Written by Founder and Managing Partner of Elevate Financial: Matt Tompkins
The CRA recently revealed that businesses owe a staggering $19.4 billion in unpaid sales tax as of March 31, 2024. This is a $3.2bn increase from prior year and double the pre-pandemic amount. That’s a 19% increase year over year, and a 100% increase over four years. The growth is exponential.
While this number is surprising on a macro scale, it’s hardly shocking on a micro level. Canadian businesses are under immense pressure, facing numerous economic challenges that continue to make paying taxes a secondary priority.
The Struggle Behind the Numbers
No business owner plans to fall behind on taxes. Instead, it’s often a necessity dictated by economic and business cycle realities. When faced with the choice between paying suppliers, employees, themselves or the CRA, the decision usually favours the former. This predicament is a reflection of the broader economic conditions impacting Canadian businesses.
Several factors contribute to this challenging environment:
- A Shrinking Economy: Without immigration, Canada’s economy would be in decline. The lack of economic growth limits opportunities and strains businesses trying to stay afloat. Just think about this: Canada’s GDP has grown 4% in a decade, whereas the USA has grown 47%. It’s hard to divvy up a shrinking pie!
- “High” Interest Rates: Although interest rates are historically low, they are higher than what many businesses have grown accustomed to. This creates a financial burden, as businesses hope for a drop that seems unlikely. This works on a consumer scale as well, which trickles into point three.
- A Weary Consumer: With disposable income becoming increasingly scarce, consumer spending is tight. For instance, the Consumer Price Index (CPI) rent inflation rose by 8.9% in May, squeezing budgets further.
All of these factors above create a negative feedback loop where consumers tighten their belt and limit discretionary spending, which impacts businesses, and then businesses naturally tighten their belts, leading to further economic contraction.
The Tax Burden
Canadian taxes are high, and many argue that they do not provide proper incentives for entrepreneurship. This tax environment is one reason why emigration to the U.S. and other countries is on the rise among Canadian business owners seeking more favourable conditions. Emigration to the US alone has risen 70% over the last decade.
Yes, our taxes are high. But we’re all still here! We signed up for the game, so we need to execute within the rules of the game.
So, what do we do? Focus on fundamentals
Despite the challenges, businesses must navigate the tax landscape by focusing on fundamental principles of sound financial management:
- Gross Margin: Ensuring that gross margins are sufficient to cover operational costs is crucial. This involves careful pricing strategies and cost control. Consistently review your pricing.
- Liquidity: Maintaining an unreasonably high amount of cash on hand can provide a buffer against unexpected expenses and economic downturns. Remember, this cash is not “wasted”.
- Focused Growth: Businesses should evaluate their growth strategies, determining whether they need more employees, additional products, or just improved systems and processes to achieve the same outcomes.
- Financial Review: Consistently reviewing financials helps track progress and identify potential issues before they become critical.
Lastly, injection of risk. As business owners our job is to inject risk into our business. Without risk, businesses can become complacent and miss potential growth opportunities. It also stimulates innovation and engagement internally.
In conclusion, while the $19.4 billion owed in unpaid sales tax is a significant concern, it underscores the need for businesses to continue focusing on the fundamentals. Don’t let the snowball continue to compound.
Learn more 🌐 https://elevate-financial.ca/
Book a call with our team 📞 https://calendly.com/matt_elevate/30min?month=2023-09
