Federal Finance Minister Bill Morneau’s election year budget, tabled on March 19th, 2019, forecasted a deficit of $19.8B for fiscal 2019, with deficits projected to decline gradually to $9.8B by 2023.
No additional measures were proposed to provide business tax reductions, or to address the 2018 Fall Economic Statement announcements regarding an Accelerated Investment Incentive or the immediate write-off of manufacturing/processing and clean energy machinery and equipment in response to the recent U.S. tax reform.
The initiatives proposed in Budget 2019 are heavily focused on investments in skills and training and offer some limited benefits to Small- and Medium-Sized Enterprises (SMEs).
SR&ED Enhanced Tax Credit Rate Eligibility Amended
The Scientific Research and Experimental Development (SR&ED) Tax Incentive Program provides a basic 15% , non-refundable credit to all businesses performing SR&ED in Canada. Eligible small and medium-sized companies can qualify for enhanced 35% refundable tax credit rate of qualifying SR&ED expenditures up to $3M per fiscal year.
Eligibility for the 35% rate is determined by a business’ level of taxable capital and income from the prior fiscal year.
- The taxable capital threshold is between $10M and $50M.
- The taxable income threshold begins at $500,000 taxable income in the prior year and reduces current fiscal year eligibility for the enhanced credit on a sliding scale until $800,000 taxable income in the prior year.
Budget 2019 proposed to eliminate the income threshold to qualify for federal enhanced (refundable) SR&ED investment tax credits for taxation years beginning on or after March 19, 2019, for SMEs, in order to increase support for SMEs that are scaling up their R&D efforts or have variable income from year to year. The capital threshold will continue to apply.
The proposed changes will allow SMEs to continue to receive refundable tax credits on up to $3M in expenditures, regardless of their profitability.
Corporate Rates and Employee Stock Option Deductions (Compared to U.S. Tax Measures)
Despite tax-payer anticipation for Canadian corporate tax rate reductions in accordance with recent U.S. tax reform, there were no proposed changes in Budget 2019 to the corporate income tax rates or to the $500,000 Small-Business Deduction Limit for Canadian-controlled private corporations (CCPCs).
Budget 2019 proposed to impose a $200,000 annual cap on employee stock option grants for employees of large, long-established, mature firms in alignment with the U.S. tax treatment. Employee stock option benefits of startups and rapidly growing Canadian businesses will remain uncapped.
Further details of this measure will be released before the summer of 2019.
Canada’s Innovation and Skills Plan is Ongoing
Canada’s Innovation and Skills Plan was launched in 2017 to help Canadian businesses start up, scale up, and become globally competitive.
- In February 2018 the Government announced a $950M investment in five regional industry-led innovation superclusters including digital technologies, food production, advanced manufacturing, artificial intelligence in supply chain management, and ocean industries. These superclusters have assumed operation and are expected to create 50,000 jobs and add $50B to the economy over the next 10 years.
- The $1.2B Strategic Innovation Fund was launched in July 2017, to spur Canadian innovation by supporting the costs of direct
labour, subcontractors, andconsultants, as well as overhead, direct materials and equipment, land and building, and other direct costs. As of January 2019, the Fund had secured 31 investment agreements from leading researchers and manufacturers, worth a total of $8.1B, including a federal investment of $795M. Budget 2019 proposes to provide a further $100M over four years, starting in 2019–20, to the Strategic Innovation Fund (SIF). The SIF will leverage private sector co-investmentsin order to support the activities of the Clean Resource Innovation Network.
- Innovative Solutions Canada was launched in December 2017, replacing the Build in Canada Innovation Program (BCIP), to help companies bridge the technology gap between the R&D stage of projects and the pre-commercialization phase through government acquisitions. The program will dedicate over $100M annually by the end of March 2020 to support challenges issued by twenty participating federal departments and agencies to address federal government needs.
- The first Canadian National Intellectual Property Strategy was proposed in Budget 2018. Budget 2019 announced intent to move forward with a pilot Patent Collective, to help Canadian start-ups and small and medium-sized enterprises pool together vital intellectual property assets.
Workforce Development Investments
Budget 2019 proposed investments in talent acquisition and skills training that impact businesses including:
- $35.2M over five years, starting in 2019, with $7.4M per year ongoing to make the Global Talent Stream a permanent program to give Canadian businesses enhanced access to top global talent. The Global Stream Talent pilot project was a part of the Global Skills Strategy that was announced in the 2016 Fall Economic Statement.
- More than $1.7B over five years, and $586.5M per year ongoing to: (1) implement a Canada Training Benefit which will include a new, refundable Canada Training Credit (CTC) to help cover up to half of eligible tuition and fees associated with training, and (2) to implement a new Employment Insurance Training Support Benefit to provide income support when an individual requires time off work As of 2019, eligible individuals will be able to accumulate $250 annually (up to a maximum of $5,000 over a lifetime) that can be applied towards eligible expenses beginning in 2020.
- An additional $150.0M over four years, starting in 2020, to Employment and Social Development Canada to create up to 20,000 additional work-integrated learning opportunities annually in partnership with innovative businesses.
Additional Funding Proposed in Budget 2019
- $100M over three years (on a cash basis), starting in 2019, to Western Economic Diversification Canada to increase its programming in western Canada.
- New Strategic Science Fund starting in 2022, which will operate under a principles-based framework for allocating federal funding for third-party science and research organizations. The Minister of Science will provide more detail on the Fund over the coming months.
- Implementation of new Regulatory Roadmaps for reviewing and modernizing regulatory requirements and practices that impede innovation and growth in the following high-growth sectors:
- Agri-food and aquaculture
- Health and bio-sciences
This includes the establishment of a regulatory sandbox for new and innovative medical products such as tissues developed through 3D printing, artificial intelligence, and gene therapies targeted to specific individuals. Further details will be released in the coming weeks.