Senate banking committee calls for tax changes to help small- and medium-sized businesses

Fundamental changes to the Canadian financial system are required to address an urgent need for more startup financing, according to a new Senate committee report.

The Senate committee on banking, commerce and the economy has spent the better part of 2026 studying the lack of access to growth capital for small- and medium-sized enterprises, or SMEs. Canadian startups have long struggled to cross a perilous space between building a business and scaling it up – known as the valley of death – often leading companies to either collapse or relocate abroad.

On Wednesday, the banking committee issued a report based on testimony from dozens of expert witnesses that offers recommendations on how to fix that problem. Many of the report’s ideas are focused on reforming Canadian tax rules to encourage more people to invest in domestic SMEs.

The report recommends that Ottawa should permit deferring capital-gains taxes on proceeds from selling a stake in a Canadian startup if that money is reinvested in another SME, “thereby encouraging the recycling of capital within the domestic economy.” More than 100 businesses, industry groups and executives signed an open letter sent to Finance Minister François-Philippe Champagne last week calling for the federal government to adopt such a policy.

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The report also said that the existing flow-through share tax credit, which allows companies involved in mineral exploration to transfer tax deductions to their shareholders, should be expanded to other industries that require significant upfront spending before any revenue is generated. Such an expansion would be especially useful for technology companies, particularly those focused on developing cutting-edge hardware such as fusion power plants.

John McKenzie, chief executive officer of Toronto Stock Exchange parent TMX Group Ltd. X-T, has been among those publicly advocating for that type of expansion since 2024.

Ottawa should also consider creating “targeted investment tax credits or targeted capital gains exemptions aimed at supporting SME investment, attracting new sources of capital, and promoting long-term investment horizons,” the report said.

Beyond tax-related recommendations, the report said Ottawa should actively encourage Canada’s banks to lend more to startups and to disclose more data on their lending practices.

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The committee also joined a growing chorus of voices calling for Canada’s large pension funds to invest more at home, with the report saying they could be encouraged to deploy more capital into SMEs through co-investments with venture capital or private debt institutions.

Ottawa could also combine several of the committee’s recommendations by “supporting the establishment of aggregation investment vehicles designed to facilitate institutional investment in SMEs, including through favourable tax treatments, co-investment structures and the potential use of federal guarantees,” the report said.

In the 64-page report’s conclusion, the committee urged the federal government to “promptly implement” its recommendations.

“Time is of the essence,” the report said.

“Canada’s innovators and entrepreneurs represent the future of our economy. Competitive access to credit and capital is critical to enabling our SMEs to compete globally, both in and from Canada.”