on October 20, 2017 —

We all know that most small businesses fail. It’s one of the toughest things to attempt: create a small company out of nothing that competes with 800lb gorillas who have all the advantages: economies of scale, cosy access to the corridors of power, and if the worst happens for Big Business, they get bailed out with our tax dollars.

If the worst happens for a small business, it’s game over.

The role of small business in Canada’s economy

According to Industry Canada’s 2016 report “Key Small Business Statistics”

Small businesses in Canada, defined as companies that have up to 99 employees aside from the founder are responsible for:

70% of all jobs in Canada

87.7% of all new jobs

Usually make the greatest contribution to net employment change.

Yet being a small business owner is not all accolades, groupies and bling. The number of small businesses that die in each sector annually is pretty close to the number that enter those sectors. This goes back to the old adage that “most small businesses will fail within 5 years”.

Almost half of all small businesses launch without external funding. These owners put their own money where their mouth is.

The time my small business almost died

Those who know me may be familiar with my company, easyDNS Technologies, which has been operating out of Toronto’s Liberty Village tech hub since before it was “the Liberty Village tech hub”. We have been operating since 1998 and usually employ somewhere between 15 and 20 FTEs. Currently we’re at 18.

Without boring you with our life story, things mostly went well for the first 13 or 14 years. We had challenges, but they were things like hacking attempts and never ending Denial-Of-Service Attacks. Financially we did well. We were able to pile up “cash on the sidelines” for a rainy day. It was a good thing we did too, because we ended up needing it.

The cash drove the bank nuts. They used to call me, practically begging me to do something with that cash but I always just “kept my powder dry”, as my lawyer liked to phrase it.

Eventually I did invest some of it, putting it into another small business that was struggling, but they had a great product and I sensed a lot of potential. My investment kept them, and their 4 FTEs running for another couple years but in the end they liquidated and I lost my entire investment. That represented about 25% of my saved capital at the time.

Concurrent with that, and reminiscent of the plot line from “Merchant of Venice” where everything went wrong for the guy at the same time, my main business began to face headwinds too.

Competition from south of the border, companies like Godaddy, who had deep pockets were blanketing Toronto with ads and were undercutting everybody. Even though they were losing money like crazy, they were succeeding in cannibalizing the entire market; then their backers cleaned up via an IPO.

It took a few years for us to pull out of the nosedive and we burned through the remainder of that aforementioned war chest. I remember it all too well. Lying in bed at night with that tightness in my chest, my breathing shallow, sweating out the next payroll. One Christmas (Christmas is brutal because in our sector revenues plunge while your payroll goes up), we had three payrolls in December. I was cashing out investments and ended up skipping my own salary for about 6 weeks.

Long story short, we pulled out and now we’re enjoying a nice run of all-time high revenue years and we’re back to profitable. But nothing like “The Golden Age” in terms of earnings. Our margins have been compressed from currency fluctuations (most of our COGs are in USD) and cross-border competition (in addition to Godaddy, both Amazon and Google have entered our space as direct competitors. How many 800lb gorillas does Morneau Sheppell have to compete with? Probably less than we do.)

Justin Trudeau excoriates small businesses as “tax cheats”

So when 2015 came along and Justin Trudeau uttered his unforgettable remarks on how “most small businesses were mainly vehicles for tax cheats” I really couldn’t believe a major politician would actually say that.

Every politician in history, all sides of the spectrum, usually hold up “small business” as “the backbone of the economy” – because it is. It’s a way to appeal to both working class and affluent voters because small business owners spend a lot of their lives as working class, and if they’re fortunate, some of their lives as moderately affluent. But even then, we’re all viscerally aware how fast our fortunes can change. Especially when we don’t enjoy special protections from the political caste.

Had Trudeau instead come out and said “most rich people use numbered companies to shelter assets [ like how Bill Morneau & I do ]”, it would be a lot more understandable. But when pushed on his original comment and given the opportunity to clarify, he instead doubled down.

Trudeau is now pushing a “tax reform” which aims to put small business owners “on the same footing” as employees from a taxation perspective. They will do this by “super-taxing” what they call “extra income in the business” at the nominal rate of income tax, as opposed to treating it as capital gains on any investments made.

The risk profile of the owners is completely different from the employees

But this overlooks the fact that business owners are not on the same footing as their employees for many reasons, which became very clear to me during my own company’s near-death-experience:

The small business owner assumes all the operational risk. The employees get paid whether or not the business makes money, as long as there is a business to pay them.

The employees get paid whether or not the business makes money, as long as there is a business to pay them. The owners form the capital , either they put in their own money, or that of their “friends and family” or they take on debt. When they take on debt, a small business owner is almost always required to put up personal guarantees: the house, the savings, the spouses assets, everything. The big boys, not so much. I doubt very much that the Morneau family has to put up one of their houses (or yachts) whenever Morneau Sheppell does a bond issuance. Something tells me they just sail through the compliance process too…

, either they put in their own money, or that of their “friends and family” or they take on debt. When they take on debt, a small business owner is almost always required to put up personal guarantees: the house, the savings, the spouses assets, everything. The big boys, not so much. I doubt very much that the Morneau family has to put up one of their houses (or yachts) whenever Morneau Sheppell does a bond issuance. Something tells me they just sail through the compliance process too… Small businesses don’t get bailed out. We are not “too big to fail” or “too big to jail”. We are “too little to care” and “too small to matter”. The more small businesses fail, the more their assets and market share can get swept off the table into the deep pockets of politically ensconced conglomerates and mega-corps.

Speaking of cheats

While Justin Trudeau is riding his high horse about small business owner tax cheats, he keeps his “family fortune” in a number of numbered companies which are not affected by the proposed tax changes.

Morneau for his part, didn’t put his assets into a blind trust when he became FM. His personal holdings in Morneau Sheppell (the ones he has tucked away in more numbered companies and it bears repeating, unaffected by the new tax proposal) have increased by over $12,000,000 since he became FM.

Morneau Sheppell also obtained a contract renewal worth $8 million dollars from The Bank of Canada in February. At renewal time Bill Morneau oversaw the Bank of Canada and still owned over 2 million shares of Morneau Sheppell. He seems to be taken aback that anybody would deign to question the conflict-of-interest issues around that.

I’ve busted my ass for 20 years, nearly didn’t make it, finally had some success at it while employing nearly 20 people, with families, kids, homes, and I get reviled for it by none other than the goddamn Prime Minister – a guy who was born into the very bosom of elite society and became a millionaire through inheritance.

Meanwhile, his right-hand man (also born rich and took over a company his dad founded) flagrantly revels in conflicts, got even richer over the course of his term as FM.

Small biz owners’ retirements in peril

Maybe someday I’ll retire, and my plan has been, for nearly my entire working career, to fund my retirement through some type of business exit.

With Trudeau and the Liberals in power, this now looks precarious.

I can see lifetime capital gains exemptions going out the window. I can see business exits taxed at the nominal rate of income, hell, I wouldn’t be surprised to see some kind of windfall tax on a small business exit down the road. These political elite parasites are utterly shameless.

Every small business owner in Canada and those who work for one need understand what the ramifications would be if we are at the beginning of a dynastic reign that is overtly hostile to the ethos and spirit of hard work, entrepreneurship and the economic contributions of small business.

Justin Trudeau and his wingman Morneau are openly signaling that this is the direction they are taking this country (but they seem to be just A-OK with already super-rich fat cats).

If the climate gets much more hostile then the calculus is whether it makes any sense to start a small business in Canada. Yes, we all know the tax laws here go by residency, so there is no “running companies remotely out of the Caribbean” (unless maybe, you’re a plugged in career politician, Morneau does have that subsidiary in Bahamas) but I already know a few tech entrepreneurs who already said “f*** it” and now live elsewhere, where they are starting their new companies.

People who know me remember that I ran as a candidate for the Libertarian Party of Canada in the last election, garnering 1% of the vote in an NDP stronghold riding. Next election I may run in Etobicoke Central (my home riding) and maybe I’m going to swing more than 1% of the vote this time. Shoot me an email or follow me on Twitter @Stuntpope if you have any thoughts around that.