Smallest companies shoulder bigger tax, regulatory burden

Compliance with regulations and tax laws can cost small businesses more in Canada than in the US, research by the Canadian Federation of Independent Business (CFIB) and KPMG suggests.

But the smallest of small businesses carry the biggest burden in both countries, according to the study.

Small businesses, defined as privately owned companies with fewer than 100 employees, represent a sizable share of the economies in the US and Canada. In Canada, small businesses employ 48.3% of the workforce, according to Startup Canada, a nonprofit group for entrepreneurs. In the US, small businesses employed 35% of the total workforce in 2008, according to the most recent US Census figures.

Also, the US Small Business Administration figured that 11% of the about 5.8 million small US companies in 2008 were start-ups, newly founded, usually innovative companies known to create jobs.

Considering small businesses’ economic impact, the study by CFIB and KPMG suggests that the regulatory and tax compliance burden on small businesses in North America “frustrates entrepreneurship, raises prices, limits choices, reduces productivity and means that living standards are lower than they might otherwise be.”

The study calculated the annual regulatory and tax compliance costs for Canadian companies with 50 to 99 employees at $1,713 per employee. But Canadian companies with fewer than five employees paid $5,942 per employee because they have fewer resources to spread the burden.

In the US, the annual regulatory and tax compliance cost for companies with 50 to 99 employees was $1,456 per employee, according to the study. Companies that employed fewer than five workers paid $4,084 per employee.

Wages and professional fees notably made up an increasing portion of total costs as the size of the business decreased.

To reduce the regulatory and tax burden on small businesses in Canada and the US, CFIB and KPMG recommend a ten-step approach to regulatory reform, including measuring the regulatory burden to get a clearer sense of the largely hidden, indirect or intangible costs and establishing constraints, such as removing an existing regulatory requirement each time a new one is introduced.

Related CGMA Magazine content:

“Regulation, Uncertainty Biggest Challenges for Small, Medium Businesses, Poll Says”: Regulation and economic uncertainty are the biggest challenges that small businesses face globally, an International Federation of Accountants (IFAC) survey of small and medium-size accounting practices (SMPs) suggests.

“The Most Business-Friendly Countries off the Beaten Path”: Small and mid-size companies looking for business-friendly markets overseas could check out a World Bank report that tracks regulatory reform efforts in 185 countries. Many of the top improvers are rarely found among up-and-coming economies.

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.