How innovative was the Federal Budget?

March 31, 2017

Innovation was a big focus of this year's federal budget, and though much funding was promised, two of the biggest benefits for innovators was something the budget didn't do; it did not increase the capital gains rate, nor did it introduce changes to the treatment of stock options. This was good news for a key reason: technology startups typically rely on these to remunerate founders/investors.

In terms of funding, Finance Minister Bill Morneau's second budget picked up where his first budget left off with an increase of $150 million to the $800 million previously earmarked for super clusters. This amount is to be spent over five years to support the building of innovation hubs. The budget also proposes an additional $400 million, which will be made available over the next three years through the Venture Capital Catalyst Initiative to help support late-stage technology as they commercialize their innovations and $14 million over two years to support non-profit Futurpreneur Canada.

“The budget also streamlines existing programs and creates new programs, including the Impact Canada Fund and the Strategic Innovation Fund, which consolidates and simplifies funding programs for the automotive and aerospace industries,” says Harry Chana, Partner and Technology and Life Sciences Tax Lead. “However, while we know companies have to prove their innovations will have a direct impact on the Canadian economy, there is no clear path as to how entrepreneurs can access those funds.”

As the 2016 BDO Technology RiskFactor Report points out, funding is a constant concern for Canada's technology sector. In fact, insufficient working capital and liquidity is second only to cyber security as a top risk. The sooner the budget lays out a plan for companies to access the funds it has promised, the better.

The government is clear that its overarching vision is to create superclusters where concentrations of high tech entrepreneurs, skilled talent, academia and government work together to create an innovation ecosystem.

“From an industry point of view, the government is picking key sectors in the economy, namely high tech and clean tech to focus on,” says Peter Matutat, Partner and National Technology & Life Sciences Leader for BDO. “What about everyone else? The fact is, innovation means different things to different people. What happens to companies in industries that are outside the focus area of the government?”

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For Paul Boucher, Partner, Consulting Advisory Services, the budget did not go far enough to encourage innovation. “In order for Canada to be a player on the world stage, companies must constantly improve their products and processes and then be able to commercialize these assets globally. Canada's commercialization gap is holding back our innovation initiatives. The question - how is the government supporting that initiative for small, midsize and large companies? The government's announced programs do not detail how it will address the commercialization gap to fit with the real needs of Canada's corporations.”

Read more: Breaking Down the 2017 Federal Budget for Canada's Private Companies

Leveraging the strength of innovation clusters will provide support for the future success of industry participants. Industry led initiatives, in partnership with research and educational institutions, are seen to be the best path forward. However, the details of how these technology clusters will be funded is yet to be seen.

One of the more promising aspects of the innovation agenda is the introduction of the Innovation and Skills Plan, which tries to bridge the gap between the skills that are required in an innovation economy versus what's actually available. “What I see day to day in the tech space is a lot of outsourcing to other countries because we don't have that talent available here,” says Chana. “In the budget, the government announced an express entry system that allows companies to bring foreign skilled workers into Canada in a much more streamlined fashion. This is an important development in the budget that could have an immediate impact if implemented as it is laid out.”

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The long-term necessity of an express entry system is also clear as Canada's population is aging and the current population of young people is in decline. “It's more important than ever to train appropriately to meet the needs of the innovation economy,” says Matutat. To that end, the budget has set aside $50 million in funding over the next two years to fund coding and digital skills workshops for children.

“Overall, the limited information we did receive with respect to innovation was good, but details are necessary to really see how impactful the government's innovation agenda will be,” says Chana.

To learn more about the impact of the 2017 federal budget, watch our webinar Budget 2017: Business as usual?

Questions? Contact your local BDO office

The information in this publication is current as of March 27, 2017.

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