Ontario to cut small business tax rate to offset January’s minimum wage increase

On a quiet Monday afternoon, Gareth Davies and his team are gearing up for what they hope will be a busy holiday season. Davies owns and operates Maker House, a store that sells everything from furniture to handmade coasters from local artisans. Located in trendy Hintonburg, it’s been up and running since 2015. Davies says for the holidays, “it’s better to over-stock because you don’t want to miss out on the sales. But if it ends up being a down year, then you’re knee-deep in inventory.”

Maker House owner and operator Gareth Davies [Photo © Matt Yuyitung]

It’s one of the many risks small business owners often face. And it’s the burden of these risks that the Ontario Liberals are aiming to alleviate with the small-business tax cut. In November, Finance Minister Charles Sousa announced that the small business corporate tax rate will be reduced to 3.5 from 4.5 per cent (on the first $500,000 of profits), as of Jan. 1, 2018. This comes on the heels of the Trudeau government’s recent promise to cut the federal small business rate to 9 per cent by 2019.

It’s no coincidence the provincial cut will come into effect at the same time that Ontario plans to increase minimum wage from $11.60 to $14 an hour. If the provincial Liberals stay in power after the upcoming spring election, that wage will rise to $15 by early 2019.

The group most vocal about the wage increase have been small-to medium-sized business owners, who worry that the hike will force them to reduce staff and shoulder more of the workload than they can bear.

So it may come as a surprise that Davies, who jokes that he works “double full-time,” supports the policy. He already pays his staff of ten $15 an hour. “I support a living wage. I think it’s a no-brainer for our society,” he says. “I think there’s a lot of businesses that plan around the status quo, so they’re going to have to adjust. And I don’t think that’s going to be easy.”

Maker House sells products from mainly local artisans, and creates custom pieces in-house. [Photo © Matt Yuyitung]

Will a higher minimum wage pose further risks to business owners?

Talks of increasing minimum wage have circulated in Canada for years. Proponents argue that wages have lagged far behind costs of living and thus need a legislated boost, while those against say it will result in more unemployment if costs of labour become too high for business owners. But now in Ontario, even those in the opposition benches have agreed that the increase is necessary long-term. The Progressive Conservatives have said that while a $15 minimum wage might be the way of the future, their party would slow its integration to 2022 if elected.

Eric Stephens, an assistant professor in the economics department at Carleton University, says the policy could have unintended consequences either way. “If you’re forced to maintain your employees at a higher wage, you’re just going to be looking for ways to get rid of those employees,” he says. “That’s going to hurt businesses, but it’s also going to hurt tax revenue, so it’s going to affect everybody.”

Assistant economics professor Eric Stephens [Photo © Matt Yuyitung]

Another possible outcome might be that high labour costs could push the drive towards automation. This refers to technology or machinery that can replace human labour, like self-checkout kiosks at grocery stores. Stephens says a rise in minimum wage could accelerate the adoption of automation: “If human labour is becoming so expensive and the jobs are fairly easy to do, that’s what’s going to happen.”

This could be especially difficult for businesses that are already short-staffed. “One of the challenges we face is having enough hours in the day to get things done with the minimal staffing we can manage,” says Arielle Stirling, a part-time employee at the year-old Art House Café in Westboro. “It’s just a matter of being stretched really thin with time and manpower,” she adds. As for the provincial government’s claim that the tax cut will help offset these costs, Stephens says there’s no solid evidence that it will.

Matching the cost of living

Regardless, the plan to increase minimum wage is underway. And it’s true that wages have been slow to catch up to the overall cost of living. A 2016 Statistics Canada report said that while: “Canada has undergone important economic, social and technological changes since the 1970s, the minimum wage and the average hourly wage are essentially unchanged.” Since the early 2000s, minimum wage has crept up from about $8 an hour, but basic living costs like rent and groceries have all significantly increased.

Though some caution that increasing minimum wage and offering tax-cuts are so-called ‘band aid’ solutions, governments, at least in Ontario, seem to agree that a “living wage” is the inevitable way forward. “It’s a necessary change for sure. I’d so much rather live in a world where everybody makes living wage,” Davies says. “Isn’t that the whole goal of Western society? To give everybody a fair chance?”