Question Period Note: STATE OF SMALL BUSINESS IN CANADA

What is the current state of small business in Canada?

• Small businesses play a crucial role in Canada’s economic resilience. They represent 98% of all businesses, employ 64% of Canadian workers, and contribute 48.2% of Canada’s GDP.

• As pandemic effects eased, the number of active businesses in Canada has returned to pre-pandemic levels and most express optimism about their future outlook.

• However, small businesses are especially sensitive to economic challenges such as inflation, tightening credit, and the phasing out of pandemic supports which coincided with an increase in insolvency filings.

• In recognition of this, the Government of Canada supports small businesses through a suite of programs to help them adapt, innovate, and grow.

The Canadian economy continues to face a number of headwinds. While inflation continues to ease, it remains elevated. GDP growth stalled in mid-2023, with a modest uptick into year-end.

Within this economic context, businesses reported a number of challenges. In the Bank of Canada’s Q4 2023 Business Outlook Survey, firms reported weaker demand and concern about economic uncertainty, with high interest rates playing a role in softened sales outlooks and hiring plans, as well as modest investment intentions. Firms reported inflation as an obstacle. Despite these challenges, according to the Q1 2024 Canadian Survey on Business Conditions, over two-thirds of all businesses across all sectors and sizes had an optimistic outlook over the next 12 months. Likewise, three-quarters of all firms had the liquidity required to operate.

Business Insolvencies

Data from the Office of the Superintendent of Bankruptcy (OSB) shows that business insolvencies increased by 41% in 2023 from 2022, exceeding the pre-pandemic levels after a significant fall in 2020-21. The OSB data also indicates that business insolvencies during the first 3 months of 2024 increased by 187% from the same period in 2023. As a lagging indicator, business insolvencies may not be predictive of future economic conditions.

Since the 2007-08 Global Financial Crisis, business insolvency rates fell every year through 2018. After a slight increase in 2019, insolvency rates fell by 24% in 2020 and by 11% in 2021. As pandemic restrictions were lifted, business insolvencies rose 37% in 2022 and 41% in 2023.

Business insolvency trends are influenced by macroeconomic, regional, and industry-specific factors, such as interest rate changes and borrowing costs, and issues affecting specific industries, such as shifts in demand or supply chain constraints. OSB insolvencies figures may not fully capture the number of businesses that exit the market due to no longer being financially viable, as many small business owners may simply close without going through formal processes.

The rise in business insolvencies recently may be attributable in part to a post-pandemic catch-up effect, following the decrease in insolvencies observed during 2020 and 2021. Other contributing causes may include the challenging post-pandemic macroeconomic environment, with high interest rates, slowing growth, tight labour market conditions, and elevated inflation levels, elevated levels of business indebtedness over the course of the pandemic, and the withdrawal of federal and provincial government pandemic supports.

Canada Emergency Business Account (CEBA)

As part of the government’s COVID-19 Economic Response Plan, CEBA was launched in 2020 to provide SMEs and not-for-profits with partially-forgivable interest-free loans to help them finance their non-deferrable expenses while dealing with lockdowns and capacity restrictions. The original loans were up to $40,000, with 25% forgivable if the remaining principal was repaid. Eligible businesses were later able to apply for $20,000 more, 50% of which was forgivable. These loans were provided through a partnership between Export Development Canada and private sector financial institutions (FIs).
The original deadline for forgiveness of December 31, 2023, was extended to January 18, 2024, for eligible CEBA loan holders. Those that submitted an application to refinance their CEBA loan to the same FI that issued it to them by January 18, 2024, could qualify for partial forgiveness upon payment of the outstanding principal plus any applicable interest by March 28, 2024. Additionally, the CEBA term loan repayment deadline for businesses unable to meet the partial loan forgiveness deadline was extended by one year to December 31, 2026. Approximately 80% of the CEBA loans issued have been repaid and that 80% of the total value of CEBA loans provided to SMEs has been repaid or forgiven.

• Canada provided essential supports to SMEs during the pandemic to keep Canadians employed and ensure businesses could survive. These include the Canada Emergency Wage Subsidy, the Canada Emergency Commercial Rent Assistance, the Canada Emergency Rent Subsidy, and the Canada Emergency Business Account (CEBA).

• Approximately 80% of eligible CEBA borrowers repaid their loan and received partial forgiveness.

• Eligible businesses who did not receive forgiveness have until December 31, 2026, to pay back their loans at 5% interest per year, below current market rates.

• Increasing insolvency rates are related to a combination of macroeconomic factors, elevated business indebtedness, and catch-up from very low insolvency rates during the pandemic.

• The Government of Canada has implemented measures to support the growth of small businesses. This includes actions initiatives such as raising the ceiling for the small business tax rates from $15 million to $50 million; securing commitments with Visa and Mastercard to lower credit fees, saving small businesses approximately $1 billion over five years; and expanding lending options for small businesses through enhancements to the Canada Small Business Financing Program.

• Budget 2024 proposes a number of new measures to support small businesses such as urgently returning $2.5 billion to an estimated 600,000 small businesses through the new Carbon Rebate for Small Businesses; the intention to legislate government procurement targets for small- and medium-sized businesses; and the Canadian Entrepreneurs’ Incentive which increases the lifetime capital gains exemption when selling all or part of a business.

• Budget 2024 also proposes additional supports for small and medium-sized enterprises. They include:
o $200 million, starting in 2026, for the Venture Capital Catalyst Initiative to support venture capital for equity deserving entrepreneurs, and to invest in underserved communities outside key metropolitan areas;
o $60 million over five years for Futurpreneur Canada that could enable 6,250 Canadian youth to launch and scale-up their businesses;
o $388 million to support Indigenous entrepreneurship, Indigenous tourism, the Strategic Partnerships Initiative, and unlock new clean energy opportunities; and
o $2.4 billion to help secure Canada’s AI advantage, which includes $100 million for the National Research Council (NRC) AI Assist Program to help small and medium-sized businesses scale up and increase productivity by building and deploying new AI solutions.

• The government also supports inclusive economic growth by helping entrepreneurs from underrepresented communities such as Black Canadians, women, Indigenous, young Canadians and people who identify as 2SLGBTQI+.