a major cost of doing business for existing companies.

“A Canadian study found that more than seven small or medium-sized businesses out of ten considered in 2002 that regulations were too complex and formed an obstacle to their growth. In Quebec, the direct costs that have to be borne by businesses to comply with regulations – federal, provincial or municipal – were estimated at $7.4 billion in 2003,” writes Valentin Petkantchin.

According to another study, Quebec is far ahead of the other provinces in terms of the number of pages of regulations (excluding laws) that it produced annually between 1990 and 1999, with more than 5,000 pages per year on average compared to fewer than 1,600 pages in Ontario or Alberta.

Punitive taxation

Various taxes and levies also contribute to the abandonment of entrepreneurial projects that would otherwise attract risk capital and investment.

In this regard, Quebec is home to the highest rate of tax on capital gains. Severely taxing capital gains exerts a particularly harmful effect on economic activity; it drains incentive from entrepreneurs as well as from investors offering risk capital to start-ups.

In addition, even if its general rate of corporate tax compares favourably with that of the other provinces, Quebec is the only province that has not reduced its tax rate for SMEs. A new rate will be introduced on January 1, 2006, but it will nevertheless remain much higher than in all the other provinces.

Public financing?

Valentin Petkantchin adds this comment as a warning against the creation of new subsidy programs for entrepreneurs: “Entrepreneurship remains a risky activity by its very nature, and it is impossible for governments to know ahead of time which projects will succeed in creating wealth.”

Entitled Obstacles to entrepreneurship in Quebec, this Economic Note can be found on the Institute’s Website.

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Information and requests for interviews: Patrick Leblanc, Communications Director, Montreal Economic Institute, Tel.: (514) 273-0969 / Email: pleblanc@iedm.org