THE SMALLER THEY ARE THE MORE THEY GET STUCK

Canada’s small businesses face more RED TAPE than U.S. peers

When it comes to regulatory demands, small- to mid-market companies in Canada are at a decided disadvantage compared with their U.S. counterparts, while larger organizations, comparatively speaking, are holding their own.

The Canadian Federation of Independent Business (CFIB) released its third edition of Canada’s Red Tape Report Monday outlining the cost of regulation to Canadian businesses. This report, sponsored by KPMG Enterprise, is one of only a handful of studies globally that have attempted to estimate regulatory costs.

It’s clear the burden of regulatory costs is a heavy one. The first edition, published in 2005, estimated that the cost of regulation to Canadian businesses of all sizes stood at about $33-billion. The good news is that in 2008 and 2012 that number held steady at $32-billion and $31-billion, respectively.

This latest report offers the first point-for-point comparison with the United States using data from Ipsos Reid. In doing so, it reveals that based on 2012 data, regulation costs for Canadian businesses with fewer than five employees were $5,942 per employee per year versus $4,084 in the U.S. However, the cost of regulations decreases as the size of the business increases — with the Canadian cost per employee reaching $1,146 at companies with more than 100 employees, compared with $1,278 for their U.S. peers. One reason cited for this is the lack of dedicated resources at smaller companies to deal with compliance matters compared with larger organizations.

In addition, Canadians spent more hours a year to comply with regulations compared with the U.S. (171 hours for companies with fewer than five employees versus 130).

“Now we have those comparative points, it’s clear we need to elevate things even further to remain competitive,” says Dennis Fortnum, Canadian managing partner for KPMG Enterprise in Toronto.

This is especially critical given that Canada has consistently been falling short of the mark in terms of productivity gains versus other developed countries, he adds.

Productivity growth in Canada was 0.7% between 2001 and 2011, well below the U.S. with 1.8% and OECD average of 1.4%, data from the Organization of Economic Co-operation and Development shows.

“We need to do everything we can to reverse that trend,” Mr. Fortnum contends. “To do that, we need to focus on freeing up capacity, driving innovation and entrepreneurship and making Canada a more business-friendly environment.”

When business owners were asked by CFIB what they would do with the extra money if regulatory costs were reduced, the top answer was invest in equipment and business expansion, followed by paying down debt.

“If we could eliminate 30% of the costs of regulation, these responses prove that the money will find its way back into the economy and be a real stimulus for growth,” Mr. Fortnum states.

If we don’t get it right for midmarket companies (less than 500 employees) especially, Canada will not perform at the level it could, Mr. Fortnum says.

“Half of the economy is driven by that segment. We have to do everything we can to make sure we have every opportunity to create jobs and build successful businesses. Given the economic backdrop, everything we do to improve productivity is important.”