Canadian tech industry seeks bailout package in Federal budget

Despite indications of a bare bones budget release today, technology industry insiders are hoping the Canadian government will provide a bailout package for companies hit by the near-crisis caused by a high flying loonie and current U.S. economy woes.

Manufacturing, retail and technology firms, most of which are located in Ontario and Quebec, should be “on the government’s radar” for economic stimulus, says one Toronto-based technology analyst.

“Companies in Central Canada, particularly Ontario and Quebec will be hit hardest by a slowing economy and they need to be helped to remain competitive,” said Vito Mabrucco, senior vice-president of worldwide consulting and managing director at analyst firm IDC Canada.

Mabruccco hopes the Federal budget will indicate a commitment towards investing in tech firms such as those in engaged in back office service and products, as well as software and hardware manufacturing.

But after having slashed taxes and increasing spending in 2006, the Conservative government is likely to have very little leftover money to fund any new programs.

Finance Minister Jim Flaherty is expected to point out that the administration had previously shaved the goods and services tax (GST) and cut corporate and personal income taxes.

“You don’t throw money around when times are tough,” Flaherty was quoted as saying earlier.

The Conservatives are expected to set aside most of the $10 billion plus budget surplus for 2007-08 for paying down the country’s $470 billion national debt and hold back on new spending to prevent Ottawa from sliding back into a budget deficit.

A spokesperson from a countrywide alliance of technology product manufacturers and service providers says his organization understands the government’s concern over the slowing U.S. and the Conservative’s aversion towards budget deficits.

But it expects to see some indication that local industries will not be neglected, he added.

“Of course the outcome is out of our hands. But we would be very disappointed if we got nothing,” said Bernard Courtois, president and CEO of the Information Technology Association of Canada (ITAC).

Saying that the tax credits and incentives ITAC has been seeking to improve industry competitiveness should be viewed by government as “investments” rather than expenses, Courtois added that these could be doled out over a period of time.

But he said the government should act quickly as it only has a slim window of opportunity to help out Canadian tech firms.

ITAC is holding out hopes that the scientific research and experimental development program or SR&ED – a government tax credit program – will be extended to included companies with much higher income levels.

At the moment SR&ED is only available to Canadian controlled private corporations (CCPC) with less than $10 million in capital assets, Courtois said.

The ITAC chief said the program needs to be expanded to include higher earning firms so as to attract more businesses and larger companies to invest in Canada.

“This is essentially our only R&D program and it doesn’t work.”

ITAC also hopes the budget would include some form of employee training tax credit and extend the time frame for tax credit firms get for depreciation of manufacturing equipment.

In a program announced last year, companies were given two years to file for tax credits on the depreciation of their machinery. The credits amount to up to 20 per cent of the equipment’s cost.

Coutrois, however said, 10 years is a more realistic time frame.

“A lot of companies will not be available to take advantage of this credit because purchase cycles often take longer than two years and the time would have run out even before CTO put forward a business case for their purchases,” he said.

Today’s announcement will most likely reveal a “bare bones budget”, according to Gord Jans, tax partner at PricewaterhouseCoopers LLP.

“The Conservatives have talked so much about belt tightening in the past that any step would most likely be towards better administration,” he said.

He said it is unlikely that capital tax will be cut further. When the Conservatives came into power capital tax was at 22 per cent, but this will be down to as much as 15 per cent by 2012.

Jans, however, perceives that the most significant development for the tech sector will be a broadening of the SR&ED program.

“A lot of people have been expecting a relaxation of the rules and a possible doubling of the credit limit.”

Research and development tax credits are capped at $ 2 million, that figure has held for at least 20 years, but Jans said this could be raised to $4 million.

On the green technology front, IDC Mabrucco said the Federal budget is an excellent opportunity for the government to show where it is headed.

“The government can use the budget to tell businesses what initiatives it considers to be green and which projects will get the funding or tax incentives.”

He said sustainable strategies have “gone beyond PR (public relations” because now companies realize going green means less power consumption and reduced expenditure.

Zerofootprint Inc. a not-for-profit environmental consultancy group said that federal government can look to British Columbia a model for putting forward an environmentally friendly budget.

“If the federal government picked up on the positive feedback that BC got regarding its budget, the government would have a much easier job,” according to Dr. Ron Dembo, founder and CEO of Zerofootprint.

He said a key green element of the BC budget is to attach a cost to carbon emission. “The government pretty much put out taxes across the board for carbon emitters.”

This, he said, sends out the message to businesses that it’s costly to be a big carbon emitter and that carbon emission is a business disadvantage.

“These policies will bring Canada into the 21st Century,” he said.

He said Canada appears to be out of step with the rest of the world. For instance the annual carbon emission footprint of an average Canadian is 15 tons compared to five tons for a Swede.


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