Job creation, economic growth and long-term prosperity—those were the three main themes of the March 29 federal budget, the first tabled by Prime Minister Stephen Harper’s Conservative government since securing a majority mandate in the 2011 federal election.
While talk of cuts in excess of $8 billion were floated in the lead-up to Finance Minister Jim Flaherty’s announcement, the budget slashed a more modest—yet still-significant—$5.2 billion in program spending, and introduced important changes to key entitlement programs. Not the right-ward revolution that some predicted, but still a shift in direction.
For small-to-medium-sized business owners, the budget delivered a similarly mixed bag of highlights: policy changes that could have an impact on their personal and business finances in the coming years, blended with a range of policy measures designed to support their firms’ continued growth and prosperity.
Those changes come on several fronts, ranging from an increase in the Old Age Security (OAS) eligibility age, to changes to the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program.
To ease the pain of recent increases to Employment Insurance premiums, for example, the budget extends the temporary Hiring Credit for Small Business. For an SME, that means a credit of up to $1,000 against increases to its EI premiums for 2012 over those paid in 2011. The government estimates the credit extension will benefit some 536,000 employers, reducing small business payroll costs in 2012 by an estimated $205 million.
“We’re very pleased that small businesses will be insulated from EI rate hikes,” said Dan Kelly, senior vice-president of the Canadian Federation of Independent Business, a Toronto-based advocacy group for small business. “This will allow for much smoother EI rate changes in the future.”
While Kelly lauded the government’s plans to cut program spending, he raised concerns over how the modifications to OAS will impact entrepreneurs—the budget includes a controversial increase in the age of eligibility to 67 from the current age of 65. Many economists argued the change was necessary to keep the program sustainable, but Kelly worries that it could fundamentally impact the retirement plans of Canada’s entrepreneurial set.
“Our members don’t have gold-plated pensions,” Kelly stressed. “Pushing up the age of eligibility makes a major impact on a small business owner’s ability to retire.”
While the change is significant, Paul Roberts, a partner with Toronto-based Lipton Chartered Accountants, is far less concerned about its effect on SME owners. Because the changes will be phased in gradually beginning in 2023, Roberts notes that most entrepreneurs will have ample time to account for the extra two-year waiting period and plan their retirement accordingly. “Most small business owners don’t take retirement at 65 anyway,” he pointed out. “Their greatest source of retirement wealth is their business.” On the plus side for entrepreneurs, the budget includes changes allowing Canadians to voluntarily defer their OAS pension for up to five years, then receive a heftier annual sum when they eventually retire.
Roberts praised the government’s efforts to simplify tax administration and compliance with the promise of a new, slimmed down Canada Revenue Agency tax-filing website designed with small business owners in mind. He was similarly pleased with the decision to leave Canada’s corporate tax rates untouched. “The corporate tax rate in Canada is already very favourable and it allows small businesses to thrive,” he said.
Other SME-friendly changes introduced yesterday include modifications to the immigration system to make it easier for Canadian firms to source and hire skilled labour from abroad—a particular concern for fast-growing provinces such as Alberta and Saskatchewan. But it was on the innovation front that the budget delivered some of its most conflicting messages for SME owners, according to Tina Kremmidas, chief economist with the Canadian Chamber of Commerce.
Although she lauded several of the government’s innovation proposals—including plans to invest $67 million to refocus the National Research Council on industry-relevant research, $400 million to help increase private sector investments in early-stage risk capital and $100 million to the Business Development Bank of Canada to support its venture capital activities—a proposed “streamlining” of the SR&ED system raised major concerns. The government plans to reduce the SR&ED tax credit rate to 15% from 20%, effective January 1, 2014, while removing capital expenditures from eligible expenses under the program. According to Kremmidas, the latter move will disproportionately favour firms operating in labour-intensive sectors such as software development, versus capital-intensive areas like manufacturing.
The CFIB’s Dan Kelly cautions that clawing money out of the SR&ED system and focusing it on other innovation-driving measures as venture capital investments could unduly impact the fortunes of larger SMEs. “We’re worried that medium-sized firms could feel the brunt of these changes,” he said.
Despite those concerns, Kremmidas argued that the budget provides plenty of reasons for Canada’s entrepreneurs to smile. “The budget is positive for economic growth over the long term,” she said. “If you can create the framework for SMEs to grow, that’s always a good thing.”