Pruning weakened branches helps a tree to grow. That’s as true in the human world as it is in the natural one. Business death and rebirth is a sign of a healthy and innovative economy.
Economists call it “creative destruction”: obsolete businesses should die to make room for innovative companies to thrive, the capital and workers freed up flow to more productive enterprises.
Unfortunately, Canada’s economy right now is doing a whole lot of destruction without much creation. There are many factors contributing to this. But one thing that could help is reforming Canada’s overly punitive bankruptcy laws to make business death less painful and entrepreneurial rebirth easier.
The problem is borne out in the numbers. According to Statistics Canada, 39,328 businesses opened in October while 44,236 businesses closed.
That’s a net loss of 4,908 companies that month, or an average of 158 closings per day. Destruction is overtaking creation.
Although there is some variation month to month (such as last spring, which briefly saw positive creation), the long-term trend is clear. University of Calgary economist Trevor Tombe estimated that new firms accounted for just 12 per cent of total businesses in 2023, a level that is second only to 2020 as an all-time low.
New entrants’ share has been sliding for years and is about half of what it was in the mid-1980s. Businesses that closed made up 15 per cent of all firms.
Meanwhile, the United States last year saw its best startup activity on record.
Some of these businesses may close only temporarily, or the owner may just walk away. The most serious cases are those that drive the business into insolvency – and those numbers have jumped, too.
Recent data from the Office of the Superintendent of Bankruptcy showed 4,810 businesses filed for an insolvency in 2023, up 41 per cent from the year before. It’s far above prepandemic levels, such as the 3,680 insolvencies seen in 2019. The Canadian Association of Insolvency and Restructuring Professionals said it was the biggest annual jump in filings in 36 years, when the government first began collecting the data.
Each of those insolvencies represents an entrepreneur who will find it more difficult to get credit in the future and will struggle to launch their next idea. And yet, we need them to. Many entrepreneurs do not strike gold on the first swing of the pickaxe, as it were, and will experience failure before they see success.
This isn’t to say the business owner should be totally absolved of their debt with no consequences. But there are ways to improve the process. For example, in 2009, the federal government passed legislation to make it easier for Canadians to file proposals instead of bankruptcies. A proposal creates a plan to pay off a reduced amount of debt over a few years, with fewer repercussions than a bankruptcy. Later research showed the number of proposals increased after that legal change, and financial institutions actually collected more money under the new system.
Ottawa could increase options for proposals by, for example, lengthening the window for repayment beyond the current five-year maximum. For bankruptcies, it could shorten the time a first bankruptcy shows up on a credit report to two or three years, from the current seven years. This would allow entrepreneurs to access credit faster for new ventures.
And as this space has suggested before, there is room for giving small-business tenants more flexibility to exit their leases. Often an entrepreneur must sign a commercial lease on a term of up to 10 years, and they must personally guarantee it. If the business goes under, that often drags the entrepreneur under, too. That is not the sort of issue a large business is likely to face, and so the provinces – who have authority on this issue – have the opportunity to level the playing field.
It matters because small- and medium-sized businesses are, in the aggregate, a huge engine of economic growth in Canada. They account for more than three-quarters of employment and more than half of gross domestic product, according to federal statistics.
We need that engine to roar – not to sputter out and die.