Conservatives court small business, pledging to end red tape ‘rat’s nest’
The Conservatives have made a concerted pitch to Canada’s small business owners, pledging to reverse a controversial Liberal tax policy that enraged them and to reduce the regulatory burden weighing on their operations.
Speaking at a campaign stop in Thorold, Ont. on Tuesday, Conservative leader Andrew Scheer pledged to do away with a “rat’s nest” of policies and processes that “bog down businesses and slow growth.”
“We will tackle the burdensome layers of bureaucratic red tape,” he said. “It’s the biggest complaint I hear from small businesses, the thing that holds them back the most.”
The latest package of Conservative promises includes a 25 per cent reduction in federal regulations over four years and a “two-for-one rule” that would see two rules dropped for every new one introduced.
The two-for-one policy was first introduced in British Columbia where it is credited with driving a 35 per cent reduction in regulations. The previous Conservative government introduced a one-for-one regulatory reduction rule in 2015.
While that one-for-one rule marked “a really good start” in terms of changing the regulatory culture, “upgrading to a two-for-one rule is necessary to achieve net reductions in the regulatory burden,” said Ryan Greer, lead analyst on regulatory issues at the Canadian Chamber of Commerce. “It makes that 25 per cent target doable.”
If elected, the Conservatives will also introduce a ministerial position, reporting to the prime minister, with specific responsibility for cutting red tape. All ministers and regulators will be given a mandate to support innovation and economic competitiveness — a measure the Liberal government pledged to explore in its fall economic statement.
Regulatory burdens have long bedevilled smaller businesses that have fewer resources and employees than larger firms, said Dan Kelly, president and CEO of the Canadian Federation for Independent Business. Canada has struggled to reduce them, even as economists warn of their damaging effect on competitiveness.
Bureaucrats often design regulations and paperwork for larger businesses that have chief compliance officers or vice-presidents of human resources. In small businesses, it’s the owners that play those roles.
Dan Kelly, president and CEO, Canadian Federation for Independent Business
“Bureaucrats often design regulations and paperwork for larger businesses that have chief compliance officers or vice-presidents of human resources,” he said. “In small businesses, it’s the owners that play those roles. So regulations are always identified as a top burden among our members, second only to taxes.”
The Conservatives took a run at the tax issue, too, promising to undo major Liberal changes to the tax system on passive investment income and “income sprinkling.”
In 2017, the Liberal government announced changes to the tax rules that made it harder for private companies to accumulate capital inside their corporations. Currently, a private company in Ontario eligible for the small business rate is taxed at 12.5 per cent on the first $500,000 of active business income. This compares to high earners who might be taxed at much more significant levels of 50 per cent or more if that income were earned personally, said Jamie Golombek, Managing Director of Tax and Estate Planning, CIBC Financial Planning and Advice.
Worried that some business owners were parking large sums of money in their corporations, the Liberals initially announced plans to tax the investment income earned on those funds at punitive rates, exceeding 70 per cent in some provinces. But following a backlash, they allowed for a maximum of $50,000 in passive income before the business starts to lose the advantage.
This is a major reversal.
Jamie Golombek, Managing Director of Tax and Estate Planning, CIBC Financial Planning and Advice
The Conservatives would cancel that, allowing corporations to earn as much passive income as they want and not lose access to the small business tax rate, Golombek said. The move will cost the government $688 million by 2029.
“This is a major reversal,” Golombek said.
Also set for a partial turnaround by the Conservatives is a Liberal policy that ended “income sprinkling,” which prevents business owners from paying dividends to a spouse or a child in order to have that income taxed at a lower rate.
The Conservatives promised to bring the policy back for spouses, but not for children.
Both tax proposals are likely to disproportionately benefit wealthier Canadians, said Kevin Milligan, an economics professor at the University of British Columbia. The top 2.9 per cent of private corporations have 88 per cent of the passive income, he notes, citing a Department of Finance report.
“People who have $50,000 in passive income are doing pretty well,” he said. “This isn’t mom and pop using this, these are very wealthy people who use passive income to park a lot of savings.”
Similarly, “income sprinkling” or splitting income with other family members is only likely to be beneficial if one member of the family is a high earner, he added.
“The gains are biggest when you have someone in the highest income tax bracket, sprinkling income to family members in lower income tax brackets,” he said. “Otherwise shuffling income back and forth doesn’t do anything.”