Small Business, Big Burden 

Regulation

Small Business, Big Burden

Over-regulation takes a toll on entrepreneurship.
What's being done to reduce the load?

FROM: JAN-FEB 2007 ISSUE | BY JANE COUTTS

You had the idea, you went out on a limb and started the business, you built it up, and you’ve even got half a dozen people working for you. Now you’d like to expand — but you don’t have time. Hours, even days, every month are taken up with paperwork.

That’s government-regulation paperwork, that mounting pile of forms and reports that often eats up hours of your time — time that could be spent developing your business. It’s estimated to cost Canadian companies almost $33 billion a year in productivity. And it definitely needs to be tamed.

It can be done, a new report from CGA-Canada says. Called Tackling Compliance: Small Business and Regulation in Canada, the report describes successful red-tape reduction programs flourishing in Canada right now. The challenge, however, is to shift governments to a new way of thinking — and keep them committed to it.

“We need clear political leadership on this issue,” said Anthony Ariganello, president and CEO of CGA-Canada, speaking at the national launch of Tackling Compliance.

Based on a national survey and round table, the report says regulatory requirements are threatening entrepreneurship in Canada, miring it “in an atmosphere of apprehension over the inequity, change, complexity, quantity, and duplication” of regulation.

The Canadian Federation of Independent Business (CFIB) calls regulation a “hidden tax” — and a regressive one that hits small firms hardest. CFIB estimates complying with regulation from all levels of government (federal, provincial, and municipal) costs Canadian businesses $32.8 billion annually, but that translates into $5,317 per year for firms with fewer than five employees, compared to $2,844 for firms with five to 19 employees, and $1,104 for firms with 100 or more.

In its 2005 report Rated R, Prosperity Restricted by Red Tape, CFIB asked business owners what they would do if they were spending less time on regulation. Six out of 10 said they would invest in equipment or expand, four of 10 would increase employee wages and benefits, and three out of 10 would do more training or hiring.

The burden of regulation actually works against other government goals, according to CFIB executive vice-president Garth Whyte. “We have these policies designed to help the economy and employment, but when it’s this onerous [to expand a business], people may not bother.”

More Harm Than Good?

There’s no doubt in David Simpson’s mind that securities regulations — ranked as the biggest problem by small businesses in CGA-Canada’s survey — are limiting small business growth. Indeed, they may actually be increasing the chances a small business will fail, said Simpson, director of the University of Western Ontario’s Ivey Business Families Centre.

That’s because the accountability and disclosure demanded by the Sarbanes-Oxley Act in the U.S. is so extensive, people are unwilling to serve on the boards of small businesses for fear of being sued. “There is a direct correlation between good mentoring, a good board, and the success of small business,” Simpson said.

There have been many plans for reducing red tape over the years, Tackling Compliance says, but most foundered “because they lacked ongoing vigilance and accountability.” That’s why regulation reform must be a high-profile responsibility for a federal cabinet minister, with a clear mandate to report progress publicly, Ariganello stated.

Eileen Fischer, of York University’s Schulich School of Business, thinks the widespread perception that regulations impede trade may be doing as much to limit business as the regulations themselves. Fischer, who holds the Tannenbaum Chair in Entrepreneurship and Family Enterprise, said small and medium-sized enterprises (SMEs) are likely to say regulation holds them back whether they have tried to do something new or not.

Governments actually do listen to business and there have been some very good efforts to streamline processes or make information more available, Fischer said, but those efforts don’t seem to register, and the perception of barriers remains as strong as ever, even when things are substantially improved. “There’s almost a marketing problem,” Fischer said.

A federal minister responsible for regulatory reform and publishing progress reports might help draw more attention to reform, but companies, even small ones, change their ideas and their activities slowly. Fischer emphasizes, “Is this really the problem with SMEs in the first place? We see a lot of regulation in the U.S. and yet they are somehow more entrepreneurially oriented.”

Reduce, Simplify, Streamline

Tackling Compliance says reducing regulation would have to start with an inventory of all the regulations of the federal government and its agencies, to establish a baseline measurement; only then could progress in reducing them be tracked.

That kind of approach is working well in British Columbia. Premier Gordon Campbell’s Liberal government announced a regulatory reform plan when it took office in 2001, hoping to increase the province’s competitiveness by reducing unnecessary red tape and regulation.

The goal was to cut one-third of regulations by 2004, and to develop a framework to test the validity of new regulations. The initial inventory showed B.C. had 382,139 regulatory requirements on its books in June 2001. By June 2006, it had exceeded its original target, cutting 225,248 regulations, or 41 per cent. Several other provinces are launching similar programs.

The city of Winnipeg recently won an award from CFIB for its efforts to cut red tape. Winnipeg’s initiative was sparked by fears its population was declining because it was a difficult place to do business. The city’s “Red Tape Report,” released in 2004, noted Winnipeg had 84 different types of business licences, with different fees for each, while Saskatoon had one.

Proposed changes ranged from eliminating all business licences and some unusual local entertainment taxes to streamlining the development permit system. But perhaps most important was the spirit behind it — that the city would “ensure the least burdensome option for addressing problems is used.”

That attitude is critical, according to the CFIB’s Whyte. “Trying to eliminate regulation altogether is a mug’s game,” he said. Rather, the goal should be to simplify, streamline, and constantly evaluate regulations. “We want policy makers to say ‘do we really need this,’” he explained. “They don’t think in terms of the farmer or the accountant who is working three or four extra hours a week to meet all the regulatory requirements.”

Message Received

In fact, the federal government is aware of the burden of regulation, said John Connell, director general of small business policy for Industry Canada, which is home to the Advisory Committee on Paperwork Burden Reduction, a group of government officials and business representatives.

“The key message we get is that it’s the total burden of red tape, it’s cumulative,” Connell said. While every effort to cut red tape is appreciated, businesses are looking for a more systematic and institutionalized approach to reducing regulation, he added. To help with that, Statistics Canada has surveyed more than 32,000 businesses on perceived costs of complying with a selection of regulatory requirements (including, ironically, the need to fill out mandatory Statistics Canada reports). The results may show some obvious areas for reform.

Another federal government effort, SMART Regulation, introduced by former Liberal finance minister Ralph Goodale, “lost traction” with the switch to a Conservative minority government, according to Michael Murphy, executive vice-president of policy for the Canadian Chamber of Commerce. Tackling Compliance notes that regulatory reform is not seen to be an issue that attracts voters; certainly it is not likely to be a priority in a short-lived government, which must hope to win support for a majority with just a handful of initiatives.

At least one Conservative minister has made it a priority, however. Minister of Revenue Carol Skelton set up a task force at the Canada Revenue Agency to review the agency’s policies and procedures, looking for those that put the greatest burden on small businesses. Launched in August, the task force was to report six months later with a list of suggestions for simplifying what businesses go through to pay or submit taxes.

“We’re taking this as an opportunity to identify areas where people have difficulties, where, by providing information or instruction, we could alleviate some of those problems,” said Edie Pastuch, director of small business relations for the agency.

She admitted many people don’t know what the agency has done to simplify transactions for small businesses, or how much help is available to them. One new feature that should be an immense help for businesses, she said, is “My Business Account,” which, when it’s fully up and running, will allow small businesses or their agents to access details on their corporate taxes, payroll, and GST accounts, seven days a week, almost 24 hours a day.

It probably isn’t possible for governments to cut regulation to a level that would satisfy every small and medium business operator in Canada. To people busy winning customers, meeting orders, and managing staff, an hour spent filling out forms is an hour they’re not making money.

But most business people understand governments can’t operate without information, whether it’s used to collect taxes, negotiate trade agreements, or run business-development programs. And the good news is evidence suggests governments understand regulation is getting out of hand — Newfoundland has launched a red-tape-cutting program modelled on British Columbia’s, and other provinces are following suit.

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Jane Coutts is an Ottawa-based journalist and former Globe and Mail reporter.