If you run an independent firm, get ready for bureaucratic hassles every step of the way, especially when it comes to dealing with the CRA, writes Philip Cross.
By Philip Cross, July 04, 2018
The importance of small business is undeniable. As Michael Novak wrote in Business as a Calling, small business creation is a “good index of the general health of society — not only its economic health but also its morale, hopefulness, and spirit of generosity for others.” Canada’s political class unanimously subscribes to the mantra that small businesses are the bedrock of our economy, with more than two million small firms employing nearly half the workforce. So why is it so difficult to set up and run a small business in this country?
To start, there is no easy-to-follow road map for establishing a small business. When I left the government six years ago, my first attempt to set up my own business was based on the counsel of a financial adviser. A year later, a lawyer told me I had missed two other critical steps. I sent in the necessary paperwork, but the bureaucracy returned the forms saying they were incomplete. My lawyer’s secretary said such unfounded rejections are routine (“they’re idiots” she sniffed dismissively), and resubmitted the forms — without any changes. Sure enough, this time they were approved.
But that was nothing compared to dealing with the Canada Revenue Agency, a black hole that swallows up small-business dreams. In one attempt to pay business income tax, my bank sent the taxes to the wrong location. Two weeks later I received an official notification from CRA that my taxes were overdue. Instead of asking what might have gone wrong, the CRA went nuclear, threatening to close my business unless payment was received immediately.
This is the everyday reality of bureaucratic attitudes to small business, not the fawning platitudes offered by politicians.
That threat induced the state of panic the CRA intended, and I repeatedly tried to contact the agency by phone and fax to find out what had happened to my payment. The Minister at the time bragged about CRA’s responsiveness, a boast echoed by Mel Cappe, the former head of the civil service, who claimed that CRA’s practices were a model for businesses because of how “they answer the phone.”
While this may be how government perceives its service delivery, my experience confirmed the Auditor General’s recent report that a majority of calls to CRA are never answered. Eventually, after much effort and undue stress, everyone agreed that the payment was made but had not reached the CRA. Nevertheless, I had to pay for late payment. By then, I was grateful that at least my business was not shut down.
As a small business, I was eventually allowed to remit my taxes on a quarterly rather than a monthly basis, saving me time filling in forms. However, according to the CRA my ability to remit quarterly is conditional on having a “perfect compliance history” of filing within 15 days of the end of a quarter. While governments with dispiriting regularity make mistakes with their paperwork, I have to be letter perfect. No excuses; no trips abroad, no illnesses, no simple forgetfulness. Any transgression will be my last.
Speaking of remittances, whoever in the federal government designed the GST never ran a small business.
Speaking of remittances, whoever in the federal government designed the GST never ran a small business. While large businesses have the resources to process their GST at relatively little cost, for a small business the GST involves meticulously recording every expenditure and revenue on a monthly or quarterly basis and only original receipts are accepted.
Every firm earning a paltry $30,000 or more must file the GST, and once registered to the GST system you cannot leave (making it the Hotel California of the tax system) even if your income falls below this threshold — a significant incentive for firms to stay very small. GST submissions are so burdensome and complex, in fact, that specialized firms have sprung up to handle the paperwork (at a cost, of course).
No wonder a 2014 survey by the Canadian Federation of Independent Businesses found that the number two complaint held by 72 percent of its members is about government regulation and the burden of paperwork (the number one complaint cited by 78 percent of firms was high taxes).
As an economic researcher, intellectual property is the lifeblood of my business, but it took over a year just to get a copyright for the name of my business. As for getting a trademark on my work, after years of effort I simply gave up.
While complicating my life and enriching my accountant, starting a business has increased my understanding of the dynamic between firms and government. It is far easier now to understand the frustration and hostility small businesses feel given the mixture of indifference and outright antagonism that the bureaucracy holds for them. The outrage to the proposed tax changes by the federal government in mid-2017, so surprising to the Trudeau government and its academic advisers, was also completely predictable to anyone who knows and understands small business.
So why do most small business owners persevere? Freedom and control of one’s work environment tops the list, which is reflected in why people increasingly turn to self-employment as they grow older; they will stay in the labour force, but only on their own terms. Maybe some day we will even have the freedom to keep over half of the pay we earn. I even grant myself the freedom to be less than perfect — except of course when dealing with CRA. Then I better be the very image of perfection.
Philip Cross is a Munk Senior Fellow at the Macdonald-Laurier Institute.