Advisors are sounding off with support for new small business tax incentives, a way of invigorating an increasingly important client base now struggling to generate capital.
Canada’s struggling small business sector has a direct impact on investor behaviour, say Ontario advisors.
Reacting to a call for tax incentives to encourage more small business investment from the Investment Industry Association of Canada (IIAC), advisors are reinforcing that when business suffers, disposable income depletes, leaving nothing left to invest.
“There is no disposable income. They (small business owners) are spending it on trying to stay afloat,” says Stephan Beda, an advisor with CSU Financial Group in Brantford. “If they don’t run a successful business, how can we expect them to invest their money.”
John Tabet, an advisor with Industrial Alliance Securities Inc. in Oakville, agrees, recalling a recent meeting, whereby taxes prevented his client from moving all his money from a corporate account to a personal account.
“They (the client) has to delay, taking some of the payment this year and deferring the rest until next year,” explains Tabet. “Here’s an owner who wants to pay down his mortgage, so he has free, personal cash flow, and has to delay (doing so) because of the taxes. (The impact) travels right down to the investor.” (continued on Page 2.)
In his latest industry letter, IIAC President and CEO, Ian Russell highlights that small business equity financings in Canada are down 40 per cent this year, in addition to the 40 per cent decline in 2012. Small IPOs are also down about 50 per cent and financing, particularly in the energy and mining sectors, are at a loss. Russell cites weak economic conditions, tax changes and high-risk behaviour from investors as culprits, which have depressed stocks and liquidity for small firms, thwarting their ability to raise capital.
“One aspect of small business is that capital flows are tight,” says Tabet. “Small businesses have more challenges as it relates to getting loans and accessing capital. It’s more expensive to access capital.”
Arguing that public and private markets for small business are imperative to generate capital, Russell suggests a selective reduction in the capital gains tax and special tax-incentives for start-ups, similar to the U.K. Enterprise Investment Scheme, which offers a 30 per cent income-tax deduction for those eligible.
“Anything that the government does to lower taxes relative to investment allows the small business to be a little more dynamic,” says Tabet. “It provides some benefit for the economy, for the corporation and for the employer, in general.”