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Canada's small businesses are taxed out, stressed out and bummed out

Briefing highlights

  • What’s worrying small business
  • Britain warns Boeing on Bombardier
  • Markets at a glance
  • BAE to cut almost 2,000 jobs
  • Pfizer mulls sale of consumer health care unit
  • Wal-Mart plans $20-billion buyback
  • Honeywell to spin off units

You can be taxed in more ways than one. And Canada's small businesses are.

The country's small and medium-sized enterprises, or SMEs, were "the pioneers" of the recovery, outpacing bigger businesses in job creation, Benjamin Tal, deputy chief economist at CIBC World Markets, said in a report on the sector.

But that's changing. These businesses are now taxed out, stressed out and bummed out, a shift that could ripple through the economy.

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"The cycle is maturing, and SMEs are showing some signs of fatigue," Mr. Tal said in the study released today.

"Over all, SME confidence has softened recently, and for the first time in nine years, larger corporations are outpacing them in job creation," he added.

"External shocks such as higher interest rates, a stronger Canadian dollar, rising minimum wages and potential tax policy changes will further test the durability of this critical segment of the Canadian economy."

This comes as Canada moves "closer to the next recession than to the previous one" amid "early signs of fragility" among companies.

These are uncertain times for small and large businesses alike. On top of rising rates and minimum wages, there are the tax structure changes proposed by the federal government, and the nobody-knows-where-it-ends renegotiation of the North American free-trade agreement.

"The federal government's proposed tweaks to the taxation of small businesses have been a source of controversy, while a planned increase in Ontario's minimum wage has businesses across a range of sectors concerned about rising labour costs," said Royal Bank of Canada economist Josh Nye.

"Those issues may have been behind a drop in small business confidence in September, with Ontario's reading in particular falling to a post-recession low."

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Indeed, the latest measure of confidence among small businesses, taken by the Canadian Federation of Independent Business, shows their optimism fading. Its index has fallen four months in a row, with the latest drop showing a slump in attitude in all provinces and the bulk of industry sectors.

The index now stands at 56.9, its weakest since March, 2016. Given that it's above 50, the latest measure still suggests that the number of small business owners who project a stronger company performance eclipse those who paint a weaker picture.

But it's weaker than one would traditionally expect in such an economic climate, the CFIB said.

Then there are the submeasures. Only 40 per cent of such owners believe their operations are in "good" shape, just 15 per cent expect to hire for full-time jobs over the next several months, and 15 per cent expect to cut their work forces.

"Worries about customer demand levels have eased, but they appear to have been supplanted by concerns over taxes and regulations as well as availability of skilled labour - both issues likely driven by recent federal and provincial policy," CFIB chief economist Ted Mallett said in the latest release of the group's index.

Many things are going right, CIBC's Mr. Tal said, at least on the surface. But it's not as rosy as it seems.

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"Corporate Canada is a tale of two entities; large corporations, defined here as those with more than 500 employees, account for more than 70 per cent of overall economic activity, and SMEs with fewer than 500 employees account for more than 99 per cent of the number of all firms," Mr. Tal said.

"And here is where we often get a sense of what's coming," he added.

"The recently euphoric 4-per-cent-plus GDP growth is of course not going to last, and SMEs are already telling us that."

The value of the loonie isn't a big factor, though the 10 per cent of small firms that rely on exports, and those dependent on orders from major exporters, will be hurting," Mr. Tal said.

But NAFTA uncertainties and higher interest rates – the Bank of Canada has raised its benchmark twice, and more increases are forecast – certainly are.

"The projected increase in interest rates in the coming 12 months will no doubt lessen consumer enthusiasm and therefore SME economic growth, directly via higher debt-service payments, and indirectly through slowing housing market activity," Mr. Tal said.

"Fortunately, our assessment that the Bank of Canada will raise rates gradually and moderately implies that the damage will be manageable."

Then there are the policy shifts.

Ontario is not the only province moving on minimum wages.

Raising minimums is a good thing – my words, as Mr. Tal didn't express an opinion. But it comes amid the rising-rate scenario and proposed federal tax changes, meaning there's a lot coming at the sector at the same time.

"From an economic perspective it is reasonable to assume that the speed at which minimum wages will be increasing, and the potential impact on the rest of the wage spectrum, will act as a headwind on overall SME activity in the coming years," Mr. Tal said in his study "The same can be said for proposed tax changes, but over all we expect Canadian businesses will continue to face a relatively favourable tax regime when compared to other developed nations."

At the end of the day, Mr. Tal believes Canada's small businesses are nimble, and can adapt to change.

"The exit rate among SMEs has been trending downward, suggesting an increased length of business survival," Mr. Tal said.

"Increased flexibility must be part of the story here as more than half of SMEs report that the nature of their business has changed over the past five years, with increased export-orientation and growing product or service line playing an important role in that change," he added.

"This finding suggests that small business owners are able to adjust to an evolving marketplace by shifting products or services."

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Britain warns Boeing

Britain's business minister Greg Clark has given the strongest indication yet that Boeing Co.'s commercial and military contracts with the British government are at risk because of the aerospace company's trade dispute with Bombardier Inc., The Globe and Mail's Paul Waldie reports.

In a statement to Britain's House of Commons today, Mr. Clark said British officials have held a dozen meetings with Boeing executives and he has met with the company's chief executive officer Dennis Muilenburg to urge him to withdraw the complaint.

Mr. Clark said he also made it clear to Mr. Muilenburg that, "If there is to be a continuing relationship then we need to have the confidence that [Boeing] will deal fairly with the United Kingdom. If this is to be a strategic partnership, it needs to be a partnership, and partners don't take the kind of action against an important United Kingdom interest that Boeing are seeking to do."

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Markets at a glance

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