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Small Business
Working Committee
report to ministers
Breaking Through Barriers
Forging our Future

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Copies of the report are available from:
Publications Centre
Industry Canada
Second Floor, East Tower
235 Queen Street
OTTAWA, Ontario
K1A 0H5
Tel: (613) 954-5716
Fax: (613) 954-6436
Acknowledgement
Financial support from the Government of Canada to pay for
the publication of this report is gratefully acknowledged.
The views expressed in this report are not necessarily those of
the Government of Canada.
© The Small Business Working Committee 1994
Cat. No. C2-253/1994E
ISBN 0-662-22794-8
SISB PU 0035-94-01
Aussi disponible en français sous le titre Franchir les
obstacles : Bâtir notre avenir.

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Members of the Small Business Working Committee . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2. TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
The Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Profit-Insensitive Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Tax Complexity and Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Harmonization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Coordination and Simplification . . . . . . . . . . . . . . . . . . . . . . . . . 18
Penalties and Dispute Handling . . . . . . . . . . . . . . . . . . . . . . . . . 18
Clarity and Consistency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Services to Taxpayers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Goods and Services Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Corporate Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Lifetime Capital Gains Exemption (LCGE) . . . . . . . . . . . . . . . . . . . . . . 21
3. FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
The Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Debt Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Loan Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Personal Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Lending Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Bank Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Environmental Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Lending to Knowledge-based Businesses . . . . . . . . . . . . . . . . . 25
Institutional Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Chartered Bank Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Caisses populaires/Credit Unions . . . . . . . . . . . . . . . . . . . . . . . 27
Leasing Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Federal Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Lender Innovations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Improved Lender Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Government Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Government Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

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Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Equity Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Private Sources of Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Knowledge-based Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Labour-sponsored Venture Capital . . . . . . . . . . . . . . . . . . . . . . . 33
Community Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Quebec Community Fund Initiatives . . . . . . . . . . . . . . . . . . . . . . 34
Federal Business Development Bank . . . . . . . . . . . . . . . . . . . . 35
New Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Current Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Community Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4. THE BURDEN OF GOVERNMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
The Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Regulatory Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Regulatory Flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Clarity, Accessibility, Interpretation . . . . . . . . . . . . . . . . . . . . . . . 41
Regulatory process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Consultations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Impact Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Complaints and Appeals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Review of Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Testing, approvals and certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Information burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Previous Reduction Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Specific Irritants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Procurement and Quick Payment . . . . . . . . . . . . . . . . . . . . . . . . 50
5. SKILLS DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
The Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Matching Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Priority Areas for Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Rationalizing government training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Human Resources Development Canada . . . . . . . . . . . . . . . . . 56
Unemployment Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Apprenticeship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Co-operative Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Access to information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Business Skills Development Network . . . . . . . . . . . . . . . . . . . . 60
Training standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
A Training Sector Council . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Awareness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

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Community-based Implementation . . . . . . . . . . . . . . . . . . . . . . . 63
6. SCIENCE AND TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
The Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Innovation and Commercialization . . . . . . . . . . . . . . . . . . . . . . . 65
Innovation and SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Tax incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Procurement issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Canadian Technology Development Program . . . . . . . . . . . . . . 69
Procurement of Finished Goods, Services and Engineering
Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Unsolicited Proposals Program . . . . . . . . . . . . . . . . . . . . . . . . . 71
Privatization/Contracting-Out . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Direct support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
7. TRADE DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
The Opportunity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Existing Trade Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
The needs continuum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Getting Export Ready . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
An incentive: Trade Starters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
A Business Government Partnership in Trade . . . . . . . . . . . . . . 78
Strategic Market Intelligence . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Detailed Market Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Export Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Networking – Alliances and Mentoring . . . . . . . . . . . . . . . . . . . . 80
Education and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Technical Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Promotion of Canadian Products and Services . . . . . . . . . . . . . 81
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Annex A – Typical Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Annex B – Proposed System for
Assessing Information Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Annex C – Export Support
for SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

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M
EMBERS OF THE
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The following individuals have participated in the Small Business Working Committee
over the last six months. The positions taken in this report represent the majority
opinion of the group involved. Not every recommendation has been agreed to by every
individual on the committee, or the organizations they represent. November 14, 1994.
Brien G. Gray, Co-chair
Bev Brennan
Small Business Working Committee
Vice President, Finance
Senior Vice-President, Policy and Research
Philom Bios
Canadian Federation of Independent Business
Phil O’Brien, Co-chair
Jeff Burnham
Small Business Working Committee
President
Past Chairman, Canadian Chamber of Commerce
Working World Training Centre
Chairman & CEO, Devencore Ltd.
Nancy Adamo
Geoff Cannon
President
Executive Director
Hockley Valley Resort Ltd.
Institute for Small Business
Bank of Montreal
Carolyn Armstrong
Tom Cumming
Vice President
President and CEO
Toronto Bio-technology Initiative
The Alberta Stock Exchange
Mona Bandeen
Don Eastcott
Chair
President
Canadian Women Entrepreneur
Eadon Companies Group
of the Year Awards
Managing Director and
Corporate Secretary
Canadian Organization of
Small Business Inc.
Claire Boulanger
Shirley-Ann George
Vice-présidente
Executive Director, Ottawa
Services de Restaurant PHM inc.
Canadian Advanced Technology
Association

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John Gow
Janice Moyer
President
President & CEO
Silver Star Mountain Resort
Information Technology
Association of Canada
Frank Heaps
Jason Myers
President
Chief Economist
The Upper Canada Brewing Company
Canadian Manufactuers’ Association
Gilles Labbé
Pierre Reid
Chairman and CEO
Recteur
Héroux Inc.
Université de Sherbrooke
Yvon Lafortune
Paul Richards
Président et CEO
President
Nova Bus Corporation –
Proscience Inc.
Corporation Nova Quintech
Larry Licharson
Aubrey Rogers
President
Treasurer
Corporate Media Services Ltd.
Cape Breton Bulk Carriers
Dennis Mills, MP
Cathy Rose
Broadview-Greenwood
President
Parliamentary Secretary to
Creative Esthetics Dental Lab Inc.
The Minister of Industry
Jim Moore
Stuart Smith
Vice President, Policy
President
Canadian Exporters Association
Philip Utilities Management
Corporation
Barbara Mowat
Garth Steele, C.A.
President
GST Partner
Impact Communications Ltd.
Welch and Company

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David Walker, M.P.
Dennis Wood
Winnipeg North Centre
Chairman and CEO
Parliamentary Secretary to
C-MAC Industries
The Minister of Finance
Warren Walker
Larry Zepf
Senior Vice President
President
Bank of Nova Scotia
Zepf Technologies
Rod White
Vice President
NewEast Technologies Inc.

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Preface
In the February 1994 budget document Growing Small Businesses, the Minister of
Finance, The Honourable Paul Martin and the Minister of Industry, The Honourable
John Manley, invited representatives from the private sector to provide the government
with practical recommendations addressing a variety of issues currently confronting the
small- and medium-sized business sector. In May 1994, the Small Business Working
Committee, originally comprised of two groups, the Business Environment Committee
and the Committee on Growth Issues, met for the first time.
Following their first meeting, and in order to address the variety of issues confronting
them, they formed six subgroups to address the issues of: taxation, financing,
regulation and paper burden; skills development; science and technology; and
international trade.
The Committee has met some 16 times throughout the spring, summer and fall, and
has received presentations from a broad range of public and private sector
representatives on a variety of small business issues.
The Committee was supported in its activities by a Secretariat comprised of the
following individuals:
Michael Flaherty, Nathalie Lavallée – Industry Canada
Gerry Binks – Department of Finance
Marcel Plamondon – Federal Office of Regional Development (Québec)
Ken Littlepage – Atlantic Canada Opportunities Agency
Christine Winiarz-Searle – Western Economic Diversification Canada
Minh Trinh – Human Resources Development Canada
Pamela Richmire – Department of Justice.
In addition, the Committee wishes to thank the many other individuals who donated
their time to ensure the work was done.

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E
XECUTIVE
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UMMARY
A world of unrelenting change presents unlimited opportunities. Those willing to take
advantage of these opportunities need to be innovative and courageous. They need to
rise above the ordinary and challenge the status quo.
Canadian entrepreneurs have demonstrated their ability to be innovative and dynamic.
The small businesses they own and operate represent channels for the energy and
creativity of an increasing number of individual Canadians. Small businesses exist in
every corner of this country, from large metropolitan areas to tiny and remote
communities. To ignore this vast pool of entrepreneurial energy is to miss a
tremendous opportunity for the Canadian economy.
THE SMALL BUSINESS WORKING COMMITTEE
Through the February 1994 budget, the Honourable John Manley, Minister of Industry,
and The Honourable Paul Martin, Minister of Finance, extended an invitation to bring
together representatives of Canada’s small and medium enterprise (SME) community to
advise on what action should be taken to ensure continued SME growth. The specific
mandate of the Committee was:
to provide advice on the real problems faced by SMEs and the types of
assistance that they really need; and
to recommend new approaches to ensure sustainable SME growth.
The Committee consisted of a wide range of representatives and stakeholders drawn
from the SME community across Canada.
WHY IS SMALL BUSINESS SO SIGNIFICANT?
Small business has come of age in Canada. Over the past two decades, the number of
new businesses in Canada has surged. Significantly, 99 percent of this country’s small
businesses employ fewer than 100 people. An additional 1.5 million individuals are
currently self-employed.
Taken together, the small business sector now accounts for approximately 40 percent
of Canada’s GDP. It is responsible for more than a quarter of alls ales, a third of all
profits and a fifth of all assets. Even more striking, the small business sector now
accounts for over half of all private sector employment. Clearly, the impact of small
business on the Canadian economy is profound and will continue to be relied upon for
economic growth and job creation.

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WHAT BARRIERS DOES SMALL BUSINESS FACE?
As we enter the 21
st
century, Canada’s SMEs confront significant challenges.
Public policies of the past three decades have left Canada with a massive
federal debt, an alarming deficit, high taxes and a rigid regulatory environment.
These are onerous barriers that seriously impact small business growth.
Assessing suitable financial support is critical to the expansion of SMEs.
Without adequate financing, the growth of these businesses will be stunted and
our future prosperity threatened.
Technology has given small firms the tools to extend their reach and increase
productivity. Technology has also intensified competition; small businesses must
remain technologically competitive if they are to survive and grow.
Owners and employees in today’s business environment require new and more
sophisticated skills.
The global economy has had a profound impact on our domestic economy – we
now must compete directly with the best in the world.
We need to address the significant barriers that stand in the way of unleashing the
entrepreneurial potential within our SMEs – primarily government debt, taxes and
regulation.
Government debt is fast approaching the unsupportable. Over the long term, debt
reduction can only be achieved if government expenditure cuts are accompanied by
policies which allow SMEs the freedom to create wealth and jobs. Governments must
also manage their affairs better, They need to reduce and re-orient programs not only
to cut costs, but to improve the way they interact with small businesses.
Taxes, at all levels, are too high. The effective tax burden on small business has
continuously increased primarily because of increases to profit-insensitive taxes (e.g. UI
premiums, Canada Pension Plan, Worker’s Compensation and property taxes).
Our regulatory system costs businesses time and money – existing regulatory
requirements create inefficiencies, reduce flexibility and impede innovation.
THE PRIORITIES FOR CHANGE
Small businesses are highly entrepreneurial and opportunity-driven. Governments
must provide an environment in which they will be motivated to remain and grow in
Canada. Given this reality, the Committee has identified the most urgent priorities for

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Canadian SMEs and presented recommendations designed to address them. To show
how these recommendations can be achieved, the Committee has provided detailed
implementation plans for each recommendation.
Together, these recommendations constitute a package of practical, common-sense
initiatives that, if implemented, will improve the competitive position of small business
and provide a sound basis for its further growth and development.
Cut profit-insensitive taxes: There has been an increased reliance on profit-
insensitive taxes by all levels of government. These levies are primarily payroll
taxes but also include business and licensing fees, and property taxes.
Together, these levies amount to a tax on job creation and a depletion of equity
capital. For small businesses, they result in lower retention of profits and greater
reliance on external financing. The Committee recommends that the federal
government reduce the burden of its own profit-insensitive taxes (specifically UI
and CPP) and partner with the provinces and municipalities to ensure they jointly
redress this fundamental impediment in the system.
Boost equity financing: Equity financing is a fundamental need for small
business. Small businesses have difficulty raising equity capital primarily
because of the relatively small amounts of equity that they require compared to
the costs and risks facing potential investors. The Committee recommends that
the federal government support the provision of equity financing for small
businesses by providing new tax incentives for private investors, ensuring that
current incentives such as the Labour-Sponsored Venture Capital Corporations
are effective and supporting the establishment of community-based equity
financing programs.
Increase financial institution participation in debt financing: Small
businesses find it difficult to obtain debt financing from traditional financial
institutions. Such institutions claim they are unable to service small loans
economically. They use conventional risk assessment policies which do not
favour small business, and they do not face the kind of competition that would
encourage them to pay attention to this market. The Committee recommends
that the major financial institutions increase their participation in small business
financing, and that the federal government use its leverage to increase
competition among these institutions to ensure that they significantly increase
their appetite for lending in this market.
Increase Small Business Deduction: Small businesses have access to the
Small Business Deduction (SBD) which reduces the federal tax rate on active
business income below $200 000. The $200 000 threshold, set in 1982, has not
been indexed to inflation, nor has it reflected significant recent increases in
profit-insensitive taxes. The Committee recommends that the federal
government adopt graduated SBD tax rates and increase the threshold to

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$400 000, thereby encouraging the continued growth of businesses that are
currently just over the $200 000 threshold by enabling more internal financing.
Stimulate SME exporting: A critical step in the exporting process occurs at the
detailed market research stage when a business has to make a serious
commitment backed by time, effort and money. Small businesses can be
encouraged to make this commitment if they feel that some of their investment in
market research can be recovered. To accomplish this, the Committee
recommends that the federal government implement a refundable tax credit
against foreign market research and development expenditures.
Reduce tax complexity and compliance costs: The complexity of tax
administration and onerous compliance costs at both the federal and provincial
levels impose a disproportionate burden on small businesses which usually have
limited resources and limited internal expertise. The Committee recommends
that all levels of government reduce complexity and compliance costs by
simplifying and harmonizing the tax system and adopting the goals of efficiency,
consistency, cooperation and fairness in their dealings with small business.
Refocus government financing programs: Government programs to support
debt financing for small business have proliferated with the result that there is
now substantial overlap in program activities and duplication of administrative
bureaucracies. This has increased the cost of delivering government assistance
and served to discourage SMEs from using the system because of its
complexity. The Committee recommends that the federal government
significantly reduce its own debt levels which will serve to lower the cost and
increase the availability of funds for small business. This can be achieved by
reducing and rationalizing government programs. Remaining government-
sponsored programs should be refocused to fill financing gaps not currently
served by the private sector.
Scientific Research and Experimental Development (SR&ED) Tax Credit:
Canadian sources of financing for knowledge-intensive ventures remain scarce.
The refundable portion of the SR&ED tax credit allows firms to maintain the cash
flow needed to fund innovative projects. The Committee recommends that the
current federal investment tax credit must be maintained and expanded to
include a broader scope of innovation activities.
Reduce and rationalize regulations: Too many regulations are developed and
administered with little consideration given to their impact on the competitiveness
of small businesses. Government must regulate less, simplify paperwork, limit
information requirements and get out of the way so that small business can
focus on creating wealth and jobs. Reducing regulatory burden will save the
government money and will yield tremendous benefits in terms of small business
productivity and competitiveness. The Committee recommends that the federal

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government remove unnecessary, ineffective or uncompetitive regulations,
rationalize existing regulations across departments and encourage regulatory
flexibility.
FISCAL NEUTRALITY
Some of the recommendations made by the Committee will save money, some are
fiscally neutral and some represent additional spending in the form of foregone tax
revenues. To offset any additional costs to the government, the Committee is in favour
of a comprehensive review of current small business programs which, it believes, will
result in substantial savings through the elimination of many programs and the
refocusing of others.
Where the Committee has recommended incentives, it does so on the understanding
that they be paid for from savings realized through the rationalization and reduction of
existing programs. The Committee believes that providing appropriate support and
incentives to small business will yield more wealth creation which will, in turn, sustain
employment, foster growth and generate additional tax revenues.
URGENT NEED FOR ACTION
A unique opportunity exists to harness the entrepreneurial energy of Canadian SMEs.
Grasping this opportunity will enable Canada to compete and prosper in the emerging
and very competitive world economy. However, the barriers imposed on small business
by all levels of government must be recognized and reduced. If this is not the case and
the barriers keep proliferating, small businesses will be unable to do the one thing that
they are best capable of doing – creating the wealth that is the key to meeting our
national fiscal and employment goals.
The real issue now comes down to what governments are prepared to do to abandon
outdated approaches and initiate significant changes in small business policy. When
Finance Minister Paul Martin and Industry Minister John Manley asked the members of
the Small Business Working Committee for their advice, they emphasized that they
were looking for concrete recommendations by the fall of 1994. The Committee
believes that it has done what was asked. It is now up to the federal government to
respond by acting promptly and decisively.
Though the formal work of the Committee is over, its members, along with the entire
small business community, will be watching what happens with keen interest. The
present administration has an opportunity to restore the federal government’s credibility
with small business. The Committee sincerely hopes that it takes advantage of this
opportunity.
Copies of the report are available from:

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Publications Centre
Industry Canada
Second Floor, East Tower
235 Queen Street
OTTAWA, Ontario
K1A 0H5
Tel: (613) 954-5716
Fax: (613) 954-6436

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1. I
NTRODUCTION
A world of unrelenting change presents unlimited opportunities. Those willing to take
advantage of these opportunities need to be innovative and courageous. They need to
rise above the ordinary and challenge the status quo.
Canadian entrepreneurs have demonstrated their ability to be innovative and dynamic.
The small businesses they own and operate represent channels for the energy and
creativity of an increasing number of individual Canadians. Small businesses exist in
every corner of this country, from large metropolitan areas to tiny and remote
communities. To ignore this vast pool of entrepreneurial energy is to miss a
tremendous opportunity for the Canadian economy.
THE SMALL BUSINESS WORKING COMMITTEE
Through the February 1994 budget, The Honourable John Manley, Minister of Industry
and The Honourable Paul Martin, Minister of Finance, extended an invitation to bring
together representatives of Canada’s small and medium enterprise (SME) community to
advise on what action should be taken to ensure continued SME growth. The specific
mandate of the Committee was:
to provide advice on the real problems faced by SMEs and the types of
assistance that they really need; and
to recommend new approaches to ensure sustainable SME growth.
The Committee consisted of a wide range of representatives and stakeholders drawn
from the SME community across Canada.
WHY IS SMALL BUSINESS SO SIGNIFICANT?
Small business has come of age in Canada. Over the past two decades, the number of
new businesses in Canada has surged. Significantly, 99 percent of this country’s small
businesses employ fewer than 100 people. An additional 1.5 million individuals are
currently self-employed.
Taken together, the small business sector now accounts for approximately 40 percent
of Canada’s GDP. It is responsible for more than a quarter of all sales, a third of all
profits and a fifth of all assets. Even more striking, the small business sector now
accounts for over half of all private sector employment. Clearly, the impact of small
business on the Canadian economy is profound and will continue to be relied upon for
economic growth and job creation.

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WHAT IS SMALL BUSINESS?
There are many ways of defining a small or medium business. Perhaps the most
common definition relates to the number of jobs it supports. In Canada, small
businesses are generally considered to be enterprises with fewer than 100
employees in the manufacturing sector and fewer than 50 in services, while
medium businesses employ up to 500 people. Another definition measures
wealth creation: small businesses are those that have annual sales below $5
million, while medium businesses sell up to $50 million annually. Another way of
thinking about business size is in relation to other enterprises in the same sector.
In some industries dominated by very large firms or in international markets, a
business employing hundreds of workers may still be considered quite small.
As we enter the 21
st
century, Canada’s SMEs confront significant challenges.
Public policies of the past three decades have left Canada with a massive
federal debt, an alarming deficit, high taxes and a rigid regulatory environment.
These are onerous barriers that seriously impact small business growth.
Accessing suitable financial support is critical to the expansion of SMEs.
Without adequate financing, the growth of these businesses will be stunted and
our future prosperity threatened.
Technology has given small firms the tools to extend their reach and increase
productivity. Technology has also intensified competition; small businesses must
remain technologically competitive if they are to survive and grow.
Owners and employees in today’s business environment require new and more
sophisticated skills.
The global economy has had a profound impact on our domestic economy – we
now must compete directly with the best in the world to survive.
SMALL BUSINESS – OUR BEST OPPORTUNITY
As governments and large corporations downsize and outsource activities, a growing
number of Canadians will either create their own jobs or work for small businesses.
Moreover, the emergence of a new, knowledge-intensive economy supported by
sophisticated information technologies will allow many more Canadians to become
entrepreneurs. In the future, most Canadians will spend their working lives in small

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businesses.
Governments can best help Canadians make this transition by making it easier for them
to create, maintain and expand their own businesses. They should focus their efforts
on creating a favourable business environment by reducing taxes, eliminating deficits
and rationalizing their own activities. In this way, small business will benefit from a
nurturing environment that can support growth and encourage international
competitiveness, and provide unemployed Canadians with the hope that improved job
opportunities will afford.
WHY DO SMALL BUSINESSES EXIST?
It is crucial for policy-makers to understand that small businesses do not exist to grow
and they do not exist to create jobs – they exist to create wealth for their owners and
shareholders. They will only grow and they will only hire people if by doing so they
create additional wealth for those owners and shareholders. As a result, owners and
shareholders must concentrate on what should be their real focus – efficiency,
productivity and competitiveness in the interests of long-term profitability.
Small business is often thought of as a single economic force. In fact, small business
represents a diversity of business types, interests and concerns. Small business can
be differentiated on the basis of numerous characteristics: size, stage of life cycle,
growth rates, ownership, sector, geographic location and strategic focus, to name a
few. What is common to all these types of businesses, however, is an entrepreneurial
desire to make their own decisions, to achieve their best, to contribute to their
communities and to see their efforts rewarded.
Ultimately, if the real purpose of a small business is wealth creation, then the best way
governments can support small business is to adopt measures that will help it achieve
that purpose. That will, in the first instance, mean allowing small businesses to retain
more of the wealth that they create to invest in future growth. It will also mean
implementing measures and incentives that help small business move into wealth-
creating activities, such as enhancing domestic competitiveness, pursuing technological
innovation and international market development.
FUNDAMENTAL PRINCIPLES FOR GOVERNMENT
There are a number of fundamental principles that governments should adopt in future
policy-making aimed at growing small business. As priorities, governments should:
remove themselves from the market and let it function freely rather than seek to
influence or distort it;

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restrict their own activities to filling gaps not currently served by the private sector
and they should do so only on a temporary basis until the private sector can take
over;
redesign the taxation system as a vehicle for economic development rather than
its current narrow role as a generator of tax revenues;
focus on helping small businesses access the information and intelligence they
require.
Business has had to redefine and re-engineer itself in the marketplace in order to
survive. Government must do the same. And it must do so using many of the same
tools: client-oriented service improvements, a focus on the bottom line, strict
accountability, measuring results and emphasizing effectiveness.
In implementing these principles, governments should employ the following operational
methods:
use business-like principles of management;
design and test all initiatives with end-users;
measure effectiveness and return on investment, not just activity;
strengthen partnering between departments, among different levels of
government, and between government and non-government organizations; and
avoid turf wars or jurisdictional disputes between departments and levels of
government.
THE BURDEN OF GOVERNMENT
There are two principal burdens imposed on small business by government that have
increased substantially over the past two decades and which are now limiting the ability
of small business to make its full contribution to the growth and stability of the Canadian
economy.
The Tax and Debt Burden
High taxes are the inevitable consequence of high deficits and growing debt. For more
than two decades, Canadians have allowed governments to act as if there were no
limits to what they could do, and spend as if there were no tomorrow. However,
tomorrow has become today and all Canadians are now liable for paying the bills.

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To escape from the debt trap, governments are casting about for additional sources of
revenues and have fastened, in part, upon small business. The burden of taxation
levied on small business has increased substantially over this period. In addition, the
sheer complexity and inefficiency of the tax system has resulted in countless hours of
costly paperwork. It must be realized that business is not an inexhaustible source of
taxable wealth. The more it is taxed, the less capital it will have to invest in future
wealth creation.
An alternative way of reducing deficits and debt at all levels of government is through
reduction in the number and cost of government business programs. These program
changes should be based on an assessment of their effectiveness and efficiency.
The Regulatory Burden
Taxation and the deficit weight heavily on small business, but that weight is
compounded by the additional burdens imposed by regulatory intervention and
interference of government in the operations of business. The bottom line for business
is cost. Government regulatory burden costs business time and money. It costs
businesses in terms of competitiveness when regulatory information requirements
create inefficiencies, reduce flexibility and impede innovation. The unproductive time
spent complying with government demands represents a massive opportunity cost to
Canadian business and the Canadian economy.
URGENT NEED FOR ACTION
A unique opportunity exists to harness the entrepreneurial energy of Canadian SMEs.
Grasping this opportunity will enable Canada to compete and prosper in the emerging
and very competitive world economy. However, the barriers impose on small business
by all levels of government must be recognized and reduced. If this is not the case and
the barriers keep proliferating, small businesses will be unable to do the one thing that
they are best capable of doing – creating the wealth that is the key to meeting our
national fiscal and employment goals.
The real issue now comes down to what governments are prepared to do to abandon
outdated approaches and initiate significant changes in small business policy. When
Finance Minister Paul Martin and Industry Minister John Manley asked the members of
the Small Business Working Committee for their advice, they emphasized that they
were looking for concrete recommendations by the fall of 1994.
The Committee believes that it has done what was asked of it. It reviewed and
analyzed a number of areas of activity in which small business and government
interface with each other – taxation, financing, regulation, skills development, science
and technology, and international trade development. Based on this analysis, the
Committee has prepared this report on how this interface can be made more effective

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and efficient as well as less costly to both government and small business. It is now up
to the federal government to respond by acting promptly and decisively.

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2. T
AXATION
THE OPPORTUNITY
The most fundamental way in which all small businesses interact with government is
through the tax system. Governments must reform their tax systems to facilitate the
creation of wealth by small business. It is through the increased wealth of small
business that governments will realize an increase in tax revenue, thereby helping
governments reduce their debt.
Canada’s tax systems (federal, provincial and municipal) have imposed a
disproportionate burden on small business. This burden has impaired the
competitiveness of small- and medium-sized enterprises (SMEs) and their ability to
create wealth and therefore jobs. One of the most significant factors contributing to this
higher tax burden has been the increased use of profit-insensitive taxes on the part of
all levels of government.
Taxes that are not based on profits represent approximately
70 percent of all direct taxes paid by corporations.
Department of Finance
The growing complexity of the tax system has resulted in disproportionate compliance
costs for small business. In addition, the benefits provided by the Small Business
Deduction (SBD) have been eroded by inflation. As a result, small business is limited in
its ability to retain earnings and maintain equity for continued growth. In order to grow,
small business is forced to rely on external sources of financing, which are extremely
difficult to find and access.
Public policies which emphasize increased taxes on SMEs act as a deterrent to growth.
The tax system should not be used exclusively as a tool for raising revenue. The
Committee is concerned that using the tax system as the primary tool to address the
deficit will not solve our fiscal and economic problems. The government has an
opportunity to shift the emphasis toward using tax policy to encourage and support
SME growth. Effectively, the less SMEs are taxed, the more capital will be available to
invest in future growth and job creation.
FIRST PRINCIPLES OF SMALL BUSINESS TAXATION
Tax systems at all levels must support the creation and growth of viable small
businesses.

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Tax measures should not result in disincentives to hire.
Canada’s tax systems must reduce their dependence on all forms of profit-
insensitive taxes.
Tax systems must be simplified to reduce the compliance costs borne by small
business and free up productive capacity.
Tax systems must encourage the retention of profits to finance the internal
growth of small businesses.
The federal, provincial and municipal governments must coordinate and simplify
their tax systems to ensure that the total tax burden on small businesses is fair
and reasonable.
Potential reductions in tax revenues must be balanced by reductions in
government spending.
PROFIT-INSENSITIVE TAXES
The growing reliance by all levels of governments on revenues from taxation that is not
related to profit (profit-insensitive taxes) is an unacceptable trend. The Committee
recognizes that increases in such taxes allow government to secure a more stable tax
base. However, this approach conflicts with the stated goals of all levels of government
to create and maintain jobs.
Profit-insensitive taxes include payroll taxes such as: premiums for Unemployment
Insurance (UI), Canada/Quebec Pension Plan (CPP/QPP) and Workers’ Compensation
(WC). In some provinces, payroll taxes also include health insurance premiums (which
can be as high as 3.75 percent in Quebec). Other onerous profit-insensitive taxes are
business and licensing fees as well as municipal property taxes, which have grown from
23 percent of all corporate levies in 1986 to 27 percent in 1992
1
.
The single most disquieting feature of payroll levies is that they amount to a direct tax
on job creation. Recent increases in these types of taxes and their high current levels
impose a disproportionate burden on small businesses. The burden of payroll taxes
tend to fall most heavily on labour-intensive businesses, or those operating at low or
negative profit margins.
For small businesses facing increased pressures on profit margins, relatively high
increases in profit-insensitive taxes imply lower retention of profits, higher vulnerability

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to recessionary times and increased reliance on external financing. In addition, payroll
taxes are added to the cost of goods and services produced and are included in the
price of exports, thereby reducing the international competitiveness of Canadian
businesses.
The Committee’s view reflects the overwhelming consensus within the business
community in affirming that a reduction of these taxes would have a positive impact on
hiring, job maintenance and wealth creation in the small business sector.
Despite the continued use of premium increases, many programs supported by these
taxes and premiums are seriously underfunded. For example, according to the chief
actuary of the CPP, the unfunded liability of the Plan has grown from $81 billion in 1977
to $491 billion in 1993. As a result, the CPP/QPP projected contribution rates are
expected to increase from 5 percent to 8.90 percent by the year 2010.
2
Similarly, recent estimates show a cumulative deficit of $5.9 billion in the UI program as
of 1993.
3

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Premium rates tend to increase during the latter parts of a recession
in order to even out deficits and surpluses in the UI account over a
recessionary period. During a prolonged recession, this tax on jobs is
increasing precisely at the time when jobs are most scarce and businesses
are least able to bear the tax.
Human Resources Development Canada
To finance UI, the insurance premium is now 3.07 percent for employees and 4.298
percent for employers – 140 percent of the employee rate.
4
Although recent statistics
suggest some improvement in UI funding levels, underfunding will continue to exist in
the foreseeable future and implies continued pressure on governments to increase
these premiums further. As long as there are no long-term structural changes to the UI
program beyond what the federal government has recently proposed, cyclical
underfunding will continue.
Workers’ Compensation Boards (WCBs) in many provinces have large unfunded
liabilities, which may lead to further increases in WC premiums. In addition, the
average benefit and assessable income levels under WC are rising in most provinces,
and this results in pressure on premiums everywhere. This is further complicated by
the fact that WC benefits are not taxable, even though contributions to WC are
deductible. As a result, WCBs, which are established under provincial authority, set
benefit levels on the assumption that benefits are not taxable (the benefit rate is
generally 90 percent of after-tax earnings) to a xxx dollar maximum. There is concern
that the non-taxation of WC benefits results in a high after-tax benefit rate and therefore
a negative work incentive.
5
Many municipalities have found it easier to tax small businesses rather than residences,
even though most of the revenue obtained goes to education rather than other services.
Ironically, small businesses, by virtue of these high taxes, are then impeded from hiring
the products of the education system they are forced to disproportionally support.
The trend toward increased reliance on profit-insensitive taxes will not be reversed until
every level of government begins to look not only at its own need to raise revenues, but
also at the cumulative impact of such taxes and the effect that these taxes have on
reducing job creation. In the absence of a coordinated approach there will be no long-
term solution. No level of government is willing to reduce its own share of these taxes
unilaterally, because each level believes that such action would simply allow the other
two levels to increase their own taxes.
There are no winners in this game. The competitiveness of small businesses is
impaired while governments struggle to squeeze ever higher taxes from them. This
vicious cycle can only be overcome through negotiation and cooperation between the
federal and provincial governments as part of their current review of Canada’s tax
structure. The Committee strongly believes that the federal government must break out
of the cycle through longer-term structural tax reform. The hope is that other

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governments, following the federal government’s lead, will reverse the unfortunate trend
and correct the inordinate burden on small business.
Recommendation
The federal government must reduce the burden of profit-insensitive taxes on
small businesses, specifically by lowering premiums on Unemployment
Insurance and Canada Pension Plan. Such reductions can be realized through
restructured programs, improvement in the efficiency of program delivery and
reductions in administrative costs.
The federal government must work with provincial governments to ensure that its
leadership is followed at the provincial and municipal level.
HOW TO GET THERE
Eliminate the funding of social, regional and economic objectives from the UI
program. Under no circumstances should there be a special payroll tax for the
purpose of financing general training. The beneficiaries of training activities from
the UI program must be restricted to those individuals who have funded the
program through the payment of premiums. Other benefits currently provided by
the UI program which relate to broader economic or social programs should be
funded from general tax revenues.
Commit to achieving equality between employer and employee UI premiums
within four years and to ongoing reductions of future premiums.
Reduce the benefit and administrative costs of UI by reforming the overall
structure of benefits and improving the efficiency and effectiveness of delivery.
Review the CPP/QPP benefits (coverage, entitlements, etc.) and program
administration to determine cost savings.
Work with provincial governments to initiate a review of the WC benefits
provided to all workers, their costs and the appropriate means of paying for
them.
Reduce program administration costs and premiums under the various provincial
plans and replace other payroll taxes, such as health care taxes, with direct
premiums or consumption taxes.
Encourage provincial governments to press municipal governments, where
appropriate, to reduce business and property taxes and licensing fees.
Ensure that all profit-insensitive taxes remain deductible for income tax
purposes.

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TAX COMPLEXITY AND COMPLIANCE
The complexity of tax administration and compliance at both the federal and provincial
levels imposes an unnecessary burden on SMEs because of their small size and lack of
internal expertise. Canada’s tax system seems to be more concerned with strict
efficiency than with overall effectiveness. By emphasizing the design of rigid systems
focused on the purity of compliance, tax administration can have the undesired effect of
inhibiting wealth-creating activity. As a result, Canadian businesses contend with tax
systems that are complex and costly to administer by both business and government.
Small business has a number of concerns associated with the complexity and
compliance procedures of the tax system:
Harmonization
The conflict between the federal and provincial tax systems and among different
provincial systems imposes unnecessary burdens on small business.
Coordination and Simplification
A lack of coordination and cooperation between branches of Revenue Canada has
resulted in the delivery of contradictory tax information to small business. It has also
led to needless complexity and duplication of services. Small business is especially
concerned about:
the separate remittances and reporting requirements of payroll deductions,
goods and services tax, excise taxes and income tax instalments;
lack of coordination in audits and collections;
the gross extent of the information collected;
shortcomings in the efficiency and quality of Revenue Canada’s service; and
the complexity of calculating taxable income and taxable benefits (e.g.
automobile benefits, arbitrary or unrealistic deduction levels for legitimate meals
and entertainment).
Penalties and Dispute Handling
Government has permitted the use of estimates in making remittances but it has also
strengthened penalties for late remittances. As a result, small businesses are often
penalized for honest errors in remitting. Although the Fairness Legislation was
established to deal with unfair or inaccurate administration of penalties, the reality is
that few small businesses are willing to risk reprisals by complaining about the
treatment they receive. It is difficult for a small business to obtain a waiver of a penalty
– the process is too formalized and costly. Small business taxpayers must be confident
that their complaints are being looked at impartially by people who are not their
accusers.

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Clarity and Consistency
Advance rulings, interpretations of Taxation and Customs regulations and policy
bulletins are difficult to understand and often issued on an untimely and inconsistent
basis. Taxpayers regularly receive differing advice from various front-line Revenue
Canada offices across the country. Policy changes within the tax system happen too
frequently and without due consideration of the administrative effect on small business.
Also, the format of basic tax forms changes too frequently and inconsistently.
Services to Taxpayers
Many small businesses complain about the quality and consistency of the service they
receive from Revenue Canada’s staff. In addition, they are bombarded by a steady
stream of incomprehensible or seemingly irrelevant information. It appears that
Revenue Canada’s concept of service to the client is not yet adhered to by all the
department’s staff. The Committee acknowledges that Revenue Canada has
attempted to resolve many of these problems. The Committee supports this effort.
Unless fundamental changes are undertaken to reform attitudes and the culture of tax
administration, small business will continue to bear an inordinate cost of compliance.
The Committee acknowledges that many of the issues noted above may be a reflection
of tax policies developed by the Department of Finance. However, the small business
sector bears a disproportionate share of the burden of implementing tax policies. The
implementation of complex tax policies and managing the compliance of multi-level
government taxes must be balanced against the need of small business for harmonized
and easily implementable tax systems.
Many o the specific issues relating to tax administration are dealt with in greater detail
in the chapter on “The Burden of Government” in this report.
Recommendation
Governments must reduce the complexity and the compliance costs of the tax
system through simplification and harmonization. In addition, Revenue Canada’s
goal in dealing with small business should be efficiency, consistency,
cooperation and fairness.
GOODS AND SERVICES TAX
The Committee reviewed the federal government’s progress with the reform of the
goods and services tax (GST), and supports its initial proposal to implement a
harmonized federal and provincial sales tax system that would result in lower sales tax
rates across Canada. The Committee strongly opposes any proposals for GST reform
that would involve a major tax increase on the part of provincial governments and/or
further fragmentation of the income tax regime.
The Committee recognizes that it is unlikely that the government will meet its original
deadline of January 1, 1996, for replacing the GST, but it believes it is more important
to get the new measures right. While the Committee strongly supports the concept of
sales tax harmonization, it believes that the implementation of this concept must not

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result in an overall tax increase or additional compliance costs for small businesses. A
reformed federal sales tax system that is harmonized with provincial sales tax systems
must reduce the sales tax compliance burden for the typical small business.
There is a concern that the anticipated magnitude of changes to the sales tax may pose
another series of transition requirements that will be both onerous and costly to the
typical small business. Small businesses have spent an enormous amount of time and
money to implement the current GST. The implementation of a harmonized sales tax
must not result in additional transition costs to small businesses.
In addition to sales tax harmonization, other specific sales tax issues have been raised
during the Committee’s discussions.
The broad range of exemptions and zero-rating provisions in the GST has led to
confusion and complications for small business. This problem should be
corrected by eliminating as many exempting and zero-rating provisions as
possible. It is recognized, however, that there are and will continue to be certain
exemptions mandated by law, agreement or government policy.
Small business operators understand the need for a consumption tax and realize
that they are the logical collectors of such a tax on behalf of the government.
However, any improvements in the administrative systems arising from
harmonization must be consistent with small business practices and realities.
Recommendation
The federal government must pursue sales tax harmonization. Harmonization
must not result in an overall tax increase. Any transition to a new system must
not impose increased costs on small businesses.
CORPORATE INCOME TAX
Small businesses have access to the SBD, which lowers the basic federal corporate tax
rate on the first $200 000 of taxable income from 28 percent to 12 percent. This
deduction is intended to compensate in part for the inherent structural biases faced by
small businesses, including higher regulatory compliance costs, higher costs of capital,
less competition for financial services, fewer economies of scale, less influence over
selling prices and weaker buying power.
The current maximum level of income eligible for this deduction was established in
1982 and, despite the substantial inflation experienced in Canada since that time, it
remains at $200 000. In addition, the corporate tax structure has remained unchanged
even while the level of profit-insensitive taxes for small businesses has increased
significantly during recent years. As a result, the current corporate income tax structure
for small businesses no longer supports small business growth to the extent that it once
did, since smaller firms still pay higher effective tax rates when all taxes are considered.
Larger businesses, with lower effective tax rates, have higher rates of post-tax
profitability and hence a greater capacity to plough back earnings into various types of
investments.

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Because of inflation, the SBD needs to be increased to encourage the continued growth
of businesses that are currently just over the $200 000 taxable income level threshold
by allowing them to retain more of their earnings to finance expansion. The doubling of
the SBD limit will remove a strong disincentive for growth.
Recommendation
The federal government should adopt graduated Small Business Deduction tax
rates based on the level of taxable income. At the same time, it should increase
the Small Business Deduction threshold to $400 000 to strengthen the equity
base of SMEs and to increase growth and job creation in higher-growth SMEs
with profits in the $200 000 to $400 000 range.
How to Get There
Immediately adopt a graduated tax rate for SMEs with taxable income between
$200 000 and $400 000. More specifically, the federal government should adopt the
following income tax regime for SMEs.
Taxable income range
Current tax rate
Proposed tax rate
($)
%
%
_____________________________________________________________________
up to 200 000
12
12
200 000 to 300 000
28
17
300 000 to 400 000
28
22
over 400 000
28
28
The Committee recognizes that the proposed change will have a revenue impact, but
this impact can be reduced by phasing out its availability for those businesses subject
to the current Large Corporations Tax
6
. In addition, eligibility for this benefit should be
restricted to SMEs that retain earnings for internal financing purposes.
LIFETIME CAPITAL GAINS EXEMPTION (LCGE)
Capital gains accruing from the disposition of qualifying small business corporation
shares are eligible for the $500 000 Lifetime Capital Gains Exemption (LCGE)
introduced in May 1985. This exemption is available to both entrepreneurs and outside
equity investors who have held shares in SMEs for a minimum of two years.
In 1991, some 26 000 taxpayers claimed this exemption. Since 1988, the federal tax
expenditure arising from this exemption has been estimated at $625 million per year
7
.
However, it is commonly recognized that many taxpayers claiming this tax provision
during the past few years have “crystallized” significant accrued gains on shares in their
small business corporations, which continue to be controlled by the taxpayer after this

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process is concluded. In other words, the gains taxed under LCGE have not always
resulted from the actual disposition of investments.
The Department of Finance is currently involved in a consultation process to seek
inputs on the evaluation of the current system and possible replacement measures. In
examining how well the LCGE has contributed to achieving these objectives, the
department has indicated that in evaluating possible alternatives, consideration should
be given to various criteria including: effectiveness, targeting, fairness, complexity and
fiscal cost. The federal government has indicated, in its current review, that the LCGE
will be changed only if there would be clear improvement in tax treatment from the
taxpayer’s perspective.
The Committee supports the preservation of the LCGE. In fact, it suggests that the
benefit could be improved for use as a tool to facilitate the flow of equity into qualifying
small businesses, in order to provide an ongoing incentive for further entrepreneurs and
outside equity investors to create and grow small businesses. A more detailed
development of this topic can be found in the “Financing” chapter of this report under
the heading “Equity Financing”.

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3. F
INANCING
THE OPPORTUNITY
Today’s small businesses are dynamic innovators that will shape the economy of the
future. In fact, our economic future is becoming increasingly dependent on the growth
of small business enterprises – to create jobs, to diversity economic activity and to
compete effectively in the global marketplace. Accessing suitable financial support to
provide the opportunity for such growth is critical to the expansion of small businesses.
Without adequate financing, the growth of these businesses will be stunted and our
future prosperity threatened.
Access to both debt and equity financing is a critical issue for SMEs in Canada. This is
especially true for growing small businesses which need different types of financing as
they move from initial start-up through early formative development to expansion and
long-term viability. There are also stable businesses that do not necessarily pursue
growth but still require access to working capital financing to maintain their operations.
The ease with which businesses obtain financing may be influenced by their growth
path, their stage of development and their characteristics. Some businesses may find it
difficult to access financing if lenders arbitrarily decide to restrict support on the basis of
sector, size, experience, business type, region or some other criterion over which the
business has no control.
Small business owners seek most of their debt and equity needs from private
individuals and financial institutions. The public sector’s role has largely been limited to
supplementing, and to some extent facilitating, the provision of private sector financing.
Though the public sector’s role in small business financing is useful, it represents only a
small fraction of the overall financing needs of businesses in Canada.
First Principles of SME Financing
Access to both debt and equity capital is of primary importance for SMEs.
The level of government debt should be reduced to lower the cost and
increase the availability of funds.
Canadian financial institutions should adopt financing policies and
practices that support the development and growth of SMEs.
Equity financing should be emphasized as a fundamental need of SMEs.
The supply of patient equity capital should be stimulated through the tax
system.
Not everyone who wants financing should necessarily get it.
Government intervention in the marketplace should not compete with but
should complement private sector initiatives by filling financing gaps not
currently served by the private sector.
Existing government-sponsored small business financing programs
should be rationalized.

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SME Responsibilities
In order to maximize their ability to access financing, SMEs should:
improve management capabilities, especially in areas such as business
planning, finance and accounting, and the preparation of cashflow
projections;
learn to communicate effectively with investors and lenders and keep them
fully informed at all times; and
explore all available sources of debt and equity financing.
DEBT FINANCING
Small businesses find it difficult to obtain debt financing from traditional financial
institutions because the latter claim they are unable to service smaller business loans
economically. One of the reasons for this inability is the banks’ use of conventional risk
assessment policies that compromise the flexibility of their loans officers. This is even
more critical given the domination of the chartered banks and the lack of competition in
small business lending markets.
Loan Assessment
The small business sector represents a challenge to financial institutions because they
incur relatively higher transaction costs in lending to smaller firms. In addition, these
institutions believe there are higher risks in small business lending and prefer to reject
proposals rather than to charger higher interest or participate in the business, for
example, through royalties or equity.
Working Capital
Rapidly growing small businesses, especially in the services sector, are often limited by
shortages of working capital. Financial institutions are reluctant to lend them this capital
because they lack tangible assets as collateral. Certain regulations prevent certain
assets they do have (such as accounts receivable and inventory) from being attached in
a preferential manner in the event of a default.
Collateral
Banks have normally required relatively high ratios of collateral coverage for smaller
business loans, particularly for working capital. If these ratios change because of
declining economic conditions, there is typically a reduction in the line of credit and/or a
requirement to pay down the loan with little notice.
Personal Guarantees
Banks claim that personal guarantees are evidence of commitment by business

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borrowers to their business. They prevent borrowers from taking actions that could
weaken the banks’ collateral security through the mixing of personal and business
assets. As a result, the banks may require the smaller borrower to give a personal
guarantee for the full amount of the loan, in addition to business collateral. Such
conditions are problematic for most businesses but are particularly onerous for micro-
business borrowers who typically have few assets to pledge. Conventional loan
assessment practices rarely consider character and a commitment to repay loans.
Lending Gap
All of these factors provide evidence that there is a small business lending gap,
particularly for small and micro-businesses that require loans of less than $100 000,
that is not being adequately filled by institutional lenders.
Bank Regulations
It has been suggested that regulations and procedures established by the Office of the
Superintendent of Financial Institutions (OSFI) to regulate the operations of federally
incorporated Canadian financial institutions may restrict the ability and willingness of
those institutions to provide financing for small businesses. For example, banks are
required by OSFI to adhere to the Bank for International Settlements (BIS) regulations
to set aside capital on commercial loans in an amount equal to 8 percent of the value of
the loan. It has been suggested that the 8 percent rule may not be appropriately
applied to a broadly diversified small business loan portfolio, and that this regulation
could have a negative impact on lending to small businesses.
1
Environmental Liability
Financial institutions are also increasingly reluctant to provide financing on commercial
property because of uncertainty about its environmental status. They normally require
extensive environmental auditing to determine the value of property as collateral for
financing. As a result, environmental legislation and regulations, including provincial
initiatives, are imposing large potential costs on small businesses and restricting their
access to financing.
Lending to Knowledge-based Businesses
Banks have found it difficult to train their account managers to understand the risks
involved in high-growth, knowledge-based businesses and to evaluate their credit
applications. They also find it difficult to lend because these businesses tend to have
insufficient fixed collateral assets, such as land and buildings, to secure the loans. A
higher proportion of their assets take the form of R&D expenditures, human resource
skills, or technology-intensive inventory that are difficult to evaluate or have limited
value as traditional collateral. In effect, the characteristics of knowledge-based firms
make it hard for them to obtain term financing under conventional bank lending
guidelines.

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Canadian banks do not operate in an unregulated
environment. Over the years, they have benefited a
great deal from the protection of the Bank Act ... I believe
it is time for the banks to give something back. The
time has come for the government to exercise leadership
and to challenge the banks to sit down and develop
concrete ways to help small and medium-sized
businesses find the capital they need.
2
The Honourable Jean Chrétien,
February 11, 1993
INSTITUTIONAL PRACTICES
Chartered Bank Lending
It has been argued that during the recent recessionary period, Canadian financial
institutions, particularly the banks, reduced the number of loans they provided to small
businesses. The banks have denied that they have a policy of restricting small
business lending and have argued instead that the financial situation of many
businesses has deteriorated to a point where their businesses no longer warrant
consideration for credit. Small businesses, on the other hand, claim that banks are
withdrawing credit support from many firms whose performance warrants continuation
of financing.
Canadian banks have experienced an increase in business loan losses during the
recession, the largest dollar volume of which was from big business. Under those
circumstances, prudent financial management dictated that they take remedial action to
protect their asset base by becoming more selective in their lending activities. These
actions have involved:
the establishment of a new measurement of profitability under which they
attempt to ensure that each individual loan maintains a preset return;
the development of specific risk assessment criteria, including a low target loan
loss ratio for SME loans, that are generally consistent throughout the banking
industry; and
the adoption of a policy of sectoral lending based on criteria according to industry
or geography, which could preclude individual loan applications from being
considered on their own merit.
All of these approaches to risk reduction inhibit small business lending by the banks.
The chartered banks have traditionally operated widespread branch networks that
reach into virtually every community in Canada. In some areas, they are often the only
source for financial services and provide virtually all small business financing. Because
of efforts to cut costs and because advanced technology is available, the banks have
been reducing the number of branches in their networks and consolidating commercial
banking operations into a smaller number of large regional centres. This has removed
the lending decision-making process from local communities and made it more difficult
for small business borrowers to establish effective banking relationships to meet their
needs.

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Caisses populaires/Credit Unions
Caisses populaires and credit unions make a significant contribution to small business
financing in parts of Canada by providing loans at the local community level. In
Quebec, the caisse populaire movement is highly concentrated in the Mouvement
Desjardins which has 1 323 caisses populaires in that provinces and 149 in the rest of
Canada. They account for almost 25 percent of the commercial loans in Quebec, with
$8.2 billion in outstanding loans to small business at the end of 1993, equal to 15
percent of their total assets. In the rest of Canada, the importance of the credit union
movement varies, with about 1 000 local credit unions that vary enormously across the
country due to differences in provincial regulations and practices. Outside Quebec, the
largest credit union movement is in British Columbia where one large institution,
VanCity, dominates the credit union market with assets of $3.4 billion. In addition,
credit unions represent an important financing alternative in Manitoba, Saskatchewan
and Alberta.
Generally, though, credit unions are small independent units that have limited capacity
to undertake commercial lending activities, even in provinces that have provided them
with these powers. Credit unions are authorized to lend under the Small Business
Loans Act (SBLA), and many do lend moderate amounts under this program. There is
concern, however, that the federal government has not pursued policies that would
promote credit unions. For example, it has not agreed to let them be eligible for direct
deposit of government pensions.
3
Leasing Companies
Leasing companies and other term lenders are active in equipment financing for small
businesses with approximately $16 billion in financing outstanding at the end of 1993,
the majority with smaller firms. During 1993, leasing firms financed about $6 billion in
leases and other term lending instruments. The industry is made up of independent
leasing companies, leasing companies associated with manufacturers and the leasing
operations of the chartered banks. For small firms, leasing is an attractive form of
financing because it can often finance 100 percent of the value of the equipment. It
does not require the firm to use equity capital for this purpose.
4
Federal Assistance
The following box summarizes the more prominent of the more than 200 federal
government programs created to assist small business. Given the limitations of time
and resources, the Committee was unable to perform a comprehensive review of their
effectiveness. The information gathered lacked measures of effectiveness that would
enable the Committee to evaluate the programs according to business principles. The
preliminary review that the Committee did perform, however, suggested that the
proliferation of programs has resulted in substantial overlap in program activities and
duplication of administrative bureaucracies. All of this increases the cost of delivering
government assistance and confirms the need to substantially rationalize government-
sponsored small business financing programs.
5
Federal Program Assistance to Small Businesses
The Small Business Loans Act (SBLA) provides lenders with a federal
government guarantee for losses incurred through small business term loans.

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The program is delivered by private sector lenders who are the sole decision
makers on loan applications. The program provides only fixed-asset-based term
loans, with working capital financing being specifically excluded from the
program. In 1993, the SBLA was amended to widen eligibility and increase the
maximum loan size from $100 000 to $250 000. This has increased the
attractiveness of SBLA loans to both borrowers and lenders, and the volume of
lending has increased dramatically. However, there is a possibility (dependent
upon statistical confirmation) that the increase in the loan size limit under the
SBLA has encouraged lenders to service the larger rather than the smaller SME
loan market and to shift existing conventional business loans into the SBLA
program.
The federal government operates the FEDERAL BUSINESS DEVELOPMENT BANK
(FBDB), which has the authority to make commercial loans (including working
capital loans) to small businesses that have experienced difficulty in accessing
credit from other institutions. Under its existing mandate, the FBDB must
operate its financing programs on a full cost recovery basis. However, some
observers feel that it is now competing directly with the banks for loans and
concentrating on larger small business loans. In 1994, the FBDB’s average loan
size was approximately $165 000. By dollar value, 11 percent of its loans were for
amounts less than $100 000. 63 percent were less than $500 000, but 39 percent
were in excess of $500 000.
The Community Future Program (CFP) was established to facilitate community
economic and employment development, as well as stabilization and adjustment
in those non-metropolitan communities that were most in need. Local economic
development stimulus is provided through Community Futures Committees
(CFCs) that act as strategic planning committees for local communities, as well
as Business Development Centres (BDCs) that provide technical and financial
support to local small businesses and entrepreneurs to increase and maintain
local employment. This program is administered by Human Resources
Development Canada (HRDC). A plan is currently being considered to transfer
administration of the program to the federal regional development agencies.

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To date the major federal regional
development agencies, Atlantic Canada
Opportunities Agency (ACOA), Western
Economic Diversification (WD), Federal
Economic Development Initiative for
Northern Ontario (FedNor) and the
Federal Office of Regional Development
– Quebec (FORD-Q) provide project
financing for small businesses in
designated regions of the country in the
form of contributions toward the
purchase of equipment, plant
modernization and business start-ups,
as well as loan guarantees and interest
buy-downs. The majority of these
contributions are repayable (except for
loans under $100 000 in the Atlantic
provinces) and targeted to small
businesses. These regional agency
programs constitute the largest part of
federal government program support
for small business financing.
Recommendation
The major financial institutions including the chartered banks, caisses populaires, credit
unions, and trust and insurance companies must increase their participation in small
business financing by establishing more innovative lending programs and techniques
and by becoming more active with small business borrowers at the community level.
The federal government must use its leverage to ensure that financial institutions
significantly increase their participation in small business lending. The government’s
regulatory environment should support such lending and encourage increased
competition in small business lending markets.
How to Get There
The Committee felt that there are actions required from both financial institutions and
the federal government:
Lender Innovations
develop more cost-effective ways of evaluating SME loan applications
revise existing risk-rating procedures, including their target loan loss ratios for
SME loans, and include more subjective criteria, such as character lending
expand current small-scale initiatives to find innovative ways of increasing their
financing of SMEs by accepting a higher degree of risk through the use of equity
kickers, longer-term quasi-equity loans, flexible repayment terms, variable
interest payments and royality-based returns

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accelerate the process of establishing specialized units to service unique small
business needs and provide account managers with the skills they will need in
the new economy
negotiate term working capital loans with small businesses based on
commitments by borrowers to meet specific financial performance criteria on an
ongoing basis
develop new policies and practices that avoid reductions in lines of credit and/or
the requirement to pay down loans with little notice
support efforts to develop and expand financing techniques for micro-businesses
(such as the calmeadow prototype program) that use character and commitment
to pay back loans as criteria for borrower collateral.
Improved Lender Services
improve every aspect of SME customer service
reduce the turnover of account managers
provide more relevant training and information to make account managers more
sensitive to the unique needs of small businesses in the new economy
return to community-based commercial banking and extend greater decision-
making authority to account managers at the branch level
introduce, within 90 days, a mediation process similar to the one adopted by the
Toronto Dominion Bank that can be used by small business borrowers to settle
disputes with the bank regarding the provision or withdrawal of credit. The
Committee prefers an effective mediation process capable of dealing with such
disputes quickly and cost-effectively to a government ombudsman. The
effectiveness and success of this mediation process should be monitored and
regularly reported on by OSFI.
Government Action
Consult with representatives of small business to:
establish new requirements for reporting on small business lending by financial
institutions (size and type of loan, characteristics of borrowers)
have OSFI publish lending data on a quarterly basis
have lending data reviewed and reported on by the Industry Standing Committee
on a regular basis to ensure that the financial institutions are meeting the needs
of small business
encourage the banks to agree to an effective Code of Conduct establishing
services standards for small businesses

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impose increased regulation which will compel improved performance if the
banks’ response to the above is inadequate.
Regulation
review the BIS capital rules related to SME bank financing and recommend to
the other co-signatories to the BIS agreement an approach that would lower the
capital requirements for SME loans.
Competition
increase competition for the chartered banks in small business lending by
encouraging the provinces to remove impediments restricting commercial lending
that prevent credit unions from competing on an equal footing with other financial
institutions, and take steps to promote the use of credit union services
encourage leasing as an alternative means of small business financing.
Recommendation
The federal government must support small business debt financing by reducing
its own debt levels which will serve to lower the cost and increase the availability
of funds for small business. This can be achieved by reducing and rationalizing
government programs. Remaining government-sponsored programs should be
refocused to fill financing gaps that are currently not served adequately by the
private sector. Governments must also amend regulations that impact negatively
on SME debt financing.
How to Get There
Government Action
Significantly reduce and rationalize the number and cost of government-
sponsored small business financing programs at all levels where there is
substantial overlap and duplication in both financing activities and administrative
bureaucracies.
Enforce the FBDB’s mandate to ensure that its activities are filling the financing
gaps confronting small businesses in all regions of the country, including those
associated with small and micro-businesses requiring loans of less than
$100 000, as well as gaps in regional and sectoral lending and working capital
requirements. These objectives should be pursued on a full cost recovery basis.
Review the recent amendments to the SBLA to ensure that the needs of small
and micro-businesses are being met adequately under this program and that
financial institutions are not abusing the program by including loans that could be
provided under conventional lending criteria.
Continue to support the Community Futures initiatives, and ensure that the
mandate of those successful Business Development Centres (BDC) remains
unchanged and that national coverage is maintained if responsibility for this

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program is transferred to the federal regional agencies.
Require that all regional development agencies concentrate on small and micro-
business financing and that all loans be repayable with interest at competitive
rates though with innovative payment terms.
Regulation
Work with the provinces to amend environmental legislation so that financial
institutions and property owners are not responsible for land-related
environmental liabilities that they did not cause. In such cases, property owners
should not be restricted in the use of real estate as collateral.
EQUITY FINANCING
Small business have problems raising equity capital primarily because of the relatively
small amounts of equity that they require versus the costs and risks facing investors in
undertaking these investments.
6
Businesses require equity financing over the growth spectrum, from start-up through
development to expansion. Start-up equity financing typically comes from owners or
from families and friends, sources that are often soon exhausted and are not normally
adequate to allow the owner to finance the development and expansion phases.
Once established and successful, small businesses may meet some of their equity
needs from retained earnings. During the early development phase, however, retained
earnings are unlikely to be sufficient to finance accelerated growth and small
businesses must attract the attention of local informal investors who may bring both
capital and expertise to the business. Normally, their capital needs at this stage are
less than $500 000.
Very few small businesses are able to generate the high rates of return necessary to
obtain financing from venture capitalists during the development and expansion stages.
In addition, until their equity requirements are in the $1 million to $5 million range, the
high administrative and due diligence costs faced by these investors make it
uneconomic for them to provide equity financing in smaller amounts.
Finally, small businesses typically find it difficult to raise capital in amounts of less than
$5 million through Initial Public Offerings (IPOs) on the stock markets, or through
private placements with long-term investors such as pension funds, life insurance
companies and mutual funds, because of the high front-end costs associated with such
undertakings. Simply put, venture capitalists and securities offerings do not represent
equity financing options for the vast majority of small businesses.
Private Sources of Equity
The primary external sources of equity capital for small businesses are informal
investors. They are typically high-income, high net worth business people with a
preference for local investments in industries that they understand. They are also
willing to invest amounts of less than $500 000 during the development stages and
often want to play an active role in management. It is often difficult, however, for
investors and small businesses requiring capital to have the same perception of the

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prospects of the business and to arrive at an investment proposal that is attractive to
both parties. In addition, linkages between informal investors and entrepreneurs
frequently do not support an adequate exchange of information on investment
opportunities and sources of investment funds on the national, regional and local levels.
Both venture capitalists and informal investors often find it difficult to liquidate their
investments in small businesses partly because the market for IPOs in Canada has a
limited capacity to absorb new junior equity issues. In addition, because of the high
costs associated with information disclosure and meeting the requirements of securities
regulations, a small business would have to grow to a substantial size before it would
be economic to take it public.
Over the years, major financial institutions, including the banks, trust companies, life
insurance companies, pension funds and mutual funds, have played a role in providing
equity funds through private venture capital companies that operate on a pooled fund
basis. Unfortunately, these institutions have recently encountered serious losses in
their venture capital activities and have now effectively terminated their provision of
equity capital to private venture capitalists. The chartered banks are now investing
moderate amounts of capital in specialized expert venture capital funds, but generally,
the volume of institutional funds available for equity investment in small businesses has
declined sharply.
Knowledge-based Businesses
High-growth and knowledge-based small businesses face more specific difficulties in
raising equity capital because of their need to finance rapid growth and their focus on
activities, such as R&D, that have a long pay-back period before adequate returns can
be achieved on equity capital. In addition, investors require specialized knowledge and
expertise to assess the potential of technology-based companies in rapidly growing and
changing markets. As a result, most venture capitalists tend to operate through
specialized expert funds that pool the capital provided by a group of investors and
develop the expertise to undertake equity investments in knowledge-based businesses.
Labour-sponsored Venture Capital
The federal and provincial governments have established tax incentives for the creation
of Labour-sponsored Venture Capital Corporations (LSVCCs) that provide equity capital
to Canadian small businesses. To date, however, only a limited number of investments
have been made in such businesses and some funds are holding much of their assets
in short-term money market instruments.
LABOUR-SPONSORED VENTURE CAPITAL CORPORATIONS
The federal government provides a 20 percent tax credit of up to $1 000 on the
first $5 000 invested in a year, and the governments of Quebec, Ontario, New
Brunswick, Nova Scotia and Saskatchewan provide a similar 20 percent credit.
Within five years of issuing its first share, a federal LSVCC is required to invest
60 percent of its shareholders’ equity in eligible small businesses – less than $50

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million in assets and fewer than 500 employees. If there is a shortfall in meeting
its 60 percent investment requirement, a portion of the federal tax credits is
recovered from the LSVCC along with a penalty of 20 percent of the shortfall.
LSVCCs have grown very rapidly in response to these tax incentives and now
have approximately $1 billion available for equity investments in small
businesses. There is a possibility that these programs have diverted funds that
would have flowed to small businesses through other investment channels, had
there not been a tax subsidy.
7
Community Investment Funds
The federal government has committed itself to establishing Community Investment
Funds (CIFs) to address the small business need for equity capital. One approach (top-
down) would be to provide equity financing for small business by using government
funds to leverage the major venture capital investors, such as insurance companies,
pension funds, banks and labour-sponsored venture capital funds. A preferable
approach (bottom-up) would be to establish community-based funds that would be
aimed at increasing local investment through stimulating the activities of local informal
investors. This approach would take advantage of community linkages to encourage
investment by these investors, possibly in partnership with institutional sources of
capital and/or existing provincial financing programs.
8
Quebec Community Fund Initiatives
The Caisse de dépôt et placement du Québec has taken the lead in setting up regional
pools of venture capital with Desjardins, National Bank and the Solidarity Fund. The
Quebec government also plays a role by supplying subsidies to finance investment
management activities of regional coordinating committees. Tiny local funds, called
Solides, have also been set up to serve the rural local areas of Quebec.
Federal Business Development Bank
The FBDB operates a small venture capital fund that makes equity investments in small
businesses in conjunction with its lending operations. The FBDB always remains a
minority shareholder and holds investments for an average of four to seven years prior
to divestiture. During fiscal 1994, the FBDB authorized equity investment of $9.7 million
with a total outstanding and committed of $42.6 million at the end of the year. One
result of this activity is that the federal government indirectly becomes an owner of
shares in the small businesses in which the FBDB has invested.
9
RECOMMENDATION
The federal government must support the provision of equity financing by
providing specific new incentives to encourage the participation of private
investors and by ensuring that current incentives are being used effectively. It
must also support the establishment of community-based equity financing
programs.

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How to Get There
New Initiatives
Adopt tax incentives to encourage individual to invest in small businesses by
reducing the inclusion rate to 50 percent for capital gains on small business
investments held for five years or longer and providing a tax free roll-over
provision for such capital gains reinvested in small businesses.
Amend the investment rules for registered retirement savings plans (RRSPs) to
permit individuals to invest their RRSP funds in their own (non-arm’s-length)
private Canadian companies.
Provide tax incentives, similar to those provided to investors in LSVCCs, to
attract private investors to local CIFs and allow capital losses on these
investments to be written off against other income.
Emphasize to the provinces the urgent need to complete the review,
harmonization and simplification of securities regulations across the country to
reduce the costs associated with new issues of securities, particularly with regard
to a simplified prospectus format for small business issues.
Apply pressure on the major financial institutions, including chartered banks,
trust companies, life insurance companies, pension funds and mutual funds, to
dedicate some level of their equity investments (including partnering with other
investors) to small business investments. The progress in achieving this goal
should be monitored and reported publicly on a regular basis.
Current Incentives
Cap existing tax benefits available to LSVCCs until they achieve their 60 percent
investment requirement for small business investments, and amend their
investment rules to permit them to invest in expert funds and local and regional
small business investment funds such as community-based CIFs. Progress on
meeting requirements should be monitored and caps removed only if these
requirements are met within set time frames with no extensions provided. A
regulatory mechanism should be established to oversee the operations of these
funds and ensure that they are meeting their small business investment
requirements while following prudent investment practices.
Require all new LSVCCs to pre-commit to specific quotas for small business
investments over a specified time frame.
Cap the FBDB’s venture capital program and privatize it when evidence is
available that the gaps being serviced by the FBDB have been filled by the
private sector or the CIFs. This would ensure that the FBDB’s mandate to fill
gaps is being maintained and that the government is not investing in small
business shares either directly or indirectly.
Community Programs
Proceed with the establishment of a locally based CIF program on a pilot-project

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basis, but without providing any federal government money as investment, either
directly or indirectly, in shares of Canadian small businesses. The CIFs should
be operated by the private sector in each community, with the government
providing a supportive environment by acting as a facilitator. This role could
include a subsidy for transaction and/or due diligence costs.
Encourage the CIFs to share infrastructure facilities and partner with the BDCs
and other federal, provincial and municipal financing programs to provide a fully
integrated community-based, SME financing program, operating in a cost-
effective manner.
Improve information linkages between informal investors and entrepreneurs at
the local, regional and national levels through the establishment of a data base
focused directly on these groups, ideally through the Canada Business Service
Centres.
It should be added that many of the recommendations concerning small business
financing are related to some of the measures proposed in the sections on tax and
regulation, both of which have an impact on financing.

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4. The Burden of Government
Small business does not believe that governments are serious about reducing
paper burden and regulatory problems. They have lost faith. They do not
understand and resent governments’ continued failure to act on reforms when
expectations have been raised.
“Regulatory/Paperburden Issues in the Small Business Sector”
Tourism Canada, 1988
Since the aforementioned report was issued, the situation has deteriorated, not
improved.
THE OPPORTUNITY
The burden of government is the intervention and interference of government in the
operations of business. It is the effect of regulations that hurt competitiveness. It is the
cost involved in complying with regulatory requirements, collecting taxes and
responding to information demands from government. And it is the administrative
hurdles, the lack of customer service, the delays, the uncertainties and the frustration
involved in dealing with public bureaucracy.
The burden of government has a cumulative effect. Every new requirement mandated
by governments places yet another weight on the shoulders of business. New
demands are continually being added – few are eliminated.
Government burden costs businesses time and money. It costs businesses in terms of
competitiveness when regulatory information requirements create inefficiencies, reduce
flexibility and impede innovation. This burden is particularly heavy for small businesses
who do not have the resources, the personnel, the time or the information to respond to
the increasing and varied demands of government.
It is conservatively estimated that regulatory compliance costs the economy
approximately $30 billion annually and requires well over 20 000 federal government
employees to keep the process lumbering along. The result to business is lost jobs,
lost investment, lost opportunities and lost entrepreneurial initiative.
1
The time to act is now! A concerted effort to reduce the burden of government offers a
tremendous opportunity for government and business to realize significant pay-offs:
government, because it can no longer afford present levels of intervention in the
economy; and business, because the removal of the burden will lead to better
productivity, more investment and more jobs. The challenge for governments is to
make and keep their commitment to regulatory reform by mustering the political will to
act.

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SMALL BUSINESS NEEDS:
TO BE TREATED LIKE A CUSTOMER BY GOVERNMENT – more emphasis
is needed on client orientation and service excellence
SPEED, CLARITY, SIMPLICITY AND FLEXIBILITY – it needs to know what
government expects and then it needs the freedom to determine how best
to meet those expectations
TO BE VALUED FOR THE INFORMATION IT PROVIDES – if business is to
collect information for governments, it should be allowed to determine how
that information is collected; and if a business provides discretionary
information, it should be paid
A SINGLE INFORMATION PIPELINE – the volume in the pipeline must not
be too great
A SYSTEM THAT IS COMPLETELY RE-ENGINEERED AND NOT JUST
TINKERED WITH – reductions in the burden of government require new
approaches from the ground up, not just pasting solutions over inefficient
existing systems
MORE “BALL PARKING” – as established by the GST Quick Method, which
replaced exact accounting-based calculations; this principle should be
extended to other taxes and to other forms of regulatory compliance or
information collection.
SMALL BUSINESS DOESN’T NEED:
UNNECESSARY AND COSTLY GOVERNMENT REGULATION
TO BE TREATED LIKE “SMALL” BIG BUSINESS – small business
structures, financing and human resources differ from those of larger firms
TO GIVE AWAY INFORMATION FOR FREE – as long as information is
treated as a free good, government will not appreciate the cost to business
of providing it
TO ACCEPT ALL CURRENT GOVERNMENT DEMANDS AS MERELY “A
COST OF DOING BUSINESS” – the inefficiency of government is hurting
Canada’s competitive edge

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DISPROPORTIONATE PENALTIES – there is a difference between penalties
imposed by governments and those that can be applied to government
A LACK OF INTERDEPARTMENTAL COORDINATION ON REGULATORY
AND INFORMATION REQUIREMENTS
GOVERNMENT PROGRAMS THAT OPERATE ON A PROCESS, NOT A
GOALS-ORIENTED BASIS – often the cost of accessing programs that are
greater than simply doing it yourself.
The Committee has divided its review of government burden into two main areas: the
regulatory burden and the information burden.
REGULATORY BURDEN
The Committee recognizes that regulations are both necessary and can, in some
instances, be beneficial to the competitiveness of business, especially when they are
designed with the help of businesses affected. However, regulations are rarely
established with recognition of the capabilities or the competitive impact on SMEs.
Compliance with regulations too often sap SMEs of entrepreneurial initiative and time,
both of which are essential to survive let alone compete. Small businesses are
disproportionally more vulnerable to the effects of regulations, as they do not have the
resources of larger businesses which can more readily absorb or distribute the work
load imposed by government demands. Regulations are usually inflexible instruments
that constrain SMEs from introducing innovations that will keep them competitive.
Often they are out-dated or incompatible with prevailing market conditions or best
business practices.
S
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OME
M
AJOR
P
ROBLEMS WITH
R
EGULATION
Cost of compliance is too high
Unclear requirements – what is expected of small business?
Uncertainty of interpretation and enforcement
Regulations do not recognize the capabilities of, or the competitive impact
on, small business
Timing of compliance, reporting and monitoring requirements
Regulations often reduce flexibility and innovative capabilities
Overlap and duplication of government regulations create additional costs
to business

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Regulations are often incompatible with prevailing market conditions, best
business-practices, or efficient administration
Regulations are often incompatible with the requirements of other
domestic or international jurisdictions or of regulating bodies.
Lack of transparency in regulatory design, interpretation and enforcement.
Many recent regulatory reform initiatives were aimed at increased competitiveness for
the entire business community, which is seen by government as a homogeneous entity.
Small business is very different – small businesses need flexibility in compliance to
ensure equitable treatment under regulatory programs.
Regulatory Flexibility
The principle of regulatory flexibility is based on the recognition that individual
businesses, not governments, are in the best position to determine how to meet
regulatory objectives in the most effective and efficient manner, taking into
consideration the particular circumstances of their businesses.
Current American law requires separate and different treatment for small enterprises.
Their Regulatory Flexibility Act requires a specific assessment of the impact a proposed
regulation would have on small business and provides for mitigating regulations or
policies, as appropriate. There is nothing comparable in Canada.
2
The federal government is considering legislation whereby departments would be
permitted to vary the details of regulations, by entering into a compliance agreement
with an individual business. This agreement would specify an alternative means for
meeting the objectives of the regulations without jeopardizing health and safety.
The process would in theory be available to all. However, the reality would fall short.
The ability of SMEs to mount the resources required to prepare the necessary
paperwork and negotiate compliance agreements is highly questionable. Special
provisions are required to make it simple for SMEs to apply for more flexible application
of regulations. This could be achieved through special provisions lessening
administrative requirements, or through widespread publication of the terms of
compliance agreements reached with the federal government.
Clarity, Accessibility, Interpretation
Regulations are written for governments, by lawyers for lawyers. They are rarely written
in clear, plain language understandable to the small-business person. Regulations are
usually not accessible. The federal government relies almost exclusively on the
obscure Canada Gazette to communicate them. Lawyers may read the Canada
Gazette; small business people do not. In the U.S., this problem was addressed by the
Regulatory Flexibility Act, which requires departments to find alternative means for
communicating with small businesses. Canada needs to follow the U.S. lead in this
regard.

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The lack of clarity of regulations can produce uneven enforcement or interpretation
across Canada. The committee heard examples of businesses that tracked the careers
and transfers of enforcement officers who provided good service and fair
interpretations, in order to ensure a continuation of clear and consistent enforcement.
Recommendation
The federal government must remove ineffective or uncompetitive regulations
that adversely affect SMEs.
The federal government must encourage regulatory flexibility, including systems
of self-regulation, in meeting government-defined performance standards. These
systems must include specific measures to address small business needs.
The federal government must rationalize existing regulations across departments
and jurisdictions.
How to Get There
Place a moratorium on new regulations until a process is established that can
effectively identify and deal with regulatory problems raised by small business.
Establish a Government Burden Commission, composed of representatives from
small business groups and deputy ministers from significant high-burden
departments and agencies. Its mandate will be to hold the government
accountable to its commitment to reduce government burden. The commission
will:
review and challenge existing and proposed programs, systems and
activities that impose a burden on business, and will exhort the
government to undertake significant re-engineering consistent with these
recommendations;
receive complaints and comments from SMEs and propose means to fix
problems; and
arbitrate on questions of government burden and report to the appropriate
Standing Committee.
The Committee does not want the government to build a bureaucracy around this
commission; thus its expenses must be covered from existing budgets.
Amend the regulatory policy to require regulatory flexibility if a small business
impact analysis reveals there would be an undue or disproportionate effect. In
such cases, the government should provide a quick method of regulatory
compliance including reduced paperwork, monitoring and reporting
requirements. Where there is no health and safety concern, a reduced level of
compliance including differential standards and reporting requirements, adjusted
timetables, or even exemptions from the proposed regulations should be
considered in the course of regulatory impact assessments.

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Review and amend, along with the provinces, labour and environmental
regulations and legislation to ensure they do not inhibit SME growth and viability.
Ensure that government training and communications programs include modules
on identifying and assessing small business interests (small business
representatives should be involved in the development and delivery of these
programs).
Ensure that interpretation of government rules and regulations have an identified
shelf-life. Interpretations should be subject to reassessment after no more than
five years. At expiration, the government must communicate new interpretations
or cease the requirement.
Allow for compliance agreements with companies (or groups of companies),
under which the federal government would agree to eliminate its operating,
monitoring and reporting requirements for a business able to demonstrate that it
has its own process in place to effectively achieve federal regulatory objectives.
There must be a quick and simple approval process for compliance agreements
with small business. A maximum time frame for approving compliance
agreements should be established.
Ensure that departments accepting compliance agreements develop a
communications protocol. SMEs require advance notice of and the gist of
compliance agreements, beyond normal gazetting requirements.
Governments should participate with SMEs in the design of alternative methods
of regulation, including self-regulation and the application of economic
measures.
Design enforcement and compliance policies that ensure government regulations
will be equally and effectively enforced.
R
EGULATORY PROCESS
The whole regulatory process, from stakeholder consultations through policy analysis to
regulatory drafting and enforcement, must be more sensitive and fair to small business
needs. Alternatives to regulations, such as compliance agreements, are being
embraced by government without assessing the particular way they affect small
business.
Consultations
The federal government’s regulatory policy requires consultations with stakeholders
before any proposed regulation is submitted to Cabinet. This requirement is too often
served in a perfunctory way, after an initiative has already been decided upon. SMEs
should be involved from the group up in designing regulation. Consultations should
seek advice from business rather than legitimize decisions already taken.
3
Impact Assessments
Before a regulation is approved, the drafters must demonstrate to their Minister and

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Cabinet that certain conditions have been met: the benefits of the regulation must
outweigh its costs, and the regulation must “impede as little as possible Canada’s
competitiveness.” The drafters are required to place all this information in a document
called a Regulatory Impact Assessment Statement (RIAS). Businesses currently are
inclined to view the RIAS as a work of fiction containing puffed-up analyses to justify
decisions already taken.
4
Communications
Regulations are first “pre-published” in the little-read Canada Gazette, and after
consultations they are published there again. In theory, small businesses wade through
this information to find out what is important. In practice, that does not happen. Thus,
proposals to regulate and/or the actual regulations are not communicated or
understood.
Complaints and Appeals
It is difficult for small businesses to comment on regulations once they have been
passed or to complain about the way they are implemented, for example, by a
government field inspector. If the owner addresses concerns to the inspector, the
inspector will probably respond by saying that he/she has no authority over the way
regulations are drawn up or implemented. And if objections are made to treatment
received from the inspector, there is no easy avenue for redress.
Review of Regulations
When all is said and done, government’s review of regulations are too infrequent, given
the fast pace of changing business conditions. Out-of-date requirements often impose
costs on business which were unforeseen when the regulation came into effect. There
must be a process put in place for periodic assessment and revision of regulations
affecting small businesses.
Recommendation
The federal government should publicize and enforce its existing regulatory policy,
which states that departments and agencies must justify the need for regulation, weigh
the benefits of the regulations against their cost, and determine the relevance, success
and cost-effectiveness of existing regulatory programs.
A special provision should be made for assessing the impact that regulations have on
small businesses.
Small businesses must be involved in the process of regulatory design, assessment
and revision from the very beginning. A process must be put in place for periodic
review, updating and revision of regulatory requirements.
How to Get There
The current federal regulatory policy must be amended by Treasury Board to
include the requirement that any measurement of the costs and benefits of a
proposed regulation should include a specific analysis of the impact on small
businesses by using the Business Impact Test (BIT). This analysis must be part

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of the RIAS.
There must be a sunset provision that requires departments to engage in
meaningful consultations on their regulations on a rotating basis, beginning every
three years and ending within two years.
A revised Treasury Board consultation and communications protocol should
ensure that consultations are an ongoing process, starting with problem
identification, continuing through the implementation of the regulation, and using
complaints and evaluations as a basis for revisiting the regulation. In effect,
complaints are market information. They should be recorded, analyzed and fed
back into the regulatory system to correct problems. The government needs to
establish some mechanism for feedback to Treasury Board of regulatory
assessments conducted by business.
The government must improve the consultation skills of public servants and
ensure they have a better understanding of small business, through
developmental training and communications programs.
Departments must establish protocols for complaint resolution, including a
maximum reaction time of 45 days. These should also include an articulated
role for regional staff as one focus for the initiation of complaints and for
providing feedback. As a general principle, the official through which a complaint
originates should be responsible for shepherding it through the system and for
reporting back periodically on its status.
A summary of any proposed regulation should be written in consultation with
small business and pre-published in appropriate publications, such as trade
magazines, in place of the regulatory policy requirement for pre-publication in the
Canada Gazette. This summary, like the regulation itself, should be written in
plain language.
STANDARDS
Small businesses are increasingly expected to meet a complex and growing array of
product, service and operating standards in the private sector. Standards are rules that
allow purchasers and suppliers to identify and meet each other’s expectations.
Standards are the common currency of globalized commerce. Conforming to
international standards allows Canadian companies to enter and compete in world
markets.
Standards are not only set by governments as part of their regulatory function but also
established by Canadian and international standards organizations (with either
voluntary or mandatory compliance), by customers and by businesses themselves.
They attempt to measure performance, meet operating goals, and improve quality and
customer satisfaction.
Standards can have a positive impact on SMEs. They can provide greater security and
market certainty to businesses competing with larger companies, both Canadian and
foreign, as long as those standards are clearly defined and equally enforced.
Standards can assist small businesses in creating product and service niches and
market opportunities, particularly in the field of new technologies. Standards set by
customers and met by their suppliers can serve as the basis of long-term relationships

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between small businesses and their customers, financiers and suppliers. Standards set
internally by small businesses can improve quality, efficiency, export readiness and the
ability to access financing, and help ensure that regulatory objectives can be met
through business practices that are best suited to particular businesses.
Standards can also act as impediments to innovation and growth. They can act as
obstacles that keep businesses out of protected markets. They can also be costly to
implement. Standards are often set by organizations dominated by the big players in a
field. It is the participants around the table that set the standards. Small businesses
that are not sufficiently represented stand the risk of becoming standard takers, not
standard makers.
Recommendation
The government must encourage SMEs to meet prevailing market standards.
Governments must also ensure the interests of small business are not prejudiced
in their development, design and application.
The government must act to harmonize standards across departmental and
jurisdictional boundaries.
How to Get There
Recognize, endorse and support the efforts of small businesses to establish and
meet internationally designed operating standards. Where company standards
meet the regulatory objectives set by government, regulators must not insist on
their own less effective and more costly operating procedures. They should
instead establish a degree of flexibility by accepting company- or industry-
derived operating standards.
Enhance the certainty of what is expected of businesses and ensure that
standards are effectively enforced. Governments should open international and
interprovincial markets by reducing non-tariff barriers to trade caused by
technical standards and their application.
Ensure that product, service and operating standards referenced in government
regulations are designed with regard to the particular circumstances of small
businesses. Governments should ensure that publicly mandated standards
minimize cost, maximize competitiveness and certainty in interpretation and
enforcement, and reflect prevailing market conditions and customer needs.
Governments should facilitate the efforts of SMEs to meet product and operating
standards by:
<
improving the effectiveness and cost of programs established to help
defray the costs of product testing and certification, and ensuring the
administrative costs of the program are lower than the cost of do-it-
yourself testing and certification;
<
working with small businesses to improve understanding of the benefits of
international standards, especially International Standards Organization
(ISO) standards; and

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<
assisting businesses to participate in ISO standards programs by taking a
leadership position (preferably as Chair) in establishing international
standards, pushing for international acceptability of Canadian registrars,
encouraging joint certification of small business and heightening public
awareness of ISO standards.
The committee heard the case of a business that is required by Canadian
regulation to submit a bio-tech product, which increases agricultural outputs, to
tests in 11 different ecological zones. U.S. federal government testing
requirements see North America as one ecological zone therefore requiring only
one test. If you owned that business, what country would you set up shop in?
T
ESTING
,
APPROVALS AND CERTIFICATION
Governments spend time, energy and resources protecting themselves in their role as
risk managers. A good deal of the certification and testing by governments is to protect
both the political and bureaucratic level from public criticism, rather than protecting the
public from legitimate health and safety considerations. Government does not know
where political risk may arise so it tends to respond by certifying and testing everything.
This shot-gun approach to risk management produces delays in the testing, approvals
and certification of products.
Time is of the essence for innovative businesses in Canada. If competitiveness is to be
enhanced through process and product innovations, bureaucratic red tape cannot stand
in its way. The conflict between the dynamism of technology and the lethargy of
bureaucracy must be addressed: there is a need to fast-track testing, approvals and
certification for Canada’s fast-moving businesses.
Time is a particular concern for small businesses that do not have the resources either
to push their specific concerns with a slow department or to wait out the long approval
time. The long wait for an approval could be a long wait for the only product a small
company has to sell. Time is money, and too much time taken may mean the loss of a
viable business opportunity and no money for the small firm.
Recommendation
The federal government must speed up testing, approvals and certification
processes and ensure that regulatory regimes respond to the needs of Canada’s
innovative SMEs, particularly in the field of emerging technologies.
How to Get There
SMEs must be given a fast lane for the approval or certification of new products.
To avoid overuse, this fast lane could be available for a limited number of
products per year on a pilot basis.
Negotiate framework agreements with the governments of our major trading
partners for international cooperation in the area of testing, standards and
certification. These agreements should promote mutual recognition of standards
and tests, and sharing the work load for testing new substances.

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Require officials to develop harmonized testing and certification standards, within
a very short time frame, and make managers accountable for success in this
effort.
One department, preferably a central agency, must be given a clear and
recognized mandate to intervene in cases where regulatory departments are
unreasonably delaying the approval or certification of new substances.
Target advanced technology industries for regulatory review, and streamline
testing and certification procedures (e.g. telecommunications, biotechnology,
medical devices and pharmaceuticals).
There exists a government policy which states, in part, that “the government
[should] ... reduce response burden on the public by eliminating unnecessary
collection of information.” This policy, called the Management of Government
Information Holdings (MGIH) policy, has been largely ignored. Since 1990, the
part dealing with paper burden lives in name only.
6
I
NFORMATION BURDEN
There is little recognition in government of how its demands for information represent a
problem for small business. The complexity, frequency and response time for
information requests are still rarely sensitive to the small-business person. Annex A
provides a partial list of some of the federal government information requirements
imposed upon a retailer/exporter.
Previous Reduction Initiatives
The Committee refers the government to the recommendations of the Nielsen Task
Force on Program Review, which produced valuable work that was largely ignored by
the previous administration. In 1988, the private sector Advisory Committee on Paper
Burden, appointed by the Minister of Small Businesses and Tourism, suggested that a
paper burden inventory and an annual paper burden budget would provide the tools for
reducing the burden. Those recommendations were never implemented because the
public service resisted change while the government lacked the will to override it.
5
Of the limited government reforms introduced to reduce paper burden, many have
relied on technology-based solutions. The problem is not just paper; the problem is
burden.
Specific Irritants
Many of the specific information burden irritants cited in this report originated in the
departments of Revenue Canada, Statistics Canada and Human Resources
Development Canada. The problem, however, exists with most government
departments – these departments are most often cited by business owners because
they interact with the greatest number of small firms.
Some of the more notable irritants associated with government information burden
include:

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different departments asking for the same information – often one department
will ask for the same information repeatedly, as in the case of verification of
payroll information;
departments demand information without any apparent sensitivity to the costs it
imposes on small business – much of this information is requested because it is
free to government;
information is requested in ways which do not match a firm’s records – the time
to compile information can be much longer than the time to complete a form (e.g.
Record of Employment (ROE), Statistics Canada surveys);
The ROE must be filled out for any departing employee, regardless of whether or
not the form is required for a UI application;
ROE requires payroll data in a Sunday to Saturday pay week, yet this cycle is
used by only one-third of businesses;
the payroll tax system requires duplicate calculations – CPP/QPP, UI and
income tax each require the use of a separate table for employee deductions;
records retention imposes significant costs – tax, customs and UI records must
be maintained for years at the expense of the business;
simple customs systems do not exist for low-volume importers and exporters;
information requirements lack clarity, are confusing and unnecessarily complex
(e.g. GST, ROE and surveys conducted by Statistics Canada); and
continuing frustration with GST collection, particularly the lack of harmony in
collecting and filing GST as well as provincial sales tax (PST).
T
HE
I
NFORMATION
B
URDEN ON
S
MALL
B
USINESS
Small business is the tax collector of government. It collects CPP/QPP, UI and
income tax contributions and remits them to government. If it errs, it can be
fined. It collects provincial sales taxes, except in Alberta. It collects the GST.
SMEs do this work for the government, without payment in most cases, with very
little consultation, and with no visible appreciation from government. Small
business has earned the right to demand that the system be sensitive to small
business and request less time and resources.
Remittances of employee deductions are too frequent. For a small non-
automated business, monthly remittances require three times as much paper
work and three times as many manual calculations as quarterly payments. Only
15 days are allowed to file most remittances. Small business understands
government’s wish to receive its money sooner, rather than later. But the cost to
small business of those monthly payments is a heavier burden than the
inconvenience the government would incur by allowing quarterly remittances.

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Procurement and Quick Payment
When small businesses sell products to government, they have to overcome years of
practices and government culture that favour large contractors. Government policy,
which now has delegated a lot of contracting to individual departments and managers,
perpetuates this bias. For instance, small businesses are limited in their ability to
compete against large firms through joint ventures with other small firms, because
government can hold only one project member liable for all costs.
Most business-to-business contracts require payment for goods and services within 30
days. Not government. Payment is released for mailing 30 days after the invoice is
certified. Departments are only required to pay interest after 45 days – in effect
enjoying a 15 day “interest holiday.” This wait is hard on a small business, because
what passes as a small contract for government can represent a sizable part of annual
cashflow for a small business. Banks also have very little patience for the cash-flow
problems of small business. Governments should not be the cause of these problems.
There are a number of other important procurement issues, which are addressed in
greater detail in the section on science and technology.
Recommendation
The federal government must immediately assess the scale and scope of the
burden problem and target a 10 percent annual reduction of the total information
burden over the next five years.
The government must consolidate reporting requirements, define essential
information requirements, and impose a moratorium on additional information
requirements until such information targets are set.
The government must immediately address specific irritants relating to the
information burden on small business.
The government must provide small business with better access to government
contracts and provide prompt payment.
How to Get There
Make a firm policy commitment to reduce the information burden on small
business and issue clear guidelines to ensure that this commitment is honoured.
Mandate Treasury Board Secretariat with overall accountability for reducing of
government burden.
Departments should have their own small business advisory committees. These
committees must be able to initiate agendas and topics for discussion.
Require departments to prepare an “information needs assessment” for any
proposed legislation, regulation, policy or program. This assessment must
identify any possible information burden. Such information requests can be

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reviewed by the Government Burden Commission.
Ensure that information requests are limited to statutory requirements.
Require departments to develop an inventory of the burdens they impose (Annex
B offers specific details to guide implementation). Departments should submit
annual information burden reduction plans to Cabinet each year. All the
government’s information requirements should be reassessed every five years.
Set up an accountability framework by which managers will be assessed for their
success in reducing information burden. A portion of any cost savings should
accrue to the responsible managers’ budgets.
Changes to current practices should be demonstrated and evaluated on a pilot
basis in a few departments before being extended throughout the government.
P
LAN OF
A
CTION TO
R
EDUCE
S
PECIFIC
I
RRITANTS
Review all retention of records requirements and reduce them by at least
50 percent.
Revenue Canada and Human Resource Development Canada must re-
engineer the payroll tax remittance system to reduce the burden on small
business. Small businesses require a more sensitive system which
consumes less time, is less frequent and recognizes the realities of
cashflow.
Allow small business to provide basic employee and taxation data to one
access point from which different departments can obtain their required
information. This must lead to simpler filing requirements for ROEs and
Statistics Canada surveys.
Require completion of the ROE only when it is required by the former
employee.
Study the feasibility of extending the ball-parking principle to the collection
of taxes and information from micro-businesses (a quick alternative
method for income tax).
Where feasible, small business should be permitted to provide ball-park
estimates in lieu of exact calculations for information requests.
Departments must pay for discretionary information. If information is not
required by statute, then departments must be prepared to pay a business
to collect, calculate and provide it.
Any information request must explain the reason for the request, whether
or not the request is based in statute, as well as provide a 1-800 number for
more information.

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Provide an express system to low-import-volume small businesses so they
can use a post-receipt, self-assessment system for customs duties.
Exempt these from import controls not related to health or safety concerns.
The penalties which governments impose and the grounds upon which
these are assessed, must be made comparable to the penalties and
circumstances under which businesses can charge government (e.g. late
payment).
When the government mandates or requires businesses to perform
specific tasks on its behalf, it must cease to punish them for honest
mistakes. Specifically:
Revenue Canada must reduce the penalties it levies for low
installment payments when these result from unanticipated swings
in cashflow.
Governments should lead by example and pay its bills within 30
days. If late, it must be subject to the same interest and penalty
charges that Revenue Canada imposes.
Public Works and Government Services Canada should monitor
departments’ ability to pay on time and hold late paying departments
publicly accountable.
Government purchase orders for goods and services under $ 10 000
should be accompanied by payment (electronically), post-dated within 30
days.
Government should encourage joint ventures between small firms by
limiting the liability for any one participant to its proportion of the total
contract.

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5. Skills Development
The Opportunity
Small businesses must ensure that the educational skills of both their managers and
employees keep up with the changing demands of a volatile, knowledge-intensive and
highly competitive economy. When they hire, they want to know that the people they
are hiring have the skills they need. And those who want to start new businesses want
to know that they can acquire the skills they will need to run it.
Both small business owners and their employees need a complex array of skills that will
vary by sector and by business. No one is in any position to predict what precise mix of
skills will be needed and when. The world is simply changing too quickly. Any attempt
to define specifically small business skill requirements could undermine the flexibility
that is a competitive advantage of small business. What Canada needs is a highly
flexible skills development infrastructure – one that responds to evolving small business
needs and adapts to changing conditions. That means a skills development
infrastructure that is sensitive to and closely integrated into the dynamics of the
workplace and the labour market.
In terms of labour force development, surveys show that 70 percent of all firms
provide some form of structured training to their employees and 76 percent
provide unstructured training. Among firms employing two to 19 workers, two-
thirds provide structured training. Evidence gathered over time suggests that
private-sector training efforts are increasing. However, evidence also suggest
that many small business managers could benefit from additional training and
skills development.
1
Matching Supply and Demand
As Table 1 shows, there is an extensive network of opportunities for skills
enhancement. Small businesses often find it difficult to navigate through what is
available to access what will best meet their needs.
Table 1. The Supply Side of Skills Development in Canada
Community colleges
In-house business expertise
University extension programs
Sector Council
Business schools
Private trainers
Labour Force Development
Boards
Trusted advisers (bankers,
lawyers, accountants)
Co-operative programs (high
schools and university)
Business service providers
(consultants and intermediaries)
Apprenticeship
Business associations

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Federal Business Development
Bank (FBDB) Counselling
Assistance to Small Enterprises
(CASE) programs, Community
Business Initiatives
Human Resources Development
Canada (HRDC) programs
On the demand side, there are individuals who want to upgrade their own skills,
businesses that want to improve the skills of their existing employees, and managers
and business people that would like to hire people with appropriate skills. However, the
Committee has observed that if you aim to create wealth, you will create jobs. If you set
out to create jobs, you will spend wealth. As long as the government is focused on
creating jobs, it may be inclined to adopt approaches that run counter to the logic of the
marketplace.
This can be seen in the current focus of HRDC to train unemployed persons for
perceived existing jobs or to provide business start-assistance. It is clear that the
unemployed need help, and that this should be provided through the UI system.
However, if we focus exclusively on artificial training and immediate job creation for the
unemployed, other longer-term skill-building and wealth creating opportunities may be
lost.
For instance, employed workers should be involved in ongoing skills upgrading, as well
as entrepreneurial development. The transition from school to the workplace should be
promoted through apprenticeships, co-ops and entrepreneurial education. There is
also significant and growing demand for the skills that will be needed to create and fill
new opportunities associated with the emergence of the new economy. Training for
these jobs of the future will inevitably involve a high degree of entrepreneurial
development, in addition to more conventional skills.
The Committee has observed that there is an imperfect match between the supply of
and demand for training and skills development in Canada. The best evidence of this is
the fact that there are thousands of vacancies for skilled jobs while unemployment rates
remain stubbornly high.
Recommendation
All training for small businesses in Canada should move toward a more effective
and flexible training infrastructure that responds to small business requirements
as they evolve. That means a skills development infrastructure that responds to
market signals, training that is shaped by real business needs, and training that
is delivered in the most effective location.
Priority Areas for Action
The Committee believes that there are four priority areas in which an opportunity exists
for business and governments at all levels to collaborate to improve the Canadian
market for skills development:
rationalize skills development programs offered by governments at all levels as a
way of eliminating duplication, cutting costs, improving relevance, and ultimately

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reducing rigidities and distortions;
ensure that there is a convenient way in which small businesses across Canada
can access all current and pertinent information on training and skills
development;
address the issue of skills development delivery and standards by forming a self-
regulating Training-Sector Council for the industry; and
develop initiatives to help small businesses understand the importance and
benefits of enhancing both managerial and employee skills as a way of growing
their companies.
R
ATIONALIZING GOVERNMENT TRAINING
Reform of the government’s role in skills development offers a significant opportunity to
realize savings, and to apply some of these savings to measures that will improve skills
market information.
Human Resources Development Canada
HRDC spends a major part of its budget on social and training assistance for the
unemployed. Too much of the training activity supported by HRDC is open-ended,
focused on traditional jobs for which demand is weakening and disconnected from the
real needs of the marketplace.
In reviewing HRDC’s current training efforts, the Committee came to the following
general conclusions:
There is a huge imbalance between efforts directed at social assistance and
those directed at developing skills relevant to the job market and to new
business creation.
Current spending on training and skills development is immense. It is not clear
that this money is well spent. Program evaluation does not measure
effectiveness or impact on the end user in a useful way.
There is a need to introduce more business-like forms of management and
evaluation: programs are not sufficiently accountable in terms of their
effectiveness, delivery efficiency and content.
There is considerable overlap and duplication both within HRDC, and between
HRDC and other departments and agencies and other levels of government ,in
the training programs currently available.
A more balanced policy approach would seek to provide more training and skills
development opportunities focused on entrepreneurship, self-employment and business
start-ups. Such a rebalancing might better prepare Canadians for taking an active role
in creating new businesses and finding new jobs, rather than passively hoping to
squeeze into an existing job.

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Recommendation
The Committee recommends that Human Resources Development Canada
change the balance of its programs away from social assistance and toward
market-oriented skills development. It should increase value of taxpayers money
spent on programs offered, reduce program proliferation, eliminate overlap and
duplication and improve effectiveness, by targeting a 50 percent reduction in the
number and cost of programs. These reductions should be undertaken in the
interests of improving the focus on those remaining.
HRDC should introduce business-like techniques for program management and
evaluation (such as impact on productivity and profitability). It should abandon
existing abstract program performance targets. Finally, HRDC should ensure that
all training efforts focus on developing skills that are in demand by employers or
than can allow people to create their own businesses. In particular, it should
place more emphasis on workplace-based training and entrepreneurship
development.
Unemployment Insurance
Developmental Uses programs under UI are intended to help unemployed Canadians
acquire new skills or upgrade old ones. Not enough of this training, however, is linked
to developing the skills that are really needed by small- and medium-sized businesses.
At present, UI blurs the distinction between unemployment support and training and it
encourages people to make choices on the basis of benefits provided instead of market
demand.
After three attempts at reforming UI over the past decade, the system is still in need of
an overhaul. The overall UI system remains in debt ($5.9 billion) and costs about $18.5
billion annually.
2
Moreover, UI has evolved to include a variety of social, regional and
economic objectives. The system sends the labour market conflicting signals, it
includes disincentives to work, it allows for cross-subsidization among sectors, it does
not control repeated usage and it is open to abuse.
The recently released proposals for reform of social programs contain suggests for
improving UI. There is an opportunity to tie UI training more directly to business needs,
by using it to develop skills that are in demand by employers or can be useful in small
business start-up and self-employment
Recommendation
Training offered under Unemployment Insurance (UI) should be better linked to
the real requirements of small business. Training programs should better
promote labour market flexibility and mobility, rather than create or reinforce
labour market rigidities.
Funds from the UI account should only go to beneficiaries. The account should
not be used to fund other labour market and social programs. The Committee
and employers are strongly opposed to the creation of any sort of payroll tax for
training the general population.

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Apprenticeship
A properly functioning system of apprenticeship across Canada could have a positive
impact on small business. It could provide potential employers with the assurance that
job candidates possess skills conforming to certain standards.
There is evidence of skill shortages in a large number of trades. This reflects the failure
of current programs for redirecting and retraining workers to better prepare them for
higher-demand occupations. More effective apprenticeship programs could enhance
these efforts, especially for unemployed youth.
Many difficulties affecting apprenticeship programs in Canada stem from jurisdictional
disputes. They reflect the inability of different levels of government, businesses and
unions to work together effectively.
The results of these failings is that of 169 apprenticeable trades in Canada, most are
not recognized as such in all 12 provincial and territorial jurisdictions.
3
One goal must
be to ensure that all jurisdictions recognize the same set of trades and standards.
Another goal should be to expand the number of apprenticeable occupations by
identifying others suited to this model of training. There is no reason that the
apprenticeship model could not be applied to occupations such as banking, insurance
and telecommunications. It should be noted that professions such as medicine and law
use a form of apprenticeship (internships, articling) though they do not call it by that
name.
Recommendation
The federal government must work closely with provincial and territorial
governments, educational authorities, business and labour to extend the
apprenticeship model into new trades. It should support efforts to increase the
percentage of the labour force that takes advantage of apprenticeship programs,
to attract younger people into apprenticeship programs, and to encourage
greater harmonization among the provinces and territories in the trades that are
recognized as apprenticeable.
How to Get There
The federal government can promote apprenticeship by acting as an honest broker in
getting key stakeholders around the table. It can exercise leverage through the funding
it provides to apprenticeship programs. While setting out general national objectives
and working to secure buy-in from all stakeholders, the federal government should not
attempt the kind of micro-management that is more appropriately left to these same
stakeholders.
Co-operative Education
Co-op programs offer small businesses an opportunity to hire bright, enthusiastic young
people whose skills might be developed and who could become valuable assets for the
firms hiring them. Such programs are also a way of developing a pool of labour that
has both experience and more relevant skills.
Many young people leave the public education system lacking both practical skills and a

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realistic idea of what is required in the workplace. By allowing young people direct
contact with the workplace, co-operative programs:
raise awareness of career possibilities and requirements;
ease the transition from school to work;
provide participants with experience and marketable skills; and
provide a future supply of trained labour for business.
According to the Co-operative, Career and Work Education Association of
Canada, the number of secondary school students participating in co-op
programs has increased more than tenfold since 1984. The number of post-
secondary institutions with co-op programs is increasing as is the number of
students who participate in them. The proportion of school boards offering
secondary co-op in at least one school ranged from 55 percent in Quebec to 100
percent in Prince Edward Island. Within such boards, the proportion of schools
offering co-op education ranged from 14 percent to 98 percent and the proportion
of students participating was between 1 percent and 11 percent.
4
Recommendation
Co-operative education is an effective way of giving young people a perspective
on skills needed and opportunities available in the workplace. The government
should promote and facilitate the expanded use of co-operative programs by all
key stakeholders, particularly secondary and post-secondary educational
institutions, and small and medium businesses.
A
CCESS TO INFORMATION
Business Skills Development Network
Small business would benefit greatly from having more complete and more easily
accessible information about skills development opportunities. Such information, for
example, can have a significant impact on the ability of small business to secure the
skills it needs to access financing. Lenders and investors are keenly interested in the
management skills and expertise available to businesses looking for financial support.
The Committee believes that small business would benefit from the creation of a
business skills network. Specifically, such a network could provide easier access to:
materials which can help identify skills development needs and point to solutions;
comprehensive information about training models and skills development
opportunities; and
reliable and affordable experts and “trusted” advisors who can provide the
mentoring and counselling that SMEs might need to assess, plan and implement
skills development on an on-demand and customized basis.

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The success of such a network will necessarily depend on the private sector which is
best equipped to provide training and mentoring. The government should not be
involved in delivering training but it can play a useful role by focusing on information
dissemination.
In particular, the government can:
provide information on key aspects of skills development (what is available, from
whom and where);
facilitate the sharing of information about experiences and best practices from
one part of the country to another;
help industries and sectors develop their own national skills and training
standards; and
work with other stakeholders to promote the importance of training and skills
development as part of fostering a “training culture” in Canada.
A critical element in making a business skills development network effective is access
to information about it. The federal and provincial governments have established
Canada Business Service Centres (CBSCs) to provide a “single window” for business-
related information from both public and private sources. The CBSCs have the
potential of serving as a convenient access point for information on skills development.
At present, they are located in major urban centres (at least one in every province), but
there are plans to extend access into smaller communities through “satellites”
consisting of terminals placed in the offices of business associations or other
organizations.
Recommendation
The federal and provincial governments and the private sector must work
together to improve the information offered through the CBSCs, particularly by
focusing on skills development opportunities at the local level. They must also
ensure that CBSC staff are properly trained to ensure quality and consistency of
service to small businesses across the country. The federal and provincial
governments should partner with non-government stakeholders interested in
skills development issues to make more information and expertise available and
accessible to small businesses.
How to Get There
The CBSC system can provide a useful vehicle for the dissemination of information
about the business skills development network. The Committee believes that the
CBSCs can do so more effectively if, wherever possible, they build on what already
exists. The CBSC information base should be integrated with what is already offered
by local business groups, community-based organizations and providers of training. In
this way, the information offered through the CBSCs can focus on and reflect what is
happening at the local community level and therefore be most relevant and useful to
small businesses.

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T
RAINING STANDARDS
A Training Sector Council
There is no national system of standards for trainers. There is also no national
mechanism through which businesses and other stakeholders can provide input on
what training standards are needed or how they can be defined.
Such standards would be useful in helping small business differentiate among the many
individuals and institutions offering training services. They would provide a set of
benchmarks that could be used to guide the delivery of training. They can also ensure
that training efforts in Canada correspond to the best available in other countries.
Finally, training standards are instrumental in forging the kind of training culture that is
key to assuring Canada of its future skill base.
The way that national standards for training industry can be achieved is to use the
Sector Council approach. The development of standards using sector-based councils
has been pursued by the federal government from the early 1980s. Sector initiatives
have encouraged labour-management collaboration, secured private-sector
commitment, supported the development of standards, influenced provincial activities,
created new delivery vehicles for skills development, and served to improve
harmonization between federal and provincial activities.
Recommendation
Canada’s public and private sector educators and trainers should organize
themselves into a Training Sector Council. Such a council can be used to market
training, administer and regulate itself, as well as to validate training by setting
its own standards. The federal government should not get directly involved in
articulating labour development or skills standards. It should continue the
partnership role it has played with businesses, educators and labour in Training
Sector Councils.
How to Get There
A Training Sector Council can be used to forge partnerships between private and public
educators. Care will have to be taken to ensure that the interests of private-sector
trainers are not overshadowed by the influence of the universities and community
colleges.
A
WARENESS
Promotion
A key barrier to the improvement of skill levels in Canada is the fact that many people
are still not aware of how important skills really are, especially in the new knowledge-
based economy that is emerging. Small business owners need to understand and
appreciate the extent to which appropriate management and labour skills can enhance
their competitiveness and improve their bottom line. In addition, the public at large
must recognize the importance of training and accept the reality of lifetime learning as a
key to keeping skills relevant.

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Such awareness raising is vital in stimulating the emergency of a training culture in
Canada. This culture should be focused on entrepreneurship and entrepreneurial
development. It is especially important that young people, employees in larger
corporations and public-sector workers develop a better understanding of how business
works.
The government, working closely with the private sector through business associations,
can play a vital role in raising awareness. More specifically, it can help to compile case
studies, success stories and examples of best practices that can serve to inspire small
businesses and encourage them to adopt similar approaches in their own enterprises.
Recommendation
The private sector and all levels of government must work in partnership to
promote a better understanding among small businesses of the important
competitive benefits arising from improved managerial and employee skills.
Such partnering is key to developing an entrepreneurially oriented training
culture in Canada.
Community-based Implementation
Skill building initiatives work best when they are led by the private sector and
implemented at the community level. The government’s role should be as a catalyst
and facilitator: it can help by contributing information, materials and technical
assistance, especially as regards best practices in skills development.
Non-government organizations (educational institutions, business associations, private
trainers, etc.) are already beginning to create local skills development networks. In
addition, there are numerous private-sector training initiatives that are taking place at
the community level throughout Canada. Moreover, the recently established Canadian
Labour Force Development Board and its network of local affiliates are working toward
national standards and strategic priorities in the area of training. As this activity
increases, it will be important to find out what is going on elsewhere in the country and
to share ideas and experiences.
New models of training are emerging. For example, distance education is being used
more frequently, especially as telecommunications technologies make this option
increasingly cost-effective. Many small businesses might benefit from the application of
distance-learning techniques to their own skills requirements, especially in rural areas.
The government should be careful not to compete with private sector providers of
training and skills development. In this regard, skills development opportunities offered
through the FBDB should complement rather than compete with private-sector
offerings. Though the FBDB uses private-sector trainers and counsellors, it subsidizes
their services. As a result, end users might find it cheaper to use a trainer through the
FBDB than on the open market, even though it may be the same trainer. The net effect
could be to distort the operations of the market for skills development.
Since there are already numerous initiatives such as sector councils, labour force
development boards, co-op and apprenticeship programs that are having an impact on
the skills development marketplace, the government should restrict its role to
encouraging such initiatives where there is a significant demand for them.

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Recommendation
Skills development initiatives must be focused at the local level. Community-
based institutions such as local labour force development boards should be
relied on to better match the supply of and demand for workers with particular
skills. The federal government must eliminate duplication and competition with
private sector training programs.

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6. Science and Technology
T
HE
O
PPORTUNITY
The Committee believes that many small businesses could benefit from better access
to financing, skilled employees and the application of best practices in management.
These factors are particularly important to the success of innovation-based, technology-
intensive SMEs. Additional issues such as the protection of intellectual property, early
commercialization of research, global competitiveness and familiarity with international
marketing are similarly important to these businesses.
In addressing government support in science and technology, the Committee focused
primarily on the innovation process as it applied to knowledge-intensive SMEs that tend
to perform R&D. Though they are a relatively small percentage of the overall small
business population, these firms embody the growth and export potential that is critical
to this country’s long-term economic success. Moreover, if these firms are successful,
their example will inevitably influence many other SMEs across Canada.
There are more than 50 federal programs providing some form of support to science
and technology-related activities. Given the number and complexity of these programs
and the time available, the Committee did not feel it could comment in detail on each
program. In some cases, it was not even possible to get program evaluations that
measured efficiency and effectiveness. Instead, the Committee has included a general
statement on the hallmarks of a good government program supporting science and
technology (see box on the next page).
1
The Committee’s primary thrust is to suggest that the government reallocate existing
spending, particularly by focusing on the commercialization of innovation. This should
not be understood as an attempt to design new programs or expand the bureaucracy.
Instead, the goal is to improve overall effectiveness by focusing on the real needs of
innovating small businesses. The Committee’s proposals constitute a tangible way of
helping growth-ready, knowledge-based firms realize their potential.
Finally, the Committee chose not to address the broader question of technology
diffusion, since this particular issue is being addressed through diffusion mechanisms
such as the Industrial Research Assistance Program (IRAP) – the role of which is being
reviewed – and the proposed Canadian Technology Network, as well as various
provincial and local initiatives.
The challenge for the federal government is to help create a healthy commercial
R&D environment in Canada.
Innovation and Commercialization
Innovation is the process by which new or improved products and processes are
developed and introduced into the marketplace. Technology plays a growing role in the
development of new products – as well as in their marketing, production, distribution
and after-sales service – but innovation remains an activity where the key assets are
people. The process embodies a set of conditions and a series of interactions,
relationships or networks among people that help to transform an abstract concept into
a marketplace success. Innovation often begins with an idea or a search for a solution

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or opportunity which is prompted by interactions within firms and among firms, their
partners and clients. As a result, clients and partners often create the discipline that
guides innovation from concept to commercialization.
Past programs offered at both federal and provincial levels have tended to focus on
pushing technology out from laboratories to industrial users. However, in the words of a
recent British Columbia review, “any developer’s push to get this technology out into the
world does not work. Only market pull has been found effective to draw technology into
production.” Commercialization and marketing must be recognized from the very
beginning as an integral part of the research and innovation process.
2
Hallmarks of Effective S&T Programs
HOLISTIC
: They cover all aspects of the innovation process, from seed assistance
for research through development and commercialization. They also recognize
the different technological, marketing and management processes that are
critical to successful innovation.
N
ATIONAL COVERAGE DELIVERED LOCALLY
: Programs should offer national coverage,
but have sufficient flexibility in delivery to adjust for specific local needs.
U
SER FRIENDLY
: Programs should exhibit simple application and assessment
requirements, quick turn-around times and be administered by interested and
knowledgeable delivery agents.
E
MPHASIZE COMMERCIALIZATION
: All programs, including the R&D done in
government labs and universities, should emphasize marketing and
commercialization so that the full potential of an innovation can be realized.
Innovation cannot be deemed successful until it is used by society to add value
to products and processes.
G
ENERAL SCOPE BUT DELIVERED BY SECTOR
: Programs should be both comprehensive
and specific; general enough to apply across a variety of industries, but capable
of being tuned to the specific needs of specific sectors. For example, a good
program would be flexible enough to meed the specific research, design and
marketing needs of designated sectors such as communications, environmental
protection or information technology.
A
CTIVE MARKETING
: Programs should actively focus on real needs and appropriate
use. They should make an effort to attract intended users as opposed to the best
connected users.
Support for innovation must be closely linked to the marketplace and the commercial
potential of the result. Government initiatives should adopt a holistic approach that
seeks to help innovative firms succeed in the marketplace. After reviewing a sample of
the more than 50 direct assistance programs targeted to science and technology, the
Committee found that most tend to focus on basic research, engineering and design.
This portion of the innovation process, however, accounts for only a portion of the costs
and knowledge required to launch a product.

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Innovation and SMEs
While all businesses can benefit from innovation, only a small number of firms have
innovation as their raison d’être. According to Statistics Canada, only 0.4 percent of
Canadian businesses perform R&D, though more recent evidence suggests that this
estimate is low. Governments’ Scientific Research and Development Tax Credit
Program assists only a portion of the research done by these companies.
3
R&D performers tend to be relatively sophisticated, technology-oriented companies with
a staff that includes a significant proportion of trained technology specialists. Many of
these firms have proven that they can adapt and develop technology, but because of
the small size of the Canadian market they are often forced to sell their products
internationally before they have significant marketing experience.
Technology-based small businesses are the primary beneficiaries of IRAP. They also
tend to use R&D tax credits and high dollar value science and technology-related
government contributions and contracts. However, such businesses often need tax
incentives, government procurement opportunities and direct assistance to support their
initial efforts, build on their core competencies and help them compete in world
markets.
Tax incentives
Tax incentives are seen to be a crucial form of assistance for innovative SMEs because
they allow firms to adjust for the costs involved in the inherently risky process of
innovation. Canadian sources of financing for knowledge-intensive ventures remain
scarce. Many of the SMEs involved in research have relatively few physical assets to
pledge as collateral for loans. In such circumstances, the refundable portion (35
percent) of the scientific research and experimental development tax credit and
complementary provincial credits allow firms to maintain the cashflow needed to fund
innovation projects, especially longer-term efforts.
The Federal Income Tax Act provides an “investment tax credit for scientific research
and experimental development” at a rate of 35 percent on expenditures up to $2 million
and at 20 percent for expenditures beyond $2 million. During 1991, 4 427 claims were
made by qualifying CCPC’s with credits worth $289 million. Other corporations had
1 822 claims with credits worth $728 million.
4
The Committee concurred with the findings of Prosperity through Innovation, which
recommended that the environment for commercializing innovative products and
services be improved by relying less on subsidies and grants and more on tax
incentives. Specifically, this study recommends that government:
move away from a narrow interpretation of what constitutes research and
development to cover in-house improvement, product development, prototype
and pilot plants, and the commercialization of new products, processes and
services; and
examine the eligibility for tax credits of social science research that contributes to
the research, development or commercialization of new products processes or
services (e.g. ergonomics).
5

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The Committee recognizes that this initiative may not be possible to implement under
the current fiscal circumstances, and that it may be difficult to design a program that
cannot be abused. However, this approach should be given a high priority. The
funding can be found through the elimination of other existing program areas.
Due to a lack of private capital in Canada, more and more small Canadian companies
are acquiring financing through the public markets, particularly in the early stages of
their growth. The Committee noted that a company listed on some foreign exchanges
could maintain its Canadian-controlled private corporation status, while losing this
status if listed on a Canadian exchange. These publicly held Canadian-controlled
corporations which have recently gone public should not lose their eligibility for the
refundable 35 percent Scientific Research & Experimental Development tax credit.
Recommendation
The current federal investment tax credit must be maintained and expanded to
include a broader scope of innovation activities.
The government must implement procedures to ensure consistency of
interpretation, including a pre-approval and/or summary approval procedure, and
simplify audit procedures relative to the Scientific Research & Experimental
Development tax credit.
Government must establish an appeal process that is clear, fast and
independent, as this is crucial to research performers.
Government should extend eligibility criteria for Scientific Research &
Experimental Development tax credits to remain in effect for three years after an
initial public offering for Canadian-controlled companies, assuming all other
criteria are met.
P
ROCUREMENT ISSUES
Government S&T procurement policies can have a significant economic impact on all
small businesses, and they can play a vital role in stimulating Canadian technology-
based SMEs. Procurement can be important in helping SMEs develop new products
and become more internationally competitive by providing a vital first sale to the home
government, thus adding credibility to the company’s international marketing efforts.
Many international trade agreements allow governments to use procurement to support
SMEs; such activity is recognized and permitted in both the North American Free Trade
Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT). This is
a common practice in the U.S., Japan and Europe.
The Committee believes that the federal government should use procurement on behalf
of Canadian SMEs. More specifically, it believes the government should provide
technology-based businesses with opportunities to use government S&T contracts to
enhance their core competencies and their competitiveness. Procurement contracts
are also important in stimulating company expertise in the provision of final goods,
services and value-added engineering processes.
There have been some efforts to stimulate government outsourcing of R&D. As of

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1972, the private sector has been given access to Canadian government contracts for
mission-oriented research, development and feasibility studies in the natural sciences.
In 1976, the government extended its program to include: ongoing S&T requirements;
scientific activities in the areas of scientific information, testing and standardization; and