Six things to watch for in Canada’s 2017 federal budget

The federal government is betting big on investment in innovation, science and R&D. Here are some specific policies to watch for

Bill Morneau and Justin Trudeau

Federal Finance Minister Bill Morneau, left, with Prime Minister Justin Trudeau (Jake Wright/CP)

When the federal government dropped the budget last year, the Liberals put a big emphasis on helping Canada become more innovative. What that meant wasn’t exactly clear. On Wednesday, however, we might get an answer. The upcoming federal budget will likely include specifics, dollar amounts and details on how various initiatives under the government’s Innovation Agenda will roll out. Here’s what to watch for.

1. Investment in high-growth companies

The 2016 budget earmarked $800 million over the next four years for “cluster funding.” While the government has been elusive in defining the word, “cluster” is taken to mean a group of companies in the same industry and location, such as fintech in Toronto or artificial intelligence in Montreal. “Our hope is that money will go to agents of commercialization,” says Benjamin Bergen, executive director of the Council of Canadian Innovators. “If we want to turn that $800 million into $8 billion, it’s through high-growth firms that that objective will be accomplished. That’s how we can grow Canada’s GDP and jobs along the way.” The budget could include criteria for identifying innovation clusters, and how much money will go to each one over what period of time. According to Bloomberg, a competition to determine the clusters may happen following the budget this spring or summer.

2. Faster hiring times for global talent

Canada’s tech industry is said to be suffering from a talent shortage; by 2020, more than 200,000 positions will be unfilled, according to the Information and Communications Technology Council. During the the fall economic update in November, the Liberals proposed the Global Skills Strategy, promising to fast-track the process of securing work permits and visas for foreign high-skilled individuals. The program, which will shrink processing time from 12 weeks to just two, is slated to begin on June 12. Funding for the program is expected to be outlined in the budget. “This will be a big impact for helping Canadian tech companies meet their talent needs,” says Bergen. “We’re hoping to see funding that’s required for the processing and staffing on that side, so the government can meet their commitment to that two-week timeline.”

3. Better access to government expertise

Last June, the Liberals announced the Accelerated Growth Service (AGS) as part of its Innovation Agenda. The AGS is meant to boost innovation by improving the way the government supports high-growth companies. Each firm would get access to a team of representatives from the governmental departments involved in helping companies scale up. Essentially, the program provides a one-stop shop for business to access government expertise. “If Canada wants to have an innovative economy, like they do in Israel and in South Korea and the United States, governments and businesses need to work hand in glove and there needs to be a real dialogue in terms of their relationship,” says Bergen. Further details on how the program will work—and how much money it will receive—could be revealed in the upcoming budget.

4. Incentives for filing patents

Canada has a patent problem. The Conference Board of Canada ranked the country 14 out of 16 nations in terms of the number of patents per capita. The poor showing is tied to the cumbersome and expensive application process, which is particularly burdensome for small enterprises and upstarts. “We expect to see [the government] incentivise companies to register for patents,” says Jason Safar, a tax partner at PwC. Quebec, for example, launched a program in 2015 that covers 50% of the costs of applying for a patent (or up to $25,000) for companies with fewer than 250 employees. In January, Quebec introduced another measure whereby businesses with patents on products developed in the province enjoy a reduced tax rate on income from those innovations. Federally, the House of Commons Standing Committee report released after pre-budget consultations recommended patent incentives similar to those in Quebec. “It fits with the government’s innovation focus, and you have a province that’s already doing this,” says Safar.

5. Hope for small business tax breaks

The Trudeau government campaigned on a promise to incrementally reduce the corporate tax rate for small businesses from 11% to 9%. The rate fell to 10.5% last year, but the government outraged small businesses by freezing the rate and nixing plans to reduce it further. In pre-budget consultations this year, the Canadian Federation of Independent Business pushed the government hard to lower the rate again. Dan Kelly, president of the CFIB, isn’t expecting the tax rate to be slashed in the budget. But he is hoping the Liberals commit to reinstating the four-year reduction plan.

6. No change for capital gains taxes

There’s plenty of buzz that the Liberals could raise the capital gains inclusion rate from 50%. Instead of paying taxes on half the value of a capital gain after the sale of an asset, for example, Canadians could pay taxes on 75% of the gain.

Kelly says the move would harm businesses and undermine the government’s commitment to innovation. “One of the reasons business owners innovate and start businesses and try to create something new is the potential for a reward down the road,” says Kelly. “If that reward has been reduced significantly, are business owners and entrepreneurs going to be as motivated to take risks? I think the government can kiss its innovation agenda goodbye,” he adds. “I’m really hoping this is a bad rumour.”

According to Safar, it is. “There’s no hard evidence that there will be a rate increase,” he says. “There’s usually some indication beforehand on significant changes.” For instance, it came as no surprise when tax rates jumped from 29% to 33% for those earning over $200,000 in last year’s budget. “The Liberals ran on a platform that that was going to happen,” says Safar. The unpredictability of the Trump administration in the U.S. may further encourage the Canadian government to take a more measured approach to tax policy.