Budget contains benefits for business

After years of telling Canada's business community it needs to boost productivity, Jim Flaherty put his money where his mouth is and unveiled a suite of changes to Ottawa's research and development tax credit system.
Federal Finance Minister Jim Flaherty, shown in Victoria last month, says the challenges of Canada's aging population came up repeatedly in his pre-budget consultations. (Geoff Howe/Canadian Press)

After years of telling Canada's business community it needs to boost productivity, federal Finance Minister Jim Flaherty put his money where his mouth is Thursday and unveiled a suite of changes to Ottawa's research and development tax credits designed to get more bang for our government buck.

Taking its cue from the Jenkins report — an expert panel led by OpenText Corp. executive Thomas Jenkins that Ottawa commissioned in the fall of 2011 — the budget included a series of moves aimed at targeting specific types of innovation among Canadian businesses.

Broadly speaking, the Jenkins report recommended implementing a system whereby Canada's current system of complex and costly indirect tax credits is replaced with more targeted moves aimed at commercializing those results and better meeting the needs of the private sector.

"This budget certainly builds on some of the Jenkins recommendations in terms of research funding, absolutely," chartered accountant and public policy analyst Bob Plamondon said.

Productivity is a measure of how much Canadian workers produce per hour worked. It's one of the key metrics to gauge standard of living, and Canada has been a laggard on that front for a generation.

One of the best ways of boosting productivity is for businesses to invest in new equipment and technology. Governments have had mixed results in getting that to happen. So the budget took aim at that by making innovation tax credits more targeted and results based.

To that end, Flaherty seems to have used a scalpel, not an axe, in overhauling Canada's Byzantine system of research and development tax credits.

Broadly, the budget outlines $1.1 billion over five years to support new research and development activities, and $500 million to help fund innovative companies already in existence.

Among the moves are $100 million of new funding for the Business Development Bank, the Crown corporation mandated to fund early stage companies that have difficulty getting funding from conventional banks.

Finance Minister Jim Flaherty's 2012 federal budget offers details on how Ottawa will overhaul environmental reviews and its approach to innovation and R&D. (Adrian Wyld/Canadian Press)

Another $400 million is earmarked to help private sector investments in early stage risk capital, and to support the creation of venture capital funds that do just that.

There's $110 million to double support to the Industrial Research Assistance Program or IRAP and $105 million to support innovation in the forestry industry. And $95 million over three years to make a program aimed at commercializing new innovations as they emerge.

"As a country, we put more into research than most countries do, but we have among the worst results on the commercial level to show for it," Plamondon said.

Indeed, the document is replete with a seemingly endless number of funding initiatives for government programs with increasingly complex acronyms. There's $60 million for Genome Canada, $23 million to enhance satellite reception, $17 million to investigate alternative isotope production technologies and $40 million over two years to help create an ultra-high speed research network.

But a closer look at the budget shows the funding is sometimes a reallocation of existing funds than any "new" spending.

The hope is that instead of offering a blanket of innovation-based tax credits to all who qualify, Ottawa can start rewarding initiatives that actually improve productivity.

"They're shifting the way they fund research and development and squeezing the money into more targeted ways," Plamondon said.

Deficit in focus

Beyond tax credits, the budget has much more of interest to Canada's business community.

Business leaders and investors are likely to welcome any moves to get the government's financial house in order, and there's some slightly better news on that front.

After posting an almost $25-billion deficit last year, Ottawa's forecasting a $21-billion deficit this coming year, followed by a $10-billion deficit in 2013-14. The year after that, the government is expecting a slight deficit of $1.3 billion before posting a $3.4-billion surplus.

In all cases, those projections are slightly more optimistic than the last time Ottawa gave its fiscal update, in November.

It's estimated that roughly $500 billion is going to be invested in Canada's resource sector over the next decade, and the budget shows Ottawa is eager to make that process as easy as possible.

The budget pledges to streamline and improve regulatory processes, so reviews are done in a timely and transparent manner. It's all part of Ottawa's goal to have "one project, one review" with resource development – as opposed to the current system, a multi-layered labyrinth of regulatory bodies.

To that end, the plan pledges $165 million over two years to simplify the approvals process for new and existing pipelines, mining and energy projects.

The Harper government has also prioritized foreign trade in recent years, signing nine new free trade agreements in the last six years. Ottawa says inefficiencies at the Canada-U.S. border, where $500 billion worth of goods cross every year, are costing the economy as much as $16 billion annually.

Ottawa pledges to address those issues, but the document is short on details of exactly how the government plans to do so. The budget does, however, have a juicy tidbit for cross-border shoppers, whereby the limits of how much shoppers can take across the border are going to jump substantially – from $50 to $200 for a 24-hour trip, and up to $800 from $400 after 48 hours.

On the labour front, Ottawa wants to make it easier for companies to hire, especially in industries and regions where there's an imbalance between jobs and workers.

To that end, there's $50 million for a plan to assist young workers to get skills and experience. There's $30 million for a program aimed at improving the labour market for persons with disabilities. And $6 million to extend a successful pilot known as the ThirdQuarter project that helps older workers get skills to rejoin the workforce.

The budget also pledges to overhaul the points system in which foreign workers are accepted to the workforce. And $300 million is earmarked for various programs aimed at improving literacy education and integration of aboriginal workers.

"There's a huge aboriginal population in Western Canada that's not currently being well used," Saskatchewan's former finance minister Janice MacKinnon said. "There's huge opportunities there."

The budget also tinkers with Canada's much-maligned Employment Insurance system for unemployed workers. Ottawa's going to spend $74 million over two years to ensure EI claimants benefit from any work they find while getting benefits. The current system penalizes claimants who earn more than one day's salary a week while on EI. But the new system pledges to let them keep more of their earnings without losing benefits.

And Ottawa's pledging to dole out $387 million more in benefits by recalculating the way benefits are paid out. The current system has wild differences between regions based on local unemployment rates.