B.C. tax backtrack puts pinch on small business

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The decade of tax cuts came to an end in British Columbia this week, with the governing Liberals suspending the planned elimination in April of the special corporate tax rate for private Canadian businesses.

That change will deliver $281-million to provincial coffers next year – or, flipped around, it will strip away up to $12,500 apiece that businesses were expecting to have to expand and invest in jobs and equipment.

B.C. Finance Minister Kevin Falcon, tabling his first budget, defended his decision by citing the "uncertain fiscal environment," and said that the tax is among the lowest in Canada. He is promising that the elimination of the small-business corporate tax could still happen, but only when B.C.'s finances have returned solidly to a surplus.

"We will revisit it only after our fiscal situation has improved," said Mr. Falcon, who is pinching pennies across the board to balance the books by 2013, eliminating the province's deficit as required by law.

The rate has fluctuated, wavering among 8.5 per cent, 5.5 per cent and 4.5 per cent in the last years of NDP government in B.C. As of December, 2008, the rate was pegged at 2.5 per cent. The small-business corporate tax rate actually applies to any Canadian-controlled private company, regardless of size. As a result, a firm with millions in earnings would still pay just the 2.5 per cent on its first $500,000 in taxable income; a higher 10-per-cent rate kicks in for income above that mark. Firms that are publicly traded or not Canadian-controlled aren't eligible for the lower rate.

In an interview, Mr. Falcon said that he is not ruling out a later elimination of the tax "if it is the smart thing to do," but that he is awaiting the guidance of an expert panel on business competitiveness, on how to provide the best relief for business.

Mr. Falcon pointed out that small business will be among the beneficiaries of the balanced budget that will come, in part, due to revenues garnered from the policy. According to the budget documents, the measure will raise $281-million in 2012-13 and $261-million in 2013-14.

"It is absolutely in the interests of small business across the province to ensure we have a government that maintains its hard-earned reputation of being disciplined on the fiscal side," he said. "That's why we enjoy our triple-A credit rating and we are seen around the world as a safe harbour for investment, and the moment we lose that is when the small-business community is going to feel that impact."

While the B.C. Conservatives, threatening to crack the centre-right coalition that is the B.C. Liberals, attack this approach from the right, there is unusual agreement between the government and opposition NDP on the issue.

Bruce Ralston, the NDP finance critic, said he could see Mr. Falcon's point.

"It does appear to be a change in direction from what they indicated, but circumstances change," he said. "The position, in the circumstances, is one I appreciate. The government needs the revenues to try to balance the budget."

Mr. Ralston, otherwise a scorching critic of Mr. Falcon's budget, said there are other ways to help small business besides reducing the tax rate to zero.

The Canadian Federation of Independent Business said it is disappointed in the change. Shachi Kurl, the federation's provincial affairs director for B.C. and the Yukon, said her organization would have welcomed a firmer commitment from the minister to getting to zero on the tax. She is concerned about the ambiguity around the situation.

Ms. Kurl said 2.5 per cent may not sound like a lot, but it is important to businesses. "The issue and the importance and the real benefit around eliminating the small-business tax rate is it helps free up capital and cash for small business and entrepreneurs who may not be able to access that through the banks," she said.

Businesses, she said, are also grappling with cost-increase pressures ranging from hikes to the minimum wage to the carbon tax and Medical Services Plan premium increases, which means the small-business tax is a new concern. "When you're making profit on the teeny, tiny margins, a few thousand dollars is not insignificant."

Shooting down growth

Afton Holmes attributes success in her business to adrenaline.

She is operations manager for PaintballGear.ca, which supplies guns, masks and other gear for the sport of paintball.

Business is good, she said, because of public affection for the sport that is sustained by the guarantee of an "adrenaline rush" for its participants.

"You're hunting people and you're being hunted. Even though you get shot, you get, maybe a bruise, maybe nothing at all," she said from her Coquitlam office. "You walk away fine."

But she said her nine-year-old business, which has 12 employees, isn't walking away well from the small-business tax decision.

"Right now, we are watching every dollar that we spend," she said. "Anywhere I see that we can shave 50 cents, I do it."

It hurts to have a 2.5-per-cent tax because profit margin leeways are 10 to 15 per cent. "[It]doesn't seem like a lot of money, but, for us, it is," she said.

"[It]will impact our growth, which is going to impact our ability to hire new people and give our existing employees pay increases and also impact our physical growth as a company – purchasing power, purchasing more inventory, which is going to supply our customers better, which is going to keep them happy."

Less to reinvest

"I thought the guy is not very smart."

That's the caustic conclusion of Henry King, owner of Art Knapp's Plantland Flowers Shop in Penticton, to Mr. Falcon's decision against cutting the small-business corporate tax rate.

"He's saying, 'I have nothing for the teachers. I have nothing for this. I have nothing for that. Guess what, we're not going to drop a small-business rate either because we all have to share in the pain,' " Mr. King said.

"We all have to share in the pain but don't make a political decision, make a smart decision – leave more money in the hands of business."

Mr. King bought his operation in 1981. He said business has been picking up lately as consumers realize the economic downturn may not be as bad as they thought.

Mr. King said the business is all about personal connections with consumers, pursued through appearances on local radio, newspaper articles and a website. In a market like Penticton, which is much smaller than Vancouver, it's easier to make connections.

"We have that unique opportunity, which makes my job very satisfying, in having a relationship with the customer, knowing their wants, knowing their needs, knowing their families, seeing their kids raised, doing the flowers for their weddings, all those sorts of things that you can strike a relationship," Mr. King said.

Mr. Falcon's decision, Mr. King said, is an obstacle. It will take away money he could better use in building his business of 18 to 20 employees. He declined to be specific about Art Knapp's financials, but noted the scenario "won't create a cash-flow crisis."

Still, it's grating.

"The more money you take away from me as a minister of finance, the less I have left to reinvest and create jobs," he said.

"All I can try and do is try and work leaner and smarter and harder because, at the end of the day, I want money left over to reinvest."

Business as usual, but PST hurts

Lawrence Adler, of International Marine Floatation Systems, just can't see past the demise of the HST.

For that reason, he freely admits to a clouded view on the issue of the small-business corporate tax.

"Zero would better than 2.5 [per cent]" said Mr. Adler, controller for his Delta, B.C.-based company, which produces concrete floating structures such as docks, floats, and boat sheds for marine use.

"But we're functioning under what we're functioning now and so it's just business as usual, whereas the shift from the PST to HST was a dramatic positive step for the way business can function," said Mr. Adler, who ironically was working on HST paperwork while being interviewed.

He described the PST as antique legislation with "abstract concepts in its guts" compared to the efficient, clearer, simpler HST that's been especially easy to work with.

While Mr. Adler said keeping the small-business tax means fewer funds for expansion or distribution to shareholders or employees, he also notes that it's an equal burden for a broad swath of B.C. enterprises, so none have an advantage.

"All businesses are in the same boat," he said.

Budget gets clipped

The tease from Victoria on the small-business tax is exasperating to hair stylist Ludovic Jan, president of the Opus Salon in Vancouver's Yaletown.

"Why doesn't he just do it?" he asked. "Just reduce it to zero."

Mr. Jan was referring to Mr. Falcon's suggestion that he might drop the tax later, subject to economic conditions.

The 27-year-old entrepreneur said is used to paying for the tax, which he has done since he took over his outlet three years ago, but he hoped it would get clipped, cutting loose $2,000 to $3,000 for him to apply elsewhere in his business.

It may not seem like much to some, but he said it is important to him. "I've learned to be careful with my money."

Mr. Jan said the money would probably have gone to upgrades for his salon or treats, such as special-occasion restaurant meals, for his staff of 14 employees.

"I am going to have to reduce the budget of my Christmas party. That's for sure," he said.

Times are already tough for business, with such provincially imposed complexities as the HST chaos, Mr. Jan said, adding that keeping the small-business tax is "an extra knife in our back."

Small business deserves more help, he said. "We are one of the big engines of the economy."

- Ian Bailey