November 2006 Briefing

Small Business View of Red Tape

Measuring Paperwork Burden

Small businesses are resilient and provide the dynamism and entrepreneurial drive that keeps Canada ranked among top economic performers. Small businesses currently account for 98 percent of the 2.3 million businesses in Canada and employ over 5 million Canadians or 49 percent of the total private sector labour force.¹

A key element to the economic success of small businesses is an unrestricted environment that encourages risk-taking, promotes competition and increases productivity. Part of creating such an environment includes government easing the paperwork burden imposed on small business by ensuring that regulations meet their intended goals at the least possible cost to business. The less time and money businesses spend preparing information for government, the more time they can spend on growing their businesses.

This report focuses on small and medium-sized business perceptions of paperwork burden, also known as information obligations or red tape.

Preliminary results from the Survey of Regulatory Compliance Costs reveal how businesses perceive overall changes, over the past three years, in the cost of compliance and the information obligations they consider to be most burdensome. Respondents were also asked to indicate the number of submissions they prepare and transmit to government for the selected information obligations examined in the survey. The number of submissions provides an indication of the volume and frequency of information obligations to which small businesses must allocate limited resources away from value-added business activities.

A second report, to be issued in winter 2007, will focus on the time spent and costs incurred by businesses to comply with information obligations stemming from regulations examined in the Statistics Canada Survey of Regulatory Compliance Costs.

The joint public–private sector Advisory Committee on Paperwork Burden Reduction (ACPBR), created to oversee the Government of Canada's Paperwork Burden Reduction Initiative (PBRI), will review the survey results and possibly report on the findings in its second progress report to the Minister of Industry.

Glossary of Terms

PAPERWORK BURDEN

Paperwork burden refers to the time and money spent by business owners, managers, staff, or external contractors and experts to understand and comply with information obligations or administrative requirements that stem from government regulations. This includes the administrative costs that go above and beyond the daily operational activities of running a business, i.e., completing forms, reporting information, obtaining assistance to understand or comply with information obligations, or following up with government to clarify information reported. Also included among the costs is the in-house training for staff involved in undertaking compliance activities and the costs incurred when hiring an external service provider (e.g., accountant, tax specialist or payroll service provider).

SMALL AND MEDIUM-SIZED BUSINESSES

Small businesses are those with fewer than 100 employees; medium-sized businesses are those with between 100 and 499 employees.

Business Perceptions of Changes
IN OVERALL COMPLIANCE COSTS

Despite past government efforts to reduce paperwork burden, government requests for information remain burdensome for small business. Beyond the regulatory requirements governing their operations and conduct, businesses are also required to supply information to government demonstrating their compliance with a broad spectrum of regulations. Together, these obligations result in a cumulative impact on businesses.

The Statistics Canada Survey of Regulatory Compliance Costs asked businesses about their perception of changes in the overall cost of complying with regulations. More specifi cally, businesses were asked whether the cost had increased, decreased or stayed the same over the previous three years. Results from the survey suggest that the problem is worsening for some businesses. Very few businesses perceive any improvements in the reduction of resources required to comply with regulations.

Figure 1 illustrates the distribution of respondents by perceived changes to overall regulatory compliance costs. Signifi cantly more businesses perceive that the cost is increasing rather than decreasing. Only 3 percent believe the cost has decreased, whereas 30 percent believe the cost has increased over the past three years.

Figure 1: Perception of changes in the overall cost of complying with regulations over the past three years

Source: Statistics Canada, Survey of Regulatory Compliance Costs — Main Survey, 2005.

These results raise questions regarding reasons for the differences in perception across businesses.

Perceptions of changes in regulatory compliance costs vary significantly across businesses. When examining the perception of businesses by employment size, results show that the larger the business, the more likely it is to perceive increases in overall compliance costs. Figure 2 shows the relationship between perceived increases in compliance costs and the number of employees. While 21 percent of small businesses with no employees perceive that costs have increased, twice as many businesses with 20 to 99 employees have that perception.

Figure 2: Perception of changes in the cost of complying with regulations over the past three years by employment size

Source: Statistics Canada, Survey of Regulatory Compliance Costs — Main Survey, 2005.

There is no evidence suggesting that differences in perception are related to the number of years in operation or to experience in dealing with regulations. Minimal differences in perception were detected between businesses in operation for more than 10 years and those operating for 3 to 10 years. The difference in perception by employment size suggests that employing additional workers does not necessarily ease the burden of complying with additional information obligations; in other words, there do not seem to be the economies of scale that one might expect.

Survey results suggest reasons for the perceived increase in overall compliance costs. Of those businesses that perceive costs have increased over the past three years, 55 percent indicate that the reason is due to "increased complexity of regulations." Figure 3 presents a breakdown of reasons provided for the perceived increase in compliance costs.

Figure 3: Reason for perceived increases in overall compliance costs (based on respondents who perceived increases)

Source: Statistics Canada, Survey of Regulatory Compliance Costs — Main Survey, 2005.

Perceived increases in the complexity of regulations may be due to a number of factors, including changes in the regulations. Regulatory changes can require businesses to re-learn how to comply, creating additional frustrations for the business.

To some extent, reasons for perceived increases vary with the employment size of the business. The larger the business, the more likely it is to indicate "larger volume of submissions" as a reason for the perceived increase in regulatory compliance costs. Table 1 shows reasons for a perceived increase in overall compliance costs by employment size. Approximately 50 percent of businesses with 20 or more employees indicate both "increased complexity of regulations" and "larger volume of submissions" as reasons for the perceived increase. Less than half of the businesses with fewer than 20 employees indicate "larger volume of submissions" as a reason.

Given that some submissions are directly related to the number of employees or the revenue generated, it is not surprising that larger businesses will indicate the number of submissions as part of the problem.

Most Burdensome Information Obligations

Over the years, businesses have repeatedly ranked paperwork and regulatory burden among their top irritants when surveyed. According to the respondents of the 2003–2004 Canadian Manufacturers and Exporters Management Issues survey, 49 percent listed "simplification of regulations and reduction of compliance costs" as a top policy priority for government in promoting economic growth. According to a 2005 member opinion survey conducted by the Canadian Federation of Independent Business (CFIB), 65 percent of respondents identified government regulations and paperwork burden as one of their greatest concerns, second only to total tax burden.

When respondents of the CFIB member opinion survey were asked to rank the most burdensome federal/provincial obligations they identified the following:

Most Burdensome Federal Obligations

• GST/HST (71 percent)
• Payroll taxes (60 percent)
• Income taxes (57 percent)
• Record of employment (39 percent)
• Statistics Canada surveys (29 percent)

Most Burdensome Provincial Obligations

• Workers' compensation (59 percent)
• PST/HST (54 percent)
• Employment standards (33 percent)
• Business registration (30 percent)

The Statistics Canada Survey of Regulatory Compliance Costs examines many of the same obligations covered in the CFIB member opinion survey. Table 2 includes the basket of federal, provincial and municipal information obligations examined in the Statistics Canada survey, along with the responsible regulator or administrator.

Responses to the Survey of Regulatory Compliance Costs also confirm that the information obligations stemming from the regulations examined in the survey are among the most burdensome for small business. When asked whether there were other obligations requiring a significant amount of time and cost for compliance, 64 percent of businesses confirmed that those included in the survey were the main ones, whereas 10 percent indicated that there were others and 26 percent did not respond.

Magnitude of the Burden

One of the primary objectives of the Statistics Canada Survey of Regulatory Compliance Costs is to develop a better understanding of the cost of paperwork burden. Once a baseline measure of the cost has been established, the government will be able to track its progress in reducing the burden.

Although compliance costs provide an indication of the impact that paperwork has on businesses, there are additional ways of illustrating the burden. One example is the number and frequency of submissions to which businesses must dedicate resources in order to comply with information obligations stemming from regulations.

The number of submissions and claims prepared by businesses is another way to illustrate paperwork burden. At least 17 million submissions to government are prepared annually by businesses represented in the survey.

Results from the survey reveal that for the 12 information obligations, over 17 million submissions and claims were prepared over a 12-month period (2004/2005) by 665 480 Canadian private sector commercial businesses targeted in the survey.² On average, the number of submissions per business is estimated at 28. However, this number varies significantly depending on the employment size of the business.

Table 3 lists the total number of submissions reported for each obligation. The number represents only a portion of the total submissions prepared by all businesses in Canada for all information obligations as the survey covers selected obligations and a targeted group of businesses.

As seen in Table 3, employment-related obligations account for the majority of submissions, due in most part to payroll remittances. The largest contributor to tax-related submissions is federal/provincial sales tax. Businesses prepare these two types of submissions and claims more frequently than the remaining submissions. Among the other regulations covered in the survey, mandatory Statistics Canada surveys account for the greatest number of submissions.

The majority of the submissions and claims reported to government are from small businesses, not surprising given the proportion of small businesses in the Canadian economy. As shown in Table 4, the majority are prepared by businesses employing between 1 and 19 employees.

The results also signal a significant increase in the number of submissions and claims required of businesses after hiring their first employee, and a positive relationship between the number of submissions and claims per business and employment size. These results corroborate the survey findings, which indicate that businesses with 20 or more employees perceive overall regulatory compliance costs to be rising due to increases in the number of submissions required of them.

While the number of submissions may provide additional context as to how businesses are affected by information obligations, the number alone is not a sufficient measure for assessing the paperwork burden imposed on businesses. There are other issues that contribute to paperwork burden. These include duplication, complexity, change, varying definitions or unclear wording of requirements.

Next Survey Briefing

Regulations serve and advance the public interest, instil trust and confidence in Canadian markets and institutions, and support a fair and competitive market economy. Governments rely on regulations to meet policy objectives. Unfortunately, the information obligations stemming from regulations sometimes result in unintended burden on businesses.

The private-public sector Advisory Committee on Paperwork Burden Reduction (ACPBR) is working with the federal government on measuring paperwork burden and identifying solutions to reduce the burden for small business.

In a 2005 progress report on government's efforts to reduce red tape, the ACPBR called on government to take action in three key areas: leadership, coordination, and cooperation; measurement and reporting; and reduction and simplification. It also noted the need for recent, relevant data, both qualitative and quantitative, on the impact of paperwork for small business in order to develop an appropriate policy response for reducing the burden.

Results from the Statistics Canada Survey of Regulatory Compliance Costs help broaden understanding of the paperwork burden and the unintended impacts on small business—barriers to maximizing profits or remaining competitive. Industry Canada will report on the Survey results in a series of briefi ngs. The next Survey Briefing will highlight the costs that businesses incur when complying with information obligations covered in the Statistics Canada Survey. The briefing is expected to be issued in winter 2007. The ACPBR will review the Survey results and possibly report on its fi ndings in its second progress report to the Minister of Industry.

About the Statistics Canada
SURVEY OF REGULATORY COMPLIANCE COSTS

The Statistics Canada Survey of Regulatory Compliance Costs is a triennial survey that was developed as part of the Government of Canada's Paperwork Burden Reduction Initiative (PBRI). The survey focuses on small businesses, given their importance to the Canadian economy and the challenges they face in complying with information obligations stemming from government regulations.

The survey has two primary objectives. The government seeks to:

• improve understanding of how small businesses comply with information obligations stemming from government regulations and the cost of compliance; and
• establish a baseline measure of the compliance costs imposed on small businesses against which government can benchmark its progress in lessening the burden.

The survey was designed in partnership with Industry Canada and with the assistance of the Advisory Committee on Paperwork Burden Reduction. It consists of two parts:

• a Main Survey, which was distributed to over 30 000 small and medium-sized businesses, in fall 2005, to collect data on the time and salaries spent complying with the obligations internally; and
• a Supplementary Survey, which was distributed to over 5000 external service providers, in winter 2006, to collect data on the time spent complying on behalf of their business clients. (External providers include accountants, payroll firms and bookkeepers.)

The survey examined the information obligations stemming from a set of key regulations. The federal, provincial and municipal information obligations examined in the survey relate to:

• employees — payroll remittances, record of employment and workers' compensation (claims and remittances);
• taxation — T4 summary/individual T4, T1/T2 income tax filing, federal/provincial sales tax and corporate tax installments;
• provincial and municipal operating licences and permits;
• corporate registration; and
• mandatory Statistics Canada surveys.

Profile of Respondents to the 2005 Main Survey

The Statistics Canada Survey of Regulatory Compliance Costs — Main Survey was distributed to 32 736 small and medium-sized businesses drawn from the 2005 Statistics Canada Business Register that:

• employ fewer than 500 employees;
• generate between $30 000 and $50 million in annual gross revenue;
• operate in the manufacturing; retail; professional, scientific and technical services; accommodation and food services; and other services sectors; and
• operate in Atlantic Canada, Quebec, Ontario, the Prairies or British Columbia.

Almost 9500 of these businesses responded to the 2005 Main Survey, resulting in a 29 percent response rate. The majority of the 9500 respondents to the 2005 Main Survey employ either no employees or fewer than five employees (70 percent), operate primarily in Ontario or Quebec (62 percent), generate the majority of their revenue from professional, scientific and technical services or retail (59 percent), and have been in operation for more than 10 years (48 percent).

Compared with Canada's overall business population, the survey sample has a similar distribution of businesses by region and industry, but slightly fewer establishments without employees, more with 1 to 19 employees and more with over 10 years in operation.

The results were stratified by region and employment size to ensure that they were representative of the 665 480 businesses in Canada with similar characteristics as those targeted in the survey frame. The 665 480 businesses represent approximately 30 percent of the 2.3 million establishments in Canada.

ACKNOWLEDGEMENTS

The report was authored by Randa Saryeddine, Policy Advisor, Small Business Policy Branch (SBPB), Industry Canada (IC). Contributors include Daniel Seens, Economist, SBPB, IC; Lucie Charron, Policy Analyst, Canadian Federation of Independent Business; and Patrick Culhane, President, Canadian Payroll Association. The author also thanks officials from the Canada Revenue Agency, Finance Canada, Human Resources and Social Development Canada, and Industry Canada, for their insights on the data.

COPYRIGHT

This publication is available upon request in accessible formats. Contact:

Multimedia Services Section
Communications and Marketing Branch
Industry Canada
Room 264D, West Tower
235 Queen Street
Ottawa ON K1A 0H5

Tel.: 613-995-8552
Fax: 613-947-7155
Email: multimedia.production@ic.gc.ca

Permission to Reproduce

Except as otherwise specifically noted, the information in this publication may be reproduced, in part or in whole and by any means, without charge or further permission from Industry Canada, provided that due diligence is exercised in ensuring the accuracy of the information reproduced; that Industry Canada is identified as the source institution; and that the reproduction is not represented as an official version of the information reproduced, nor as having been made in affiliation with, or with the endorsement of, Industry Canada.

For permission to reproduce the information in this publication for commercial redistribution, please email: droitdauteur.copyright@tpsgc-pwgsc.gc.ca

60098

¹ Industry Canada, Key Small Business Statistics, July 2006.

² The survey targeted for-profit establishments with fewer than 500 employees, generating between $30 000 and $50 million in gross revenue, located across the provinces and operating in five sectors, namely manufacturing; professional, scientific and technical services; retail; accommodation and food services; and other services.