Joe Oliver unveiled his first major decision as finance minister with a targeted tax credit for small business to boost hiring without sacrificing Conservative plans to balance the books and cut taxes further before next year's election.
But business owners and economists raised concerns the Small Business Job Credit would benefit only a small share of Canada's work force, and leave out the employers that hire the most.
The credit effectively reduces employment insurance premiums for small businesses, but falls short of a direct cut in premiums that would benefit all businesses and all workers. That broader cut in payroll taxes wouldn't happen until 2017, Ottawa confirmed Thursday, when premiums would drop sharply from the current $1.88 per $100 of insurable earnings to $1.47.
In the interim, small businesses will receive credits that effectively reduce the EI premium rate by 15 per cent over the next two years, with an average refund of about $350 per small employer that qualifies. That also means workers and many businesses will continue to pay premiums at the existing rate, boosting government revenue at a time when it is planning to win over voters with a good-news 2015 budget heavy on tax cuts and new spending.
The decision to limit the size of the credit shows the government's desire to please small business – a key constituency – while ensuring there is still financial room to deliver on some of the government's more expensive and outstanding pledges from the Conservatives' 2011 platform, such as allowing couples to split their income for tax purposes.
Mr. Oliver, who made the announcement Thursday at a hardwood flooring business in Toronto, said Ottawa could not immediately afford a premium reduction for all businesses and workers while still balancing the budget.
"In that respect, it's partly a question of the fiscal impact, which would have been very large, so we decided to focus it on the companies that we felt needed it most," he said.
An official with the Parliamentary Budget Officer said even with the credit, Ottawa will be collecting at least $4-billion more in premiums over the next two years than is necessary to cover the cost of benefits.
Mr. Oliver needs to find room to pay for the party's income-splitting pledge, which is estimated to cost $2.5-billion a year in forgone revenue. Conservatives have indicated a strong desire to deliver on that promise in the coming budget, even though former finance minister Jim Flaherty, who died in April, had questioned the idea, saying he was not sure it would benefit society and that the policy "needs a long, hard analytical look."
The government argues the credit will apply to 90 per cent of Canadian businesses. However that remaining 10 per cent makes up a large percentage of the Canadian work force.
Only businesses with roughly 20 full-time equivalent employees or fewer are likely to qualify for the new credit. Statistics Canada data show that businesses with fewer than 20 employees account for only 20 per cent of all employment in Canada.
As a result, economists from across the political spectrum questioned the effectiveness the credit will have on hiring, while some small businesses that fail to meet the criteria were furious.
"It's appalling," said Peng Sang Cau, chief executive officer of Transformix Engineering, a Kingston company that makes automation equipment. She has 51 employees and pays far more than $15,000 a year in EI premiums for her employees – the government's cutoff for accessing the credit.
Small and medium sized companies are often cited as the "job engine" for the Canadian economy, she said, but medium sized firms often get lost in the shuffle when it comes to government support.
The Canadian Federation of Independent Business praised Thursday's announcement and estimated the credit would create 25,000 person years of employment over the next two to three years.
"It is a big, big deal for small business," said CFIB president Dan Kelly, who was part of the announcement with Mr. Oliver and praised the decision.
The Canadian Council of Chief Executives, which represents large employers, is among several voices expressing concern that the credit risks discouraging some small employers from adding staff if it means they would exceed the cutoff and lose the credit.
It is a concern shared by Jack Mintz, director and Palmer Chair in Public Policy at the University of Calgary.
"I would have preferred broad-based tax cuts," he said. "If we keep giving these things to small businesses, what happens when they become big businesses? It becomes a disincentive to growth."
NDP finance critic Nathan Cullen said businesses should have to prove they have increased staff before qualifying for tax credits, while Liberal finance critic Scott Brison said direct premium reductions would be better. Mr. Brison said the government is continuing to use artificially high EI premiums to pad its bottom line. Mr. Oliver rejected the accusation, insisting his government is not creating a "slush fund" from EI revenue.
EI premiums are paid by individual workers and their employers.
In both cases the amount paid is calculated using a rate set by Ottawa. For individuals in 2014 it's $1.88 per $100 of earnings. Employers pay the individual rate multiplied by 1.4.
The amount of the premium is capped by applying the premium to a maximum of $48,600 in earnings. In 2014 the cap works out to $913.68 for individuals and $1,279.15 for employers.
Mr. Oliver rejected the suggestion that the government's actions are a sign of concern about the Canadian labour market.
"It's not a sign of worry," he said. "It's a sign of confidence that we're continuing on the right path."
With reports from David Parkinson, Richard Blackwell and Tavia Grant in Toronto