The Hidden Tax Burden
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The Hidden Tax Burden
Report on the costs paid by businesses in complying with the tax system.
August 2008
Lucie Charron, Senior Economist
George Chow, Director of Finance
Janine Halbesma, Senior Policy Analyst
Executive Summary
The cost to business of paying taxes goes well beyond the amount remitted to government. The tax compliance cost includes the money businesses spend to prepare, compute and remit taxes to the three levels of government and reflects the complex nature of the Canadian tax system. Unfortunately for business, the cost of complying with complicated tax rules and regulations is added to the already high burden of paying taxes. The tax compliance cost is not just a matter of the level of taxation, it is the extra expense incurred by businesses to ensure they are complying with the law.
While businesses will always pay a certain amount to comply with all tax obligations, excessive compliance costs have serious negative implications for Canadian businesses and the overall economy. They add to the already high level of taxes paid by firms, making the cost of doing business in Canada unnecessarily high. They raise the price of goods and services, limit the growth potential of smaller businesses by diverting resources from business operations, create a disincentive to start a business, reduce business productivity and lower the standard of living for Canadians.
Far too much is at stake for Canada not to have a better understanding of the hidden costs of paying taxes. In this report, the Canadian Federation of Independent Business (CFIB) reveals these costs for businesses of all sizes—small, medium and large. The ultimate goal of this study is to produce an estimate of tax compliance costs for the Canadian business sector to be used for tracking and monitoring purposes in the future.
Some examples of tax compliance activities are:
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collecting and storing data for tax filings and/or audit requirements;
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making tax payments;
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completing tax forms;
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paying salaries related to tax paperwork;
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dealing with the Canada Revenue Agency (CRA) and provincial revenue ministries;
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keeping current with changing tax legislation;
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and paying fees to tax consultants such as accountants and lawyers.
In a nationwide survey of more than 8,200 Canadian business owners, CFIB conservatively estimates that the annual cost for businesses to comply with their tax obligations is $12.6 billion. More than 90 per cent of this estimate, or $11.4 billion, is placed on small and medium-sized businesses (SMEs). This is not surprising given that the smaller the business, the higher the tax compliance cost per employee. For example, the study found that, when expressed on a per employee basis, average tax compliance costs ranged from $3,928 for very small firms (those with fewer than five employees) to $212 for large firms with 500 or more employees.
This estimate reflects the costs paid by businesses, be it in-house costs such as staff salaries or external expenses for tax consultants. It does not reflect all of the negative impacts on the Canadian economy. If it did, the cost estimate would be significantly higher.
The results of this study make clear that compliance costs are a significant component of taxation on business, with the bulk of the burden falling on smaller firms. CFIB wants to ensure that tax compliance costs on businesses are no longer an afterthought in formulating tax policy and is working closely with the CRA, finance departments and provincial revenue ministries to find ways to improve the tax system for businesses and to simplify and reduce the
tax compliance burden.
