The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses Brian Erard Department of Economics Carleton University
October 1997
WORKING PAPER 97-12 Prepared for the Technical Committee on Business Taxation
Working papers are circulated to make analytic work prepared for the Technical Committee on Business Taxation available. They have received only limited evaluation; views expressed are those of the authors and do not necessarily reflect the views of the Technical Committee or the Department of Finance.
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses Brian Erard Department of Economics Carleton University
October 1997
WORKING PAPER 97-12 Prepared for the Technical Committee on Business Taxation
Comments on the working papers are invited and may be sent to: Paul Berg-Dick, Director Business Income Tax Division Department of Finance Ottawa, Ont. K1A 0G5 Fax: (613) 943-2486 e-mail:
[email protected]
Brian Erard Department of Economics Carleton University 1125 Colonel By Drive Ottawa, Ontario K1S 5B6 Fax: (613) 520-3906 e-mail:
[email protected]
For additional copies of this document please contact: Distribution Centre Department of Finance 300 Laurier Avenue West Ottawa K1A 0G5 Telephone: (613) 995-2855 Facsimile: (613) 996-0518 Also available through the Internet at http://www.fin.gc.ca/ Cette publication est également disponible en français.
Abstract This report presents the findings from a survey of small and medium-sized Canadian businesses concerning their perceptions about the cost of complying with corporate income and capital taxes at the federal and provincial levels. The survey also inquires about the perceived costs of complying with other taxes that businesses commonly face, including payroll, sales, and property taxes. In contrast to the other taxes they face, the vast majority of small and medium-sized businesses report that they rely on outside professional assistance to comply with their corporate income and capital taxes. Although the availability of outside tax assistance undoubtedly reduces the overall income tax compliance burden for these firms, the high cost of this assistance is nonetheless the most commonly reported source of compliance problems by respondents. Record-keeping requirements, the complexity of information requested, and the lack of co-ordination among governments are also commonly cited sources of concern. A disproportionate share of firms in the construction, other primary, retail, and other personal service industries perceive that their compliance costs are either high or very high. In addition, firms located in Quebec are much more likely to perceive high or very high compliance costs than their counterparts in other provinces. Whether actual compliance costs are substantially higher among such businesses is not certain, however, because different respondents may employ different standards of reference when classifying their costs as “high” or “low.”
Table of Contents 1.
Introduction............................................................................................................................ 1
2.
Survey Design and Administration ...................................................................................... 1
3.
Are the Respondents Representative of the CFIB? ............................................................ 2
4.
Do They Represent Small and Medium-sized Businesses in General? ............................. 2
5.
Respondent Characteristics .................................................................................................. 3
6.
Perceived Compliance Costs ................................................................................................. 3
7.
Determinants of Perceived Compliance Costs..................................................................... 4
8.
Sources of High Perceived Federal Compliance Costs....................................................... 7
Concluding Remarks..................................................................................................................... 8 Appendix – The Hard Facts: Small Business Barometer September 1996 Survey.............. 19 References .................................................................................................................................... 23
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
1
1. Introduction The corporate income tax system imposes costs on businesses beyond the revenue that is collected. In particular, Canadian businesses expend significant resources in keeping tax records, researching the tax laws, filing returns, responding to audits, and launching appeals.1 Ultimately, these costs are borne by individuals in the form of a lower return on their investments, reduced employment compensation, and/or higher prices for the products they consume. In order to assess whether and how the corporate income tax compliance burden can be reduced without compromising other governmental objectives (e.g. without sacrificing revenue or raising administrative costs), it is useful to have reliable information on its nature and underlying causes. This report presents the findings from a survey of small and medium-sized Canadian businesses concerning their perceived cost of complying with federal and provincial corporate income and capital taxes. This survey, which was distributed to members of the Canadian Federation of Independent Businesses (CFIB), inquires about the size, composition and major sources of these costs. In addition, it inquires about the perceived costs of complying with other taxes that businesses commonly face, including payroll, sales and property taxes. The survey responses pertaining to these other taxes provide a benchmark against which to compare the results for federal and provincial corporate income and capital taxes. The remainder of the report is organized as follows. The design and administration of the survey are summarized in Section 2. Section 3 provides a discussion of how representative the respondents are of the overall CFIB membership, while Section 4 takes up how representative they are of small and medium-sized Canadian businesses in general. Section 5 presents information on respondent characteristics. The magnitude and composition of reported compliance costs are summarized in Section 6. In Section 7, regression analysis is employed to explain the observed patterns in perceived compliance costs. An analysis of the reported sources of high compliance costs is performed in Section 8. Some concluding remarks are offered in Section 9.
2. Survey Design and Administration At the request of the Technical Committee on Business Taxation (henceforth referred to as the Committee), the CFIB agreed to include a series of questions on the compliance costs of taxation in its September 1996 “The Hard Facts: Small Business Barometer Survey” of its membership, which consists of over 85,000 small and medium-sized Canadian businesses nationwide. A preliminary draft of the questions was developed in June 1996 and submitted to the Committee for comments. The questions were revised on the basis of the comments received, and then submitted to the CFIB for consideration. After some discussion, the questions were further revised and incorporated into the survey. Although it was initially hoped that the survey would solicit quantitative information about the size of compliance costs, the CFIB elected to request
1
Taxation also creates economic distortions that impose a further burden on society; however, such costs are beyond the scope of this paper.
2
WORKING PAPER 97-12
qualitative information instead.2 Respondents were asked to rank their perceived compliance costs for each type of tax, separately for in-house and outside costs, using a four point scale ranging from 1 (very high) to 4 (low). They also were requested to provide details on who manages compliance and administration for the various taxes, the sources of compliance problems and the amount of taxes paid. A copy of the survey is provided in Appendix I. The survey was mailed to the entire membership. In total, 8,823 completed surveys were returned, yielding a response rate of 10.2 percent. The survey responses were coded by the CFIB and merged with its records on the respondents’ characteristics, including details on gross revenues, number of full-time equivalent employees, industry category and province of residence.
3. Are the Respondents Representative of the CFIB? Given that only about 10 percent of all CFIB members responded to the survey, it is important to evaluate whether the respondents are representative of the overall membership. Table 1 provides a comparison of the distribution of full-time equivalent employment within the sample and the overall membership. The figures suggest that the response rate was disproportionately high among the largest employers in the CFIB. Table 2 summarizes the distribution of firms within the sample and overall membership in terms of industrial classification. Firms in the agriculture, construction, retail, and hospitality and personal services categories tend to be somewhat under-represented in the sample, while those in the manufacturing, wholesale, business services, and financial, insurance and real estate categories tend to be somewhat over-represented. Thus, the raw data from the survey will tend to be more representative of larger firms and firms in certain industrial categories than of the CFIB membership in general. However, the impact of firm size and industrial activity on perceived compliance costs are explicitly accounted for in the econometric analysis presented in Section 7.
4. Do They Represent Small and Medium-sized Businesses in General? Ideally, one would like to have a sample that is representative of all small and medium-sized independent Canadian businesses. Although the CFIB is open to all such businesses, certain firms may be more likely to join this organization than others. For example, Table 3 compares the distribution of full-time equivalent employment within the CFIB membership and the overall population of small and medium-sized firms, where the latter is defined as all businesses with less than 500 full-time equivalent employees. Although the figures for this latter group are for a somewhat earlier year (1993, as compared to 1996), the distribution is not likely to have changed dramatically in the interim period. It is clear from the table that the CFIB membership contains a disproportionate share of the larger (i.e. medium-sized) firms in the population. Moreover, it 2
Based on past experience, the CFIB felt that many respondents would find it too difficult to provide an accurate quantitative measure of their costs.
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
3
appears that the membership is made up largely of more established businesses. Only 5 percent of CFIB members have been in operation for less than two years, and only 17 percent have been in operation for less than five years. By extension, the set of survey respondents (which contains a disproportionate share of the largest CFIB members) will tend to be more representative of medium-sized and more established firms than of small and medium-sized businesses in general. However, the impacts of both firm size and years in operation on perceived compliance costs are explicitly controlled for in the econometric analysis presented in Section 7.
5. Respondent Characteristics Table 4 presents some basic summary statistics on firm characteristics. On average, a firm in the sample has approximately 15 full-time equivalent employees and has been in business for nearly 20 years. For those firms providing information on taxes paid, federally administered corporate income and capital taxes reportedly average $38,000, and provincially administered corporate income and capital taxes reportedly average another $17,000. About 80 percent of these firms report paying some federally administered corporate income and capital taxes, whereas about two thirds report paying some provincially administered corporate income and capital taxes. However, the figures for these taxes are questionable. An analysis of the responses reveals that many relatively small firms (as judged either by the number of full-time equivalent employees or gross revenues) outside Alberta, Ontario and Quebec reported paying positive amounts of provincially administered corporate income and capital taxes. However, such firms in most cases would not, in fact, be subject to any provincially administered corporate income or capital taxes. Outside of Alberta, Ontario and Quebec, none of the provinces administers its own corporate income tax, and these firms would generally not have sufficient assets to be subject to provincially administered capital taxes. It therefore appears that many of the respondents misinterpreted provincially administered taxes as taxes owed to a particular province. Table 5 summarizes the distribution of gross receipts among firms in the sample. Revenues for about 90 percent of the firms fall between $50,000 and $5 million with a heavy concentration within the range of $200,000 to $2 million. Table 6 provides details on the extent to which firms are relying on outside professional assistance to manage compliance and administration with various taxes. Most firms rely on such assistance for corporate income and capital taxes at the federal and provincial levels. However, management of payroll, sales and local taxes as well as licences and other fees takes place solely in-house for most firms.
6. Perceived Compliance Costs This section summarizes the respondents’ subjective rankings of the costs of complying with the various taxes they face. Respondents were asked to rank each tax using a four point scale ranging from 1 (very high) to 4 (low). It is important to recognize that respondents may differ in their views about what constitutes a high compliance cost. Some might evaluate their compliance
4
WORKING PAPER 97-12
burden for a given tax in relation to their compliance burden for the other taxes they face. Others may consider their compliance costs in relation to the total amount of taxes paid. Still others may compare their burden to what they perceive that similar businesses in other jurisdictions are experiencing. As a result, one needs to be very careful in interpreting the statistics on reported compliance costs. These statistics provide a useful indication of how high respondents perceive their compliance burdens to be, but they do not provide an objective measure of the actual compliance costs faced by the respondents. Table 7 provides statistics on the magnitude of perceived in-house and outside compliance costs for various taxes. For the purposes of this study, corporate income and capital taxes were combined together. However, many firms in the sample would likely have insufficient assets to be subject to capital taxes at the provincial or federal levels.3 Separate rankings of federally administered and provincially administered corporate income and capital taxes were requested. Based on a ranking from 1 to 4, federally administered corporate income and capital taxes received an average ranking of 2.81 for in-house compliance costs and 2.43 for outside costs. The cost of complying with provincially administered corporate income and capital taxes received a similar ranking (2.88 for in-house costs and 2.51 for outside costs, implying only a slightly lower perceived burden). When viewed in relation to payroll and sales taxes, the in-house compliance burden ranks relatively low for corporate income and capital taxes. However, outside compliance costs are reportedly higher, making it unclear whether the combined in-house and outside compliance burden is perceived to be higher or lower. Licences and other fees, followed by property and other local taxes, receive the lowest rankings for both in-house and external costs.
7. Determinants of Perceived Compliance Costs In this section, probit analysis is used to explore what aspects of a firm and its tax circumstances are most responsible for the perceived compliance burden from corporate income and capital taxes. Because only subjective rankings of compliance costs are available, it is not possible to measure the impact of various factors (firm size, industry, location, etc.) on the actual compliance burden of small and medium-sized businesses. Rather, one only can attempt to infer how such factors are related to perceptions of the magnitude of this burden. Four separate models are estimated, accounting separately for federally administered and provincially administered taxes, and within each category, for perceived in-house and outside compliance costs. Firms are sorted into two classes according to their rankings of compliance costs. Those reporting that their costs are high or very high are put into class one, while those reporting their costs as moderate or low are put into class zero. The following variables are used to explain which class a firm is likely to fall into:
3
All incorporated firms in Quebec, however, face provincial capital tax, as there is no exempt-asset level. British Columbia, Manitoba and Ontario have exempt-asset levels ranging from $1 million to $2 million, whereas the exemption levels in other provinces with capital taxes, and for the federal large corporations tax, are higher.
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
CONSTANT:
the constant term of the model
NEMPL:
the number of full-time equivalent employees
NYRSBUS:
the number of years a firm has been in business
AGRIC:
dummy variable for agricultural industry category
CONSTR:
dummy variable for construction industry category
TRANCOM:
dummy variable for transportation and communications industry category
OTHPRIM:
dummy variable for other primary industry category
WHOLESL:
dummy variable for wholesale trade industry category
RETAIL:
dummy variable for retail trade industry category
FINANC:
dummy variable for finance and insurance industry category
BUSSERV:
dummy variable for business services industry category
COMSERV:
dummy variable for community services industry category
OTHSERV:
dummy variable for hospitality, personal, and other services category
UNCLASS:
dummy variable for firms with no classified industry category
BC:
dummy variable for residence in British Columbia
YUKON:
dummy variable for residence in Yukon
ALTA:
dummy variable for residence in Alberta
NWT:
dummy variable for residence in Northwest Territories
SASKAT:
dummy variable for residence in Saskatchewan
MANITOB:
dummy variable for residence in Manitoba
QUEB:
dummy variable for residence in Quebec
NB:
dummy variable for residence in New Brunswick
NS:
dummy variable for residence in Nova Scotia
PEI:
dummy variable for residence in PEI
NFLD:
dummy variable for residence in Newfoundland
PREP:
dummy variable for management assistance by an outside professional
5
The omitted dummy variable for industry category is manufacturing. Therefore, the signs of the coefficients for the industry dummy variables indicate whether a given industry is more (indicated by a positive sign) or less (indicated by a negative sign) likely than manufacturing to be associated with high or very high perceived compliance costs. The omitted dummy variable for province/territory is Ontario. Therefore, the signs of the coefficients for the province/territory dummy variables indicate whether a given province is more (indicated by a positive sign) or less (indicated by a negative sign) likely than Ontario to be associated with high or very high perceived compliance costs.
6
WORKING PAPER 97-12
Table 8 presents the results of the analysis of reported in-house compliance costs for corporate income and capital taxes that are federally administered. For variables NEMPL or NYRSBUS, the marginal effect provides an estimate of the change in the probability that a firm would report high or very high in-house compliance costs from a one unit increase in the variable (an additional employee or an additional year of operation), holding all other variables constant at their mean values in the sample. For the dummy variables, the marginal effect provides an estimate of the change in the probability that a firm would report high or very high in-house compliance costs if the variable were to change from zero to one (i.e. if the characteristic in question were to become present), holding all other variables constant at their mean values in the sample. As indicated by their t-statistics, many of the explanatory variables do not have a statistically significant effect on the probability that a firm would report high or very high in-house compliance costs. For example, the number of employees and the number of years in business are not significantly related to the perceived compliance burden.4 However, certain variables have very important effects. For example, a firm from the other primary industry category is about 16 percent more likely to report high or very high in-house compliance costs than a manufacturing firm, all other factors held constant. The construction, transportation and communications, retail, and other personal services industries also are associated with a greater incidence of high reported in-house compliance burdens. Some provinces also are associated with relatively high reported in-house compliance costs. In particular, firms residing in Quebec are almost 24 percent more likely perceive that they experience high or very high costs than firms residing in Ontario, after controlling for other factors. Whether the actual in-house compliance burden for firms in Quebec is substantially higher than for firms in Ontario is an open question, but it appears that Quebec firms perceive this to be the case. Saskatchewan is also associated with a somewhat greater incidence of high perceived compliance costs. A firm from Newfoundland, on the other hand, is 12 percent less likely than a firm from Ontario to perceive that its in-house compliance costs are high or very high, other factors held constant. As one would expect, firms that rely on outside management assistance for federal corporate and capital taxes tend to have lower perceived in-house costs. Table 9 presents the results of the analysis of reported outside compliance costs for corporate income and capital taxes that are federally administered. Again, the size of a firm as measured by the number of employees and the number of years of operation are not significantly related to the reported compliance burden. As with reported in-house compliance costs, the construction, other primary, retail, and other personal service industries (but not transportation and communications) are associated with relatively high perceived outside compliance costs. On the other hand, the business service industry is associated with a relatively low perceived outside compliance burden. Quebec is again associated with a greater incidence of high compliance burden reports (about 10 percent greater than Ontario, after controlling for other factors). As one would expect,
4
When firm size is measured using dummy variables for gross receipt category in place of NEMPL, it continues to have no significant effect on compliance burden.
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
7
firms that rely on outside professional assistance to manage and administer their federal corporate income and capital taxes report a greater incidence of high outside compliance costs than other firms. Table 10 presents the results of the analysis of reported in-house compliance costs for corporate income and capital taxes that are provincially administered. These results should be interpreted with great caution, however. As mentioned in the previous section, it appears that many respondents misinterpreted provincially administered taxes to mean taxes owed to a particular province. Relative to manufacturing, the other primary, construction, transportation and communications, and retail and other personal services industries all have a greater reported incidence of high in-house compliance costs. In the case of provincial affiliation, Quebec again is associated with relatively high perceived compliance costs. Controlling for other factors, a firm from Quebec is 26 percent more likely than a firm from Ontario to report a high or very high inhouse compliance burden. Firms from many provinces that do not administer their own corporate income tax report costs as high or higher than those in Ontario, however. This seems highly implausible (since most of these firms would not be subject to any provincially administered income or capital taxes) and is presumably due to their misinterpretation of the term “provincially administered.” Table 11 presents the results of the analysis of reported outside compliance costs for corporate income and capital taxes that are provincially administered. Like the results in Table 10, these results should be treated with great caution. The other primary, retail and other personal service categories are associated with relatively high perceived outside compliance burdens, while the business services category has a relatively low reported compliance burden. Quebec has a much greater incidence of high outside compliance cost reports than Ontario, controlling for other factors, while Alberta and especially Newfoundland have a lower relative incidence. As with all of the other analyses, firm size, as measured by the number of employees and the number of years of operation, have no significant relationship with compliance costs after controlling for other factors.5
8. Sources of High Perceived Federal Compliance Costs One of the survey questions inquires about the aspects of federal corporate income tax compliance that create the most problems for business. The firms were instructed to circle as many of the 10 listed potential sources of compliance problems as applied. In addition, space was provided to write in an alternative source. On average, firms circled three sources. The percentage of firms circling each source is presented in Table 12. The most frequently chosen source was the cost of professional services (58.8 percent), followed by record-keeping requirements (45.5 percent), the complexity of information requested (32.4 percent), and the lack of co-ordination among governments (28.9 percent). Firms that have been in operation for less
5
Nor does size have a significant effect in any of the analyses when it is instead measured using dummy variables for gross receipt category.
8
WORKING PAPER 97-12
than two years were relatively more likely to report that rules or procedures are unclear, and relatively less likely to report the frequency of remittances, the cost of professional services, or the cost of audits, appeals and litigation as problems. Larger firms, as measured by gross receipts, were relatively more likely to report the frequency of remittances, the cost of professional services, the lack of co-ordination among governments, and the cost of audits, appeals and litigation. They were relatively less likely to report record-keeping requirements or penalties.
Concluding Remarks In contrast to the other taxes they face, the vast majority of small and medium-sized businesses report that they rely on outside professional assistance to comply with their corporate income and capital taxes. The high use of external income tax assistance was also cited by the panel of accounting experts in the Plamondon study (1996). As discussed in that report, smaller businesses are likely to lack the technical knowledge to properly complete an income tax return; may not be familiar with recent tax changes; and would in all probability find it cost-inefficient to attempt to develop this expertise in-house. Although the availability of outside tax assistance undoubtedly reduces the overall compliance burden for these firms, the high cost of this assistance is nonetheless the most commonly reported source of compliance problems by respondents. In contrast, very large businesses, which tend to do much more of their tax work in-house, are less likely to express concern over this issue. As reported in Erard (1997) the burdens of complying with foreign reporting rules and participating in audits and appeals are much more common sources of concern for large corporations. However, income tax complexity in general and the lack of tax co-ordination among governments are frequently cited compliance problems by businesses of all sizes. Perceptions about the level of corporate income and capital tax compliance costs vary substantially among small and medium-sized businesses. Somewhat surprisingly, however, neither firm size nor number of years in operation are related to these perceptions. However, a disproportionate share of firms in the construction, other primary, retail, and other personal service industries perceive that their compliance costs are either high or very high. In addition, firms located in Quebec are much more likely to perceive high or very high compliance costs than their counterparts in other provinces. Whether actual compliance costs are substantially higher among such businesses is not certain, however, because different respondents may apply different standards of reference when classifying their costs as “high” or “low.” Nonetheless, perceptions are important in understanding how business owners feel about the tax system in which they participate.
9
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
TABLE 1 Percentage Distribution of Firms by Employment Category Number of Full-time Equivalent Employees
CFIB Membership
Survey Respondents
less than 5
39.8
39.2
5 to 19
44.7
40.6
20 to 49
11.0
13.9
50 to 499
4.5
6.3
100.0
100.0
Total
Sources: CFIB tabulation for overall membership as of June 27, 1996; author’s tabulation for survey respondents.
TABLE 2 Percentage Distribution of Firms by Industrial Category
Industry
CFIB Membership
Survey Respondents
Agriculture
6.4
5.7
Other Primary
1.8
1.6
Manufacturing
13.4
14.6
Construction
11.6
9.7
Transportation and Communications
4.2
3.9
Wholesale
7.5
9.1
29.4
22.8
Financial, Insurance and Real Estate
4.3
6.5
Business Services
7.9
11.4
Community Services
2.5
3.0
10.9
8.7
–
3.0
Retail
Hospitality and Personal Services Unclassified Total
100.0
100.0
Sources: CFIB tabulation for overall membership as of June 27, 1996; author’s tabulation for survey respondents.
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WORKING PAPER 97-12
TABLE 3 Percentage Distribution of Firms by Employment Number of Full-time Equivalent Employees
CFIB Membership
All Small and Mediumsized Firms
less than 5
39.8
75.4
5 to 19
44.7
17.9
20 to 49
11.0
4.3
50 to 499
4.5
2.2
100.0
100.0
Total
Sources: CFIB tabulation for overall membership as of June 27, 1996; Statistics Canada Small Business and Special Surveys Division estimates as reported in Lagacé (1997) for all small and medium-sized firms with paid employees in 1993.
TABLE 4 Respondent Characteristics Characteristic
Value
Sample Size
Mean number of full-time equivalent employees
15.3
8,576
Mean number of years in business
19.6
8,576
$38,025
4,727
79.8
4,727
$16,963
4,215
66.4
4,215
Mean federal income and capital tax paid Percent paying positive federal income and capital taxes Mean ‘separately filed’ provincial income and capital tax paid Percent paying ‘separately filed’ positive provincial income and capital taxes
Note: Sample restricted to firms reporting an answer other than "None/Not Applicable" to either question 12A or question 13A (pertaining to in-house and outside compliance costs, respectively).
11
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
TABLE 5 Distribution of Gross Receipts Range ($ thousands)
Frequency
Percent
Cumulative Percent
0-19
40
0.5
0.5
20-49
134
1.6
2.1
50-99
438
5.3
7.3
100-199
958
11.5
18.8
200-499
1,673
20.1
38.9
500-999
1,596
19.1
58.0
1,000-1,999
1,631
19.6
77.6
2,000-4,999
1,059
12.7
90.3
808
9.7
100.0
5,000 and over
Note: Sample restricted to firms reporting an answer other than "None/Not Applicable" to either question 12A or question 13A (pertaining to in-house and outside compliance costs, respectively).
TABLE 6 Use of Professional Outside Management Assistance Percentage Using Professional Assistance
Sample Size
Income and capital filed with federal government
75.2
8,668
Income and/or capital filed separately to provinces
72.6
8,020
Payroll (EI/UI, CPP/QPP, WCB/CSST, etc.)
16.1
8,408
Sales (GST, PST)
9.5
8,373
Local (commercial property, development charges)
4.3
8,408
Licences, registration fees, other
3.4
8,587
Type of Tax
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WORKING PAPER 97-12
TABLE 7 Distribution of Compliance Cost Rankings Type of Tax
Income and capital tax filed federally Income and/or capital tax filed provincially
Percent with Ranking In-house Costs (outside costs) Very High High Moderate Low (1) (2) (3) (4) 7.4 26.2 44.0 22.4 (13.5) (39.5) (37.3) (9.7)
Mean Rank
2.81 (2.43)
5.9 (11.9)
24.3 (37.2)
45.2 (38.9)
24.6 (12.0)
2.88 (2.51)
Payroll
9.6 (7.5)
31.2 (25.3)
44.4 (41.7)
14.8 (25.5)
2.64 (2.85)
Sales
13.0 (9.2)
32.4 (25.9)
40.7 (39.0)
13.8 (25.9)
2.55 (2.82)
Local
3.1 (3.6)
9.3 (12.4)
42.1 (36.9)
45.4 (47.1)
3.30 (3.27)
Licences, registration fees, other
3.8 (4.0)
12.1 (13.2)
41.8 (37.1)
42.4 (45.7)
3.23 (3.24)
Note: Figures based on firms responding with an answer other than "None/Not Applicable" to question 12 (13).
13
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
TABLE 8 Probit Analysis of In-house Compliance Costs for Income and Capital Taxes Filed Federally Parameter Estimate
t-statistic
-.5186
-9.48
.0005
0.91
.0002
0.91
-.0004
-0.45
-.0001
-0.45
AGRIC
.0990
1.33
.0365
1.31
OTHPRIM
.4146
3.47
.1598
3.36
CONSTR
.1514
2.46
.0563
2.41
TRANCOM
.2199
2.67
.0828
2.59
WHOLESL
.0555
0.88
.0203
0.87
RETAIL
.1540
3.02
.0568
2.98
FINANC
-.0454
-0.63
-.0163
-0.64
BUSSERV
-.0190
-0.31
-.0069
-0.31
COMSERV
.0045
0.05
.0016
0.05
OTHSERV
.2266
3.57
.0851
3.47
UNCLASS
.3376
1.04
.1294
1.00
BC
.0241
0.48
.0088
0.48
YUKON
.3772
1.49
.1451
1.43
ALTA
.0056
0.10
.0020
0.10
NWT
.0030
0.01
.0011
0.01
SASKAT
.1137
1.71
.0421
1.68
MANITOB
.0154
0.27
.0056
0.20
QUEB
.6175
13.36
.2376
13.15
NB
.0021
0.02
.0008
0.02
NS
-.0532
-0.64
-.0191
-0.64
PEI
-.0179
-0.11
-.0065
-0.11
NFLD
-.3656
-2.17
-.1203
-2.45
PREP
-.1297
-3.77
-.0476
-3.73
Variable CONSTANT NEMPL NYRSBUS
Sample size:
7,718
log likelihood: -4,790.3
Marginal Effect
t-statistic
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WORKING PAPER 97-12
TABLE 9 Probit Analysis of Outside Compliance Costs for Income and Capital Taxes Filed Federally Variable
Parameter Estimate
CONSTANT
t-statistic
Marginal Effect
t-statistic
-.2308
-4.23
.0006
1.15
.0002
1.15
-.0001
-0.12
-.00004
-0.12
AGRIC
.0479
0.67
.0190
0.67
OTHPRIM
.2304
1.95
.0901
2.00
CONSTR
.1022
1.71
.0405
1.72
TRANCOM
.0476
0.59
.0189
0.59
WHOLESL
.0245
0.41
.0098
0.41
RETAIL
.1106
2.27
.0439
2.28
FINANC
.0053
0.08
.0021
0.07
BUSSERV
-.1321
-2.15
-.0526
-2.15
COMSERV
-.0242
-0.27
-.0096
-0.27
OTHSERV
.1635
2.65
.0645
2.68
UNCLASS
.3205
0.97
.1239
1.02
BC
.0372
0.76
.0148
0.76
YUKON
.6180
2.24
.2261
2.61
ALTA
-.0655
-1.27
-.0261
-1.27
NWT
.3694
0.99
.1417
1.05
SASKAT
-.0036
-0.05
-.0014
-0.05
MANITOB
-.0537
-0.74
-.0214
-0.73
QUEB
.2538
5.43
.0995
5.54
NB
.0110
0.13
.0044
0.13
NS
.0743
0.91
.0295
0.91
PEI
.0157
0.10
.0062
0.10
NFLD
-.2272
-1.46
-.0903
-1.47
PREP
.2751
7.56
.1094
7.61
NEMPL NYRSBUS
Sample size:
7,418
log likelihood:
-5,052.8
15
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
TABLE 10 Probit Analysis of In-house Compliance Costs for Income and Capital Taxes Filed Provincially Variable
Parameter Estimate
CONSTANT
t-statistic
Marginal Effect
t-statistic
-.6176
-10.93
.0005
0.83
.0002
0.83
-.00002
0.02
-.000008
0.02
AGRIC
.0718
0.89
.0252
0.88
OTHPRIM
.3773
2.90
.1407
2.75
CONSTR
.1583
2.47
.0565
2.40
TRANCOM
.1999
2.31
.0722
2.23
WHOLESL
.0068
0.10
.0023
0.10
RETAIL
.1916
3.60
.0679
3.53
FINANC
-.0260
-0.34
-.0089
-0.34
BUSSERV
-.0427
-0.64
-.0146
-0.65
COMSERV
.0264
0.26
.0092
0.25
OTHSERV
.2123
3.17
.0765
3.06
UNCLASS
-.0237
-0.07
-.0082
-0.07
BC
.0476
0.87
.0166
0.86
YUKON
.3924
1.27
.1470
1.20
ALTA
-.1948
-3.35
-.0644
-3.53
NWT
-.6775
-1.23
-.1839
-1.74
.0221
0.30
.0077
0.30
-.1060
-1.28
-.0357
-1.32
QUEB
.6971
14.72
.2626
14.28
NB
.0167
0.17
.0058
0.17
NS
-.0331
-0.35
-.0114
-0.35
PEI
-.1850
-1.06
-.0606
-1.13
NFLD
-.3618
-1.97
-.1117
-2.27
PREP
-.1263
-3.59
-.0442
-3.55
NEMPL NYRSBUS
SASKAT MANITOB
Sample size:
7,081
log likelihood:
-4,171.6
16
WORKING PAPER 97-12
TABLE 11 Probit Analysis of Outside Compliance Costs for Income and Capital Taxes Filed Provincially Variable
Parameter Estimate
CONSTANT
t-statistic
Marginal Effect
t-statistic
-.2945
-5.34
.0004
0.80
.0002
0.80
NYRSBUS
-.0007
-0.73
-.0003
-0.73
AGRIC
-.0095
-0.13
-.0038
-0.13
OTHPRIM
.2812
2.26
.1111
2.31
CONSTR
.0569
0.93
.0227
0.93
TRANCOM
-.0174
-0.21
-.0070
-0.21
WHOLESL
.0167
0.27
.0067
0.27
RETAIL
.1175
2.33
.0468
2.34
FINANC
-.0240
-0.33
-.0096
-0.33
BUSSERV
-.1377
-2.11
-.0547
-2.12
COMSERV
-.0125
-0.13
-.0050
-0.13
OTHSERV
.1281
2.01
.0510
2.02
UNCLASS
.1453
0.44
.0578
0.44
-.0271
-0.51
-.0108
-0.51
.3107
1.04
.1223
1.07
ALTA
-.1652
-3.11
-.0656
-3.14
NWT
-.3363
-0.64
-.1312
-0.66
SASKAT
-.0042
-0.06
-.0017
-0.06
MANITOB
-.1255
-1.63
-.0499
-1.63
.3431
7.22
.1355
7.39
NB
-.1059
-1.11
-.0421
-1.12
NS
.0168
0.18
.0067
0.18
PEI
-.1998
-1.17
-.0790
-1.19
NFLD
-.3856
-2.26
-.1496
-2.38
PREP
.3008
8.30
.1190
8.43
NEMPL
BC YUKON
QUEB
Sample size:
6,834
log likelihood:
-4,636.1
17
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
TABLE 12 Sources of High Federal Income Tax Compliance Costs Aspects of Federal Income Tax Compliance Causing Most Problems
Number of Firms Reporting
Percentage of Firms Reporting
Frequency of remittances
2,340
27.2
Complexity of information requested
2,780
32.4
Redundancy of information requested
2,273
26.5
Record-keeping requirements
3,899
45.5
Cost of professional services
5,046
58.8
Penalties
2,197
25.6
Rules or procedures are unclear
2,106
24.6
Lack of co-ordination among governments
2,478
28.9
Cost of tax audits, appeals and litigation
1,344
15.7
Complexity makes advance planning impossible
1,607
18.7
222
2.6
Other
NOTE: Sample restricted to firms reporting an answer other than "None/Not Applicable" to either question 12A or question 13A (pertaining to in-house and outside compliance costs, respectively)
.
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
23
References Erard, B. (1997) “The Income Tax Compliance Burden on Canadian Big Business,” Working Paper 97-2, Technical Committee on Business Taxation, Ottawa. Lagacé, C. (1997) “Small Business Primer,” Canadian Federation of Independent Businesses Research Report, April, Willowdale, Ontario. Plamondon, R. (1996) “Compliance Issues: Small Business and the Corporate Income Tax System,” Working Paper 96-9, Technical Committee on Business Taxation, Ottawa. Pope, J., R. Fayle, and D.-L. Chen. (1991) The Compliance Costs of Public Companies’ Income Taxation in Australia, 1986/1987. Sydney: Australian Tax Research Foundation. Sandford, C., M. Godwin, and P. Hardwick. (1989) Administrative and Compliance Costs of Taxation. Bath, U.K.: Fiscal Publications Sandford, C. and J. Hasseldine. (1992) “The Compliance Costs of Business Taxes in New Zealand,” Mimeo, Institute of Policy Studies, Victoria University of Wellington. Slemrod, J. and M. Blumenthal. (1993) “The Income Tax Compliance Cost of Big Business,” Working Paper No. 93-11, the University of Michigan School of Business Administration. Vaillancourt, F. (1987) “The Compliance Costs of Taxes on Businesses and Individuals: A Review of the Evidence,” Public Finance (42:3) 395-414.
Note: I am grateful to the Committee, particularly John Sargent and Jack Mintz, the Department of Finance and Revenue Canada for helpful comments and suggestions. I also thank the Canadian Federation of Independent Businesses, particularly Ted Mallett, for administering the survey described in this report.
24
WORKING PAPER 97-12
Technical Committee on Business Taxation The Technical Committee was established by the Minister of Finance, at the time of the March 1996 federal budget, to consider ways of: • • •
improving the business tax system to promote job creation and economic growth, simplifying the taxation of businesses to facilitate compliance and administration, and enhancing fairness to ensure that all businesses share the cost of providing government services.
The report of the Technical Committee was released in April 1998, with public consultations to follow the release of the report. The Technical Committee was composed of a panel with legal, accounting and economic expertise in the tax field. The members are: Mr. Robert Brown Price Waterhouse Toronto, Ontario Mr. James Cowan Stewart McKelvey Stirling Scales Halifax, Nova Scotia Mr. Wilfrid Lefebvre Ogilvy Renault Montreal, Quebec Professor Nancy Olewiler Department of Economics Simon Fraser University Burnaby, British Columbia Mr. Stephen Richardson Tory Tory Deslauriers & Binnington Toronto, Ontario
Professor Bev Dahlby Department of Economics University of Alberta Edmonton, Alberta Mr. Allan Lanthier Ernst & Young Montreal, Quebec Professor Jack Mintz, Chair Joseph L. Rotman School of Management University of Toronto Clifford Clark Visiting Economist (1996-1997) Department of Finance Ottawa, Ontario Mr. Norm Promislow Buchwald Asper Gallagher Henteleff Winnipeg, Manitoba
The Technical Committee commissioned a number of studies from outside experts to provide analysis of many of the issues being considered as part of its mandate. These studies were released as working papers to make the analysis available for information and comment. The papers received only limited evaluation; views expressed are those of the authors and do not necessarily reflect the views of the Technical Committee. A list of research studies follows. They may be requested from: Distribution Centre Department of Finance 300 Laurier Avenue West Ottawa, Ontario K1A 0G5 Telephone: (613) 995-2855 Facsimile: (613) 996-0518 They are also available on the Internet at http://www.fin.gc.ca/
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
Technical Committee on Business Taxation Research Studies WORKING PAPER 96-1
Comparison and Assessment of the Tax Treatment of Foreign-Source Income in Canada, Australia, France, Germany and the United States Brian Arnold (Goodman Phillips & Vineberg) Jinyan Li and Daniel Sandler (University of Western Ontario)
WORKING PAPER 96-2
Why Tax Corporations? Richard M. Bird (University of Toronto)
WORKING PAPER 96-3
Tax Policy and Job Creation: Specific Employment Incentive Programs Ben Cherniavsky (Technical Committee Research Analyst)
WORKING PAPER 96-4
The Effects of Taxation on U.S. Multinationals and Their Canadian Affiliates Jason G. Cummins (New York University)
WORKING PAPER 96-5
The Integration of Corporate and Personal Taxes in Europe: The Role of Minimum Taxes on Dividend Payments Michael P. Devereux (Keele University)
WORKING PAPER 96-6
International Implications of U.S. Business Tax Reform Andrew B. Lyon (University of Maryland)
WORKING PAPER 96-7
The Economic Effects of Dividend Taxation Ken J. McKenzie (University of Calgary) Aileen J. Thompson (Carleton University)
WORKING PAPER 96-8 Capital Tax Issues
Peter E. McQuillan and E. Cal Cochrane (KPMG, Toronto)
WORKING PAPER 96-9
Compliance Issues: Small Business and the Corporate Income Tax System Plamondon & Associates Inc. (Ottawa)
WORKING PAPER 96-10
Study on Transfer Pricing Robert Turner, C.A. (Ernst & Young, Toronto)
WORKING PAPER 96-11
The Interaction of Federal and Provincial Taxes on Businesses Marianne Vigneault (Bishop’s University) Robin Boadway (Queen’s University)
WORKING PAPER 96-12
Taxation of Inbound Investment W.G. Williamson and R.A. Garland (Arthur Andersen, Toronto)
25
26
WORKING PAPER 97-12
Technical Committee on Business Taxation Research Studies (Cont’d) WORKING PAPER 97-1 The Sensitivity of the Corporate Income Tax to the Statutory Rate Peter Dungan, Steve Murphy, Thomas A.Wilson (University of Toronto)
WORKING PAPER 97-2 The Income Tax Compliance Burden in Canadian Big Business Brian Erard (Carleton University)
WORKING PAPER 97-3 Taxes, the Cost of Capital, and Investment: A Comparison of Canada and the United States Kenneth J. McKenzie (University of Calgary) Aileen J. Thompson (Carleton University)
WORKING PAPER 97-4 Tax Policy and the Dynamic Demand for Domestic and Foreign Capital by Multinational Corporations Rosanne Altshuler (Rutgers University) Jason G. Cummins (New York University)
WORKING PAPER 97-5 Tax-exempts and Corporate Capital Structure Thomas A. Wilson and Steve Murphy (University of Toronto)
WORKING PAPER 97-6 A Critical Review of the Empirical Research on Canadian Tax Compliance Brian Erard (Carleton University)
WORKING PAPER 97-7 The Incidence of the Corporate Tax Revisited John Whalley (Universities of Western Ontario and Warwick, and NBER)
WORKING PAPER 97-8 Efficiency Considerations in Business Tax Reform John Whalley (Universities of Western Ontario and Warwick, and NBER)
WORKING PAPER 97-9 Tax-exempt Organizations and the Financing of Taxable Businesses Thomas E. McDonnell (The McDonnell Consulting Corporation, Toronto)
WORKING PAPER 97-10 Tax-exempts and Corporate Capital Structure: An Analysis of Efficiency and Revenue Implications James Pesando, Michael Smart and Thomas A. Wilson (University of Toronto)
The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses
27
Technical Committee on Business Taxation Research Studies (Cont’d) WORKING PAPER 97-11 Business Taxation of SMEs in Canada Kenneth Hendricks, Raphael Amit, and Diana Whistler (University of British Columbia)
æ WORKING PAPER 97-12 The Income Tax Compliance Burden on Small and Medium-sized Canadian Businesses Brian Erard (Carleton University)
WORKING PAPER 97-13 Effects of the Treatment of Tax Losses on the Efficiency of Markets and the Incidence of Mergers Michel Poitevin (Université de Montréal)
WORKING PAPER 97-14 Tax Reforms, Debt Shifting and Tax Revenues: Multinational Corporations in Canada Vijay Jog (Carleton University) and Jianmin Tang (Technical Committee secretariat)
WORKING PAPER 97-15 The Calculation of Marginal Effective Tax Rates Kenneth J. McKenzie (University of Calgary), Mario Mansour (Department of Finance) and Ariane Brûlé (Technical Committee secretariat)
WORKING PAPER 97-16 Analysis of National Pollutant Release Inventory Data on Toxic Emissions by Industry Nancy Olewiler and Kelli Dawson (Simon Fraser University)
WORKING PAPER 97-17 The Evolution of Business Taxes in Canada: Data and Estimates John H. Sargent, Claude Bilodeau, Jeanine Hage and Mindy Sichel (Technical Committee secretariat)
