Study finds regulation, taxes stifle small firms

OTTAWA A messy tangle of regulatory requirements and growing tax burden in Canada continues to hinder private sector productivity, with policy dysfunction weighing particularly heavily on small businesses, according to a new study.

In a report Monday, the Organization for Economic Cooperation and Development (OECD) found “stagnating productivity and weak business dynamism are a concern” in Canada, due to a host of regulatory and financing shortfalls.

So-called “entrepreneurial dynamism” refers to the ability for new small businesses to enter the market and force out older and weaker firms. The OECD found that Canada has the highest number of older firms among 15 other developed countries.

“Barriers to foreign direct investment and the regulatory protection of incumbents are higher than in many other countries,” the report said, adding that governments should focus on “reducing market failures and better harmonizing provincial legislation.”

Inter-provincial trade barriers are particularly troublesome for small firms, the report said. Costs tied to complying with varying provincial regulations amount to the equivalent of a five- to 15-per-cent tariff for smaller firms, compared to less than five per cent for larger firms.

Air transport, courier services and telecommunications were deemed to be the most in need of reform, largely due to caps on foreign investment. The report also said a lack of interconnectedness between provinces in the electrical grid “is largely a result of geography and the uneven distribution of the population, but it also reflects regulatory fragmentation.”

Observers say policy shortcomings underlie a deeper challenge facing smaller businesses in Canada.

“There are some market distortions that need to be dealt with,” said Ted Mallett, vicepresident and chief economist at the Canadian Federation of Independent Business, which represents over 11,000 firms.

Policy failures come in addition to a complicated tax regime that is tough for small businesses to navigate. Small companies tend to be more burdened by added administrative costs than larger ones, Mallett said.