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Allan Lanthier is a retired partner of a major international accounting firm. He has been an adviser to the Canadian federal government on taxation and fiscal policy matters.

Small and medium-sized business enterprises (SMEs) are the engine of the Canadian economy. They employ about 90 per cent of our private-sector work force, while large businesses – including public companies listed on the Toronto Stock Exchange – only account for one out of 10 private-sector jobs. At least this is what we have been told by the federal government – repeatedly and consistently – for many years. But are these statistics accurate? And do SMEs really need the billions of dollars in tax subsidies they are given every year?

The government defines a small business as one with no more than 99 employees, while a medium-sized business has 100 to 499 employees. A large business has 500 or more. The government states that small business employs about 70 per cent of the private-sector work force, with medium-sized business accounting for about 20 per cent. Large business only accounts for a modest 10 per cent. If these percentages seem odd, it is because they are incorrect.

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The government numbers use the concept of “establishment size,” an approach based on how many people are employed at a particular location. The concept is flawed. For example, under this methodology, every branch of a Canadian bank is counted as a separate, small business. The correct concept to use is “firm size,” based on the total number of individuals employed by a business at all its locations.

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In 2018, there were about 12 million private-sector jobs in Canada. Using the numbers from Statistics Canada for firm size, SMEs employed about seven million individuals, or 58 per cent of the total, and large business five million, or 42 per cent. These ratios are in line with those of other industrialized countries. For example, a report from the Organization for Economic Co-operation and Development this year stated that, in countries across the OECD, SMEs account for about 60 per cent of employment.

And what about job creation? These numbers vary over time, depending on economic factors and conditions. However, from 2016 to 2018, the Canadian private sector added 316,000 jobs. Large business created 200,000 of those, about 63 per cent, and SMEs accounted for the balance.

SMEs enjoy significant tax subsidies in Canada, the most important being preferential tax rates on the first $500,000 of annual business income. The average federal-provincial-territorial rate is about 27 per cent for large corporations but only 12 per cent for SMEs on qualifying income – a differential of 15 percentage points. This translates into an annual cost of almost $14-billion in tax revenues – a cost that is borne by other Canadian taxpayers. The question is whether the cost is warranted.

The objective of the preferential rate is to encourage the growth of small businesses by helping them accumulate capital for business expansion. However, economic studies and analyses suggest that Canada’s small-business rate does not contribute to business expansion in any meaningful way. In addition, many small businesses have only one or two employees, including professionals such as doctors, lawyers and accountants who incorporate primarily to access the small-business rate.

Benefits equivalent to Canada’s small-business rate are generally not available in other countries. In 2015, Britain repealed its “small profits rate,” and in 2018 the United States eliminated its reduced corporate rates on taxable income of up to US$75,000. Still, Canada is not alone in providing preferential rates. There are 36 countries in the OECD, and its recent report states that nine of those countries (including Canada) have small-business rates. These subsidies reduce the average corporate tax rate in those nine countries by about six percentage points, a far cry from the differential of 15 percentage points in Canada.

SMEs are critical to job creation and economic growth. And they face challenges that large businesses do not, including size-related barriers in accessing skilled labour, financing and digital technologies. However, these challenges exist in other countries as well. In Canada and elsewhere, there are a range of government programs and subsidies beyond small-business rates that seek to address these issues.

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It may be expedient for politicians to state that SMEs are the backbone of the Canadian economy and that they require 14 billion of our tax dollars every year to survive and grow. But politically expedient statements are not always accurate. The small-business rate should be repealed.

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