If there’s one truism for entrepreneurs, it’s that no two years are ever the same.
Whether they’re focused on growing their business or managing the myriad number of challenges that can make it difficult to achieve success—think everything from satisfying client expectations to managing costly HR issues—owners of small and medium-sized businesses have no shortage of concerns to occupy their agendas.
You’re likely in the same boat. Perhaps this is the year that you plan to launch into international markets. Maybe you’re determined to (finally!) kick-start that new marketing initiative or make a few key hires to help expand your company. Whatever the case, you likely have a plan to take your organization to the next level. But what happens when it comes to managing more existential threats—some of them outside of your control?
That’s the reality facing entrepreneurs across Ontario this year. More so than in the recent past, your success or failure could be affected by everything from new legislation to increased regulation that will make it harder to boost profits and grow your business. There’s never been a better time to think proactively and take steps to mitigate threats related to the four most significant challenges facing your business in the year ahead:
NAFTA—The potential demise of the pan-continental trade agreement is no laughing matter. The Trump administration is currently playing hard ball, insisting on draconian concessions from its trading partners Canada and Mexico, while offering little in return. Crippling tariffs on steel and aluminum have just recently been tabled, although with exemptions for Canada and Mexico–exemptions that will remain permanent, the Trump Administration stresses, if the countries agree to a new NAFTA that is favourable to the U.S. As Minister of Foreign Affairs Chrystia Freeland has noted, the Americans seem to view cross-border trade as a zero-sum game. This is bad news for Canadian companies that do business South of the Border. While there’s a strong chance that a last-minute deal will be drafted to save the North American Free Trade Agreement, business leaders and even Canadian government officials are reportedly taking contingency planning seriously, anticipating that Trump could easily pull the plug on this important deal. Canadian firms with U.S. customers should take similar precautions.
If NAFTA were to cease to exist tomorrow, how would your business be impacted? What can you do now to mitigate the risk stemming from NAFTA’s collapse? Maybe there’s little or nothing that can be done—particularly if your business is inherently tied to the U.S. In that case, maybe these concerns are all for naught. Many analysts have noted that in NAFTA’s absence, the previous bilateral Canada-U.S. trade agreement would likely come back into effect—or maybe not. Uncertainties abound as we risk sailing into uncharted waters. The key takeaway is that NAFTA’s renegotiation has created widespread concern for many Canadian SMEs. Don’t let yours be one of the ones left scrambling if a new deal doesn’t get done.
Rising labour costs—The Fair Workplaces, Better Jobs Act (Bill 148), was introduced last year and sent shockwaves through the small-business community. Among many other significant measures, the legislation increased the provincial minimum wage to $14 per hour from $11.60, with another $1 raise slated for Jan. 1, 2019. Bill 148 also increased vacation time for longer-tenured employees, mandated 10 personal emergency-leave days for all employees (two of which must be paid), introduced new penalties for non-compliance and promised to bolster employment standards enforcement with the hire of additional Ministry of Labour inspectors.
These new measures have translated into substantially higher labour costs for many Ontario-based small and medium-sized businesses, particularly those that rely on minimum-wage workers. Expect these costs to continue to climb as everything from workplace regulation and even the risk of employment-related litigation in areas such as human rights law makes an already daunting business environment even more challenging for Ontario employers. Our advice is to carefully analyze all business-related expenditures and overhead to identify potential efficiencies. In some cases, considering measures such as process automation or departmental outsourcing may help mitigate the risk from rising wages and employment-related expenses. Whatever approach best suits your business, be aware that doing business in Ontario isn’t going to get cheaper anytime soon.
Federal tax changes—Much has been written about the federal government’s planned crackdown on tax-planning strategies for private corporations. Ottawa’s initial intent was to introduce sweeping tax changes that would have curbed income sprinkling to family members, limited the ability of business owners to grow passive income portfolios within a private corporation and restricted the practice of converting regular corporate income into capital gains. A nationwide outcry forced the Trudeau Liberals to back track on some of the proposed measures, while offering a business tax reduction for incorporated small businesses to 10 per cent from 10.5 per cent. The rate will drop again to 9 per cent in 2019. When it comes to income sprinkling, a new reasonableness test will determine the appropriateness of wages and dividends to family members—imposing a substantial burden on family members working in a small business who will now be forced to track hours and the type of work they perform—while entrepreneurs will now face a graduated claw back in the small business tax deduction once they earn $50,000 in passive income in an investment portfolio inside a corporation.
These changes underscore the need to re-evaluate your corporate and personal tax-planning strategy. Now is the time to work with your financial team—lawyers, accountants and financial advisors—to design a new plan that protects your corporate and personal bottom lines.
Increased CRA enforcement—Ottawa is becoming far more sophisticated in its ability to track and collect outstanding taxes. As we’ve covered in recent blogs, this means everything from monitoring real estate transactions to conducting ‘lifestyle assessments’ to determine whether an individual’s conspicuous consumption matches their declared income or assets. Canada Revenue Agency employs ever more sophisticated algorithms that allow the agency to scrutinize records like never before. This could mean flagging suspicious business expenditures in areas such as entertainment or questioning whether certain declared business losses are, indeed, legitimate, for example. CRA is only getting better at enforcement, so entrepreneurs are wise to ensure they work with accountants and tax lawyers who take a conservative approach and understand the many nuances of Canadian tax law. Ensuring full compliance is more important than ever before at a time when government scrutiny is set to intensify in the years ahead.
Adriano Romeo, Partner