Research & Economic Analysis

Empowering small businesses

Written by Marvin Cruz | 11 juil. 2024 19:46:01

Small businesses continuously seek ways to optimize their operations, enhance profitability, support their employees, and contribute to their communities. However, the current economic climate has made these goals particularly challenging. They’re grappling with several obstacles, including the high costs of doing business (e.g., elevated interest rates, higher labour costs), labour shortages, debt repayments, reduced consumer spending, and increased fees and taxes (such as recent hikes in CPP/QPP, Employment Insurance, carbon tax, capital gains tax, and insurance costs).

At a time when governments (federal and provincial) have spent billions to support foreign-owned automotive companies, one might question: where is the support for small business to achieve their goals during these challenging times?

Tax reforms and cost-reduction initiatives could provide much-needed relief, supporting the growth and sustainability of businesses across the country. According to a CFIB survey, 74% of business owners prioritize reducing the overall tax burden. In line with this, our latest Your Voice Omnibus survey for June explores how Canada’s business owners plan to use savings from tax and fee reductions, while identifying the taxes and fees that most adversely impact business operations.

Strategies for using savings from tax and fee reductions

Delving into the specific strategies business owners intend to pursue from tax savings, survey findings reveal that 56% of business owners would increase employee compensation, 54% would pay down business debt, and 46% would expand their business. Other priorities include hiring new employees (36%) and lowering or maintaining prices (29%). These strategic uses of tax savings underscore the critical role tax relief can play in driving significant economic benefits for businesses, ultimately benefiting the broader economy.

Top priorities for small business tax savings include increasing employee compensation, paying down business debt, and expanding the business

Source: CFIB, Your Voice omnibus survey – June 2024, was conducted online June 4-19, 2024. A total of 2,035 CFIB members who are owners of Canadian independent businesses, from all sectors and regions of the country answered the question above. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/- 2.2%, 19 times out of 20.
Question: If governments at any level were to reduce the overall burden of taxes and fees, what would your business do with the savings? (Select all that apply)

Business strategies for tax savings vary significantly across different sectors and business sizes. Among businesses that prioritize increasing employee compensation, the predominant sectors are transportation (66%), enterprises and administrative management (63%), personal services (60%), manufacturing (59%), and construction (57%). Personal services and construction face the highest vacancy rates in the country at 5.5% and 5.1%, both above the national average of 3.5%. Enterprise management and transportation also face notable vacancy rates at 3.7% and 3.3%. High vacancy rates may drive these sectors to focus on boosting employee compensation to attract workers, though its effectiveness depends on the availability of qualified candidates.

Additionally, increasing employee compensation becomes more prominent as business size grows. This trend suggests that larger businesses, with greater financial resources and a need to attract and retain skilled talent, are more likely to focus on boosting employee compensation.

The sectors in which businesses prioritize paying down debt are hospitality (66%), retail (60%), social services (60%), and agriculture (59%). In these sectors, a significant proportion of businesses report being in a weak financial position, characterized by challenges with cash flow, financing, and debt management. The highest reports of financial vulnerability are seen in hospitality (52%) and retail (41%), with and social services also notably affected (31%). Paying down business debt also emerges as the preferred strategy among the smallest businesses which in turn report being in the poorest financial health among all other businesses sizes.

Source: CFIB, Your Voice omnibus survey – June 2024, was conducted online June 4-19, 2024. A total of 2,035 CFIB members who are owners of Canadian independent businesses, from all sectors and regions of the country answered the question above. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/- 2.2%, 19 times out of 20.
Question:
If governments at any level were to reduce the overall burden of taxes and fees, what would your business do with the savings? (Select all that apply)
Note: *Less than 40 responses.

Most harmful taxes and costs on Canada’s businesses

Business owners contend with a variety of taxes and costs, but when it comes to which are the most harmful to their operations, 71% cite payroll taxes, followed by insurance costs at 62%, and corporate income taxes at 53%. Other notable burdensome taxes include carbon taxes (52%), credit card fees (48%), business property taxes (44%), and provincial gasoline and fuel taxes (44%).

High taxes and costs present a significant challenge for businesses, particularly smaller enterprises, by reducing the funds available for reinvestment. This constraint hinders growth and innovation, as it can limit a business's ability to purchase new equipment, upgrade technology, expand their workforce, and raise wages.

Payroll taxes stand out due to their unique challenges. For instance, they represent a mandatory cost for employers independent of profitability, and often involve complex administrative requirements. A CFIB report discovered that depending on the province, employers may face up to seven different payroll taxes, resulting in an employer paying between 9.1% ($4,538) and 13.3% ($6,632) on top of a $50,000 salary.

Key tax and cost burdens for small businesses include payroll taxes, insurance costs, and corporate income tax 

Source:  CFIB, Your Voice omnibus survey – June 2024, was conducted online June 4-19, 2024. A total of 2,035 CFIB members who are owners of Canadian independent businesses, from all sectors and regions of the country answered the question above. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/- 2.2%, 19 times out of 20.
Question: Which of the following taxes and costs are the most harmful to the operation of your business? (Select all that apply)

Among various operational costs, insurance expenses emerge as a particularly heavy burden for business owners. Small businesses are often required to have insurance, but obtaining coverage has become increasingly difficult and costly. As of June 2024, 67% of business owners reported insurance expenses as an input cost that is causing difficulties for their business, well above the 2009-to-2024 historical average of 49%. A recent CFIB survey found that half of business owners reported a significant increase (10% or more) in at least one type of their insurance premiums over the past year ─ with limited options to switch insurers, businesses are left to shoulder these escalating costs.[i] The share of businesses experiencing a significant increase ranges from 27% for general liability personal insurance to 40% for commercial property insurance.

The financial strain on business owners is worsened by high corporate taxes, which reduce the after-tax earnings and diminish the liquidity available for reinvestment in operations or covering other costs. This issue is compounded by the difficulty small businesses face in accessing financing and the disproportionately higher costs they incur from government regulation and tax compliance.[ii] Reducing corporate income taxes would not only significantly offset these expenses, but also allow businesses to retain more of their earnings and better manage their operations.

As CFIB previously highlighted, four in five businesses agree that the increase in the carbon tax rate by 23% to $80 per tonne poses a challenge as it hinders their ability to meet other operational expenses (e.g., payroll, rent, mortgage, utilities, inventory). Additionally, carbon tax hikes have resulted in businesses raising their prices (67%), reducing investments in their business (39%), and cutting/freezing salaries (30%). While the federal government has committed to returning the $2.5 billion promised carbon tax revenues to small business, 83% of owners oppose the federal carbon tax plan altogether.[iii]

Key policy reforms to foster small business success 

Given the challenges that high taxes and costs pose for small businesses, policymakers should consider implementing changes to help these businesses thrive and achieve their goals. In this regard, increasing the Small Business Deduction (SBD) threshold to $700,000 and indexing it to inflation going forward, as well as decreasing the federal small business tax rate from 9% to 8%, would provide significant relief.  

Additionally, lowering Employment Insurance (EI) premiums for smaller employers and reducing red tape would alleviate financial and administrative burdens. Concerning the carbon tax, ensure the $2.5 billion in carbon tax revenues is returned in 2024 with meaningful rebates for the smallest of businesses and raise the share of future rebates for SMEs back to 9% (from 5%). On the insurance side, additional efforts are required to ensure all businesses have access to affordable insurance coverage.  

These measures would empower small businesses, foster innovation and expansion, and enhance overall economic vitality, ensuring that businesses can continue to contribute positively to their communities and the economy. 

 

[i] CFIB, Insurance Survey, conducted online March 18 – May 9, 2024. A total of 3,676 CFIB members who are owners of Canadian independent businesses, from all sectors and regions of the country answered the survey. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/- 1.5 %, 19 times out of 20.

Insurance types include auto (personal and commercial), property (personal and commercial), general liability (personal and commercial), business interruption, cybersecurity, professional liability and product liability.

[ii] Mallet, Ted. Policy Forum: Mountains and Molehills—Effects of the Small Business Deduction. Canadian Tax Journal, 2015. 

[iii] CFIB, Your Voice omnibus survey – April 2024, was conducted online April 4-22, 2024. A total of 2,750 CFIB members who are owners of Canadian independent businesses, from all sectors and regions of the country answered the question above. For comparison purposes, a probability sample with the same number of respondents would have a margin of error of +/- 1.9%, 19 times out of 20.