Small businesses and their advocates in Canada have not been exceptionally pleased with Finance Minister Bill Morneau’s decision to scrap a planned 1.5% decrease in the rate of tax that SMBs would be required to pay on their income. The Canadian Federation for Independent Business in particular called the decision one of “a number of broken committments.” Taxation has long been considered one of the biggest challenges for small business scaling, so such criticism has been justified in the eyes of many.
In the interest of argument, could Morneau have made a pragmatic decision? New research by the International Monetary Fund supports the conclusion that he may have. Namely, IMF analysis noted:
“Preferential tax treatment of small companies is too blunt an instrument to foster entrepreneurial activity efficiently.”
Let’s step back for a moment and take a look at some of the data that surround this assertion. First of all, among OECD countries, Canada boasts some of the lowest small business tax rates in the world. Combine this with historically low interest rates, and you would in theory be giving small businesses a fruitful environment in which to expand. However, many Canadian small businesses have remained just that: small, and for too long. Scalability has been compromised in favour of sustainability. “Tax treatment of small firms may actually hurt growth by creating a small-business ‘trap’ as a result of the higher taxes firms would face once they cross a certain size threshold,” an IMF report noted.
As innovation goes, the report states, newer businesses are more likely to create more valuable opportunities and business ideas as opposed to smaller ones. For small businesses with a long tenure to remain successful, stagnation must be high on the list of things to avoid. How, then, does the business owner approach small business scaling in a fashion that encourages growth without running into financial barriers?
Firstly, businesses need to have the financial support available to them that will help with the assumption of greater scale and greater risk. Financial technology firms are opening up the availability of financing to a wider audience and reducing the risk of lending market blowback through the creation of more intelligent and responsive lending models. Businesses that remain stuck under the “tax ceiling” are less likely to experience the kind of growth needed to reestablish small enterprises as drivers of new employment and innovation.