Prior to the pandemic, a national study indicated that Canada had at least 1,300 social enterprises, providing services to approximately 5.5 million people.
As its name implies, Tentree, a Vancouver clothing venture, plants ten trees for every article of clothing that it sells. Cheekbone Beauty, a cosmetics company based in St. Catharines, Ontario, donates 10 per cent of its profits to support Indigenous education. To help reduce the multi-million tonnes of textile waste dumped into North American landfills every year, Nudnik, an independent Toronto clothing brand, sells non-gendered t-shirts for kids manufactured using organic cotton waste.
Each of these companies aims to help solve the world’s problems while contributing to the economy as a profitable venture. Another thing they have in common is having millennial founders.
Millennial entrepreneurs aren’t the only ones who launch social enterprises, but as a group, they represent a generation of empathetic and socially conscious individuals. And businesses like the ones mentioned above represent a vital iteration of contemporary Keynesian capitalism, filling gaps in the marketplace where governments do not operate.
“While millennials appear naturally motivated to support the evolution of stakeholder capitalism and solve challenging social problems via entrepreneurship, the challenges they face as business founders are also greater than those experienced by previous generations.”
Unfortunately, while millennials appear naturally motivated to support the evolution of stakeholder capitalism and solve challenging social problems via entrepreneurship, the challenges they face as business founders are also greater than those experienced by previous generations, especially in Canada.
Entrepreneurship in general is lauded in this country, but it is no secret that Canadian start-ups can experience significant challenges when trying to secure financing, which is why some of our best and brightest entrepreneurs relocate to the United States, where access to capital is perceived as more bountiful.
Millennials, who are already challenged when it comes to purchasing homes, often have it particularly tough when seeking to launch a business because Canadian banks do not issue unsecured loans. But there is a simple way to give social entrepreneurs of all ages more support. All levels of government already invest heavily in programs that aim to grow our base of social enterprises. But social enterprises receive no tax incentives, which is surprising given the services that they provide to society.
In Canada, there are three categories of business incorporation: charity, non-profit, and for-profit. Charities and non-profits are heavily reliant upon government grants that support their social mandates, but they pay no taxes because they exist to contribute to society. Social enterprises are required to incorporate as for-profit ventures and so they pay the corporate tax rate, despite providing support to society beyond the economy, and despite the fact that, unlike most charities, social enterprises’ profit motivation enables them to scale without having to rely on government support.
At upwards of 38 per cent, the corporate tax rate in general serves as a disincentive to Canadian entrepreneurial growth. Instead of focusing on national and international expansion, as I pointed out in a 2016 IBJ article entitled “Fighting Canada’s Entrepreneurial Complacency,” some entrepreneurs simply believe it makes more sense to stay small and reap the benefits of doing so, which include making it easier to maintain a healthy work–life balance.
Keep in mind that with and without tax incentives, stimulating growth still requires entrepreneurs to take on additional stress and time commitments. And while a relatively healthy work–life balance is essential to sustainability, our progressive tax structure nevertheless contributes to Canada lagging behind other G20 nations in producing organizations with revenues above $100 million.
Now imagine a Canada with a fourth category of incorporation, one designed to give social enterprises the same tax benefits that are offered to charities and non-profits.
This fourth “social enterprise” category could make our nation a tax haven for social entrepreneurship. Instead of pushing entrepreneurs away, Canada would attract top social entrepreneurial talent from the global talent pool while stimulating the growth of a social venture ecosystem, perhaps even one with numerous $100-million-plus social enterprises. In addition, this simple policy adjustment has the potential to mitigate long-term fallout from pandemic measures that have left far too many of our entrepreneurs struggling simply to survive.
By balancing people, planet, and profit, social enterprises embody the new economy. That’s what makes attracting the world’s best and brightest social entrepreneurs to Canada such a massive opportunity for our nation—one that benefits both the economy and society. But to make it happen, policymakers need to reconcile their desire to foster social entrepreneurship with the unfavourable tax rate that social enterprises are required to pay.