Hardwiring Sensitivity to Small Business Impacts of Regulation: Guide for the Small Business Lens
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The purpose of the "small business lens" is to drive better analysis of small business realities and consultation at the earliest stages of regulatory design and to consider risk-based alternate compliance approaches that minimize costs for small business.
This document provides guidance to federal departments and agencies on how to implement the small business lens when regulating, based on section 7(N) of the Cabinet Directive on Regulatory Management.
The small business lens takes effect on February 1, 2012.
Area of Application
The small business lens applies to all federal departments, agencies and instruments to which the Cabinet Directive on Regulatory Management applies, as described in section 3 of the directive ("Scope of Application").
Costs: The small business lens applies to the direct compliance and administrative costs that small businesses face when complying with regulations.
Proposals: The lens applies to regulatory proposals that impact small business and that have nationwide cost impacts of over $1 million annually.
On an exceptional basis, the lens may also apply to regulatory proposals that have nationwide cost impacts of under $1 million annually, where costs on small businesses are disproportionately high (e.g., high costs for a few small businesses). Applying the lens will be determined on a case-by-case basis for such regulatory proposals.
The lens does not apply to proposals that have no impacts on business. If proposals decrease costs to small businesses, the lens does not apply if this decrease can be demonstrated. An appropriate demonstration would be to quantify and monetize this decrease using the Regulatory Cost Calculator and include results in the Regulatory Impact Analysis Statement (RIAS).
All costs defined in the following are "incremental" costs, i.e., costs that are related only to the proposed regulatory change, as compared with the baseline (usually the prevailing situation in the absence of the proposal). Costs that would occur under the baseline scenario are not part of the incremental costs associated with a proposed regulatory change.
- Compliance costs:
- Up-front capital costs as well as ongoing maintenance and training costs that businesses face when complying with a regulation. These include signage or notifications (when in material form, such as a road sign), testing, training staff, purchasing new equipment or software, maintaining equipment and software, renting additional space, purchasing equipment to maintain records (such as secure filing cabinets), etc.
- Administrative costs (also known as "administrative burden"):
- Costs related to the planning, collecting, processing and reporting of information, and completing forms and retaining data required by the federal government to comply with a regulation. This includes filling out license applications and forms as well as finding and compiling data for audits and becoming familiar with information requirements. Refer to Appendix A of Controlling Administrative Burden That Regulations Impose on Business: Guide for the One-for-One Rule for examples of activities that are considered administrative costs.
- Direct costs:
- Defined as compliance or administrative costs that are directly related to the change in behaviour induced by the regulation. Generally, a direct cost is a cost to a party that is either targeted by the regulation or that will face requirements as a result of implementing the regulation. In addition, direct costs are limited to costs that are measurable using the Standard Cost Model and other methodologies generally accepted to measure compliance costs as previously defined.
- Taxes, fees and penalties:
- As per the Treasury Board of Canada Secretariat's Canadian Cost-Benefit Analysis Guide: Regulatory Proposals, taxes, fees, levies and other charges, because they constitute transfers from one group to another, are not considered to be compliance or administrative costs, whether they are intended as incentives to foster compliance and change behaviour or whether their purpose is to recover the costs of providing a service.
- Small business:
- Defined as any business, including its affiliates, that has fewer than 100 employees or between $30,000 and $5 million in annual gross revenues. This definition is based on commonly used definitions for what is considered a "small" business in Canada.
- Defined as an enterprise that operates in Canada and engages in commercial activities related to the supply of services or property (which includes goods). A business does not include an organization that engages in activities for a public purpose (i.e., social welfare or civic improvement), such as a provincial or municipal government, a school, a college or university, or a hospital or charity. Although the intent of the small business lens is to target businesses that fall within the definition of "small business" after accounting for all affiliates, data limitations may not always allow making this distinction when estimating the cost associated with flexible options. Limitations associated with the data set's ability to differentiate between the types of businesses that are included must be specified in the analysis.
The small business lens comprises three key components:
- The Small Business Lens Checklist
- This checklist promotes consideration of the needs of small businesses early in the regulatory design stage, including better communication of requirements, simplified and streamlined design, and implementation that reflects consideration of small business realities.
- The checklist is to be attached to the RIAS as part of the submission to the Treasury Board, and published in the Canada Gazette as an annex to the RIAS.
- The Risk-Based Regulatory Flexibility Analysis
- The purpose of the risk-based regulatory flexibility analysis is to assess alternative compliance or "flexible" approaches for small businesses in order to reduce the direct administrative or compliance costs they would face as a result of the proposed regulation. The small business lens requires that at least one flexible option for small business be assessed, in addition to the initial option considered by the sponsoring department or agency.Flexible options
- A flexible option is one that reduces compliance or administrative costs on small business. The reduction in costs does not have to be permanent. For example, an acceptable flexible option could be to extend a compliance date for small businesses by two years if this would yield quantifiable cost savings.
- Where appropriate and possible, a flexible option can also be one where fees, other charges or penalties are reduced for small businesses or where mitigation measures are put in place for small businesses.
- The small business lens does not prescribe a particular approach for the flexible option. Departments and agencies can select any option among the following or other options as appropriate:
- Longer time periods to comply with the requirements, longer transition periods or temporary exemptions;
- Performance-based standards;
- Partial or complete exemptions from compliance, especially for firms that have good track records (legal advice should be sought when considering such an option);
- Reduced compliance costs;
- Reduced fees or other charges or penalties;
- Use of market incentives;
- A range of options to comply with requirements, including lower-cost options;
- Simplified and less frequent reporting obligations and inspections; and
- Licences granted on a permanent basis or renewed less frequently.
- The flexible option for small business does not necessarily have to be different than the option for large or other businesses. Departments and agencies can provide flexibility for all businesses; in this case, the regulatory flexibility analysis amounts to identifying and costing the savings associated with flexibility separately for small business.Valuation
- Administrative and compliance costs for small businesses are to be quantified and monetized using the Regulatory Cost Calculator for both the initial option and the flexible option. A consideration of the risks associated with the flexible option for the health, safety and security of Canadians and/or the Canadian environment and economy should be included in the RIAS.
- Where flexibility is granted in terms of reduced or mitigated fees, or other charges or penalties, the total amount reduced or mitigated for small businesses is to be quantified and monetized.Consultation
- As with all regulatory submissions, departments and agencies are to engage in meaningful consultations with interested stakeholders throughout the regulatory process. Departments and agencies are expected to consult small businesses on possible flexible options prior to prepublication of the RIAS in the Canada Gazette, Part I. It is strongly recommended that these early consultations be used as an opportunity to identify interested small business stakeholders and obtain the information and data necessary to estimate the costs of the initial and flexible options.
- At a minimum, the fully costed flexible and initial options should be presented to stakeholders in the Canada Gazette, Part II, and at the prepublication stage in the Canada Gazette, Part I, whenever prepublication is required. Prepublication is recommended whenever the small business lens applies.
- Consultations can be conducted via roundtable discussions, panels, surveys, etc., whether online, by phone or in person or through small business associations.
- Reverse Onus Provisions
- Reverse onus provisions place the onus on departments and agencies to demonstrate to ministers that they have done what they can to minimize direct administrative and compliance costs on small business without compromising the health, safety and security of Canadians or the Canadian environment or economy.
- This is demonstrated by conducting the risk-based regulatory flexibility analysis and by providing a justification in the RIAS if the flexible option for small businesses identified in the analysis is not the recommended option.
Regulatory Cost Calculator
Background: The purpose of the Regulatory Cost Calculator is to provide federal departments and agencies with a standardized tool to conduct the analysis required for the One-for-One Rule and the small business lens. For the One-for-One Rule, the calculator is to be used to quantify and monetize increases or decreases in administrative costs. For the small business lens, the role of the calculator is to help quantify and monetize the compliance and administrative costs associated with the initial and flexible options assessed for the regulatory flexibility analysis.
The calculator is based on the internationally recognized Standard Cost Model methodology and provides key data such as Statistics Canada data on the number of small businesses by industry sector and various hourly wage rates. Standard parameters are also set to allow results to be aggregated across departments to showcase the outcomes of the small business lens or the One-for-One Rule.
Considerations: Use of the calculator is mandatory to allow for review and aggregate reporting of results by the Regulatory Affairs Sector of the Treasury Board of Canada Secretariat (TBS-RAS). The tool is flexible enough to accommodate different data sets. For example, departments and agencies do not have to use the data on the number of stakeholders provided in the calculator if they have more appropriate or precise data. In this case, the "custom groups" option in the profile tab should be selected.
Initially, use of the calculator for the quantification and monetization of compliance costs will be optional if departments and agencies already have their own established models or tools. In this case, a detailed breakdown of compliance costs and relevant assumptions is to be sent separately to TBS-RAS.
- When seeking TBS-RAS approval of a RIAS, the regulatory organization is to send the following:
- One finalized Microsoft Word copy of the Small Business Lens Checklist to TBS-RAS for approval (analyst level). TBS-RAS will notify the regulatory organization of approval by email.
- One Microsoft Excel copy of the completed Regulatory Cost Calculator used to conduct the regulatory flexibility analysis, for TBS-RAS review and approval. (If an alternative model is used to estimate compliance costs, include supporting tables, calculations and results.)
- A summary of small business consultations and efforts to accommodate the needs of small business in regulatory design, as well as a summary of the regulatory flexibility analysis (the Regulatory Flexibility Analysis Statement) is to be included in the prepublication RIAS (Canada Gazette, Part I), whenever applicable, and the finalized RIAS (Canada Gazette, Part II). (Detailed assumptions underpinning the regulatory flexibility analysis can be included as part of the Cost-Benefit Analysis Report.)
- If no flexibility is provided to small business, a justification is to be included in the RIAS.
- The completed checklist is to be published in the Canada Gazette along with the RIAS.
- The President of the Treasury Board is to issue the first Annual Scorecard Report on the small business lens's implementation in fall 2013.
Roles and Responsibilities
Federal departments and agencies and TBS-RAS have specific roles and responsibilities with respect to the federal regulatory process, including the small business lens, which are described in section 8 of the Cabinet Directive on Regulatory Management.
Treasury Board Part B ministers are responsible for overseeing implementation of the small business lens and reviewing its systemic performance. Performance of the small business lens is to be assessed in Annual Scorecard Reports.
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- Assessing, Selecting, and Implementing Instruments for Government Action
- Controlling Administrative Burden That Regulations Impose on Business: Guide for the One-for-One Rule
- Guidelines for Effective Regulatory Consultations
- TBS privacy policies and guidance
Appendix: Small Business Lens Checklist
- HTML version of the Small Business Lens Checklist
- PDF version of the Small Business Lens Checklist (50 kb)
- An example of such a case is a proposed regulation or regulatory amendment that would impose $1,000 in average annual compliance and administrative costs (up-front capital costs as well as ongoing maintenance, training and reporting costs) on 5,000 small businesses in Canada. If there are no other costs, the nationwide cost impacts would amount to $5 million annually, and, as such, the small business lens would apply.
- This case could occur when, for example, a proposal would impose $5,000 in average annual compliance and administrative costs, but on only 100 small businesses in Canada. If there are no other costs, the nationwide cost impacts would amount to $500,000 annually, which is below the $1 million threshold. However, because small businesses face high costs, the lens would apply to ensure that every effort is made to minimize costs on those small businesses impacted.
- Employees can be either full-time or part-time. For the Statistics Canada Business Register data provided in the Regulatory Cost Calculator, employment size ranges are based on the Canada Revenue Agency form (PD7) filled out by the employer where the number of employees over the last pay period (full-time or not) is reported. As such, these size ranges will tend to reflect the annual maximum number of employees, both full-time and part-time.
- The minimum threshold of $30,000 has been set to match data sets that are based on registered businesses. In terms of GST/HST collection, for example, registration is not required for certain businesses in Canada until the value of a business's annual supplies exceeds $30,000.
- Statistics Canada defines small businesses as businesses having annual total revenue between $30,000 and $5 million for its small business profiles. The same definition is also used for Industry Canada's SME Benchmarking Tool. Industry Canada also defines "small business" as one that has fewer than 100 employees.