CALGARY—Small business tax breaks aren’t doing Canadian companies or the economy any favors, says a new paper from the University of Calgary’s School of Public Policy.
The paper was written by economists Jack Mintz and Duanjie Chen.
It argues small business tax exemptions are actually encouraging companies to break up into smaller, less efficient units.
The authors analyzed the impact of taxes on small business growth by estimating the amount of tax paid on the rate of return to capital.
They found that capital investment rates increase when the company’s asset size goes from $1 million to $30 million.
The effective tax rate on new investment almost doubles when firms shift from small to medium-sized businesses.
“As you grow, you end up paying more corporate taxes and as you get even larger, you might exhaust the availability of lifetime capital gains exemption,” Mintz says.
He calls this a “wall of taxation” that not only keeps businesses from growing, but the Canadian economy too.
“Canada has a lower productivity compared to the U.S. because we have more small businesses,” Mintz says.
“Our current system encourages businesses to stay small and not take advantage of economies of scale, which is really important for in order to get lower production costs and be more competitive in international markets.”
The authors urge Canadian governments to replace the current small business tax deduction and lifetime capital gains exemption.
Instead, they recommend creating a capital gains incentive for small businesses going public, reducing the lock-in effect of capital gains taxes and encouraging investments in depreciable assets.
But those measures don’t account for the financial tax burden that smaller companies already face, says Dan Kelly, senior vice-president of legislative affairs for the Canadian Federation of Independent Business (CFIB).
“Larger firms have access to a variety of tax credits that are out of reach for smaller firms,” Kelly says.
The federal government’s SR&ED credit is one example of the “paper chase” SMEs have to go through to get a break.
“Often, the administrative costs to apply often exceed the value, whereas larger firms have the staffing and systems in place,” Kelly says.
Those bigger companies have also seen their corporate tax rates drop from 28 per cent to 15 per cent in the past decade while the rates for small businesses only went down from 12 per cent to 11.
“We see little evidence of businesses deliberately staying small because of rates. In fact, lowering small business rates can be really helpful for firms in the start-up phase to pump money back into their business.”