You know a budget is dull when one of the major networks dedicates prime-time space to a description of the budget lock-up. One of the commentators described it as “hardly visionary or game changing.”
To be fair, it is an election budget with little good news on the economic horizon. The price of oil has plunged to record lows putting the brakes on the growth in the west. Ontario, long the engine of economic growth, now relies on part-time service jobs as its moribund economy stubbornly refuses to get started. With all of this, and an outstanding commitment to balance the budget, there wasn’t a lot of room to be creative. The main focus was clearly on the individuals and families.
Within these limits, its no surprise that a large part of the budget was focused on “goodies” for individuals and families. After all – they vote. Companies don’t.
Also not surprising, given the economic constraints, that most of the spending in the budget occurs over many years. This is a classic political device that turns $10 million a year into an exciting $50 million dollar “action plan.”
So what should companies take from this budget, especially those with a strong technology base? There are some key elements.
There was some good news for business in this budget in terms of tax reductions. Shrinking the small business tax rate from 11 per cent to 9 per cent is a great move, even if it is phased in over four years. Raising the bar as to what constitutes a small business is also great news. To get this favourable rate, a company can make up to $500,000 in profits.
In addition to the tax break on income tax, small and medium sized businesses will get a break on Employment Insurance (EI) rates. Firms that pay less than $15,000 in EI will qualify for a 15 percent cut.
Two good incentives for businesses to expand and invest in people and technology. For those who run and those who sell to small and medium-sized businesses, it’s good news.
Even larger companies get some good news in the budget with the overall reduction in EI premiums from $1.88 in 2016 to an estimated $1.49 in 2017 – a reduction of 21 per cent. This is relatively small, but combined with earlier breaks in corporate tax rates it continues to reduce corporate expenses and encourage expansion and investment.
Capital Cost Allowance
If you invest in capital equipment the extension of the accelerated Capital Cost Allowance (CCA) is a bonus, particularly for those who invest in technology. When you invest in technology that becomes obsolete in two or three years, it’s hard to justify the investment when it takes you eight years to apply that expense through depreciation. Under the accelerated depreciation provisions which were continued in this budget, you can deduct 90 per cent of the cost of an asset in four years. Under the old rules it could take seven years to deduct that same 90 per cent.
There is only one problem with this scenario. In a world where so many companies are investing in new technology in the cloud, where is the advantage? Cloud systems can be expensed fully each year as they are operating expenses (OPEX) versus capital (CAPEX). So if your investment is in “as a Service” this budget provision is meaningless.
High Tech and high speed – funding for growth
In fairness, there are other encouragements for businesses in terms of financing. The Industrial Research Assistance Program (IRAP) that provides advice and funding to a range of businesses had its budget doubled in 2012 with the commitment of an additional $110 million per year, and we’re seeing that play out here. IRAP has historically provided knowledgeable and experienced advisors as well as funding for small and large projects. The program has a rigorous evaluation process but companies are given every help to succeed and to make their best case.
Another program that provides funding assistance is the Canada Foundation for Innovation. CFI is a “not-for-profit corporation that supports the modernization of research infrastructure at universities, colleges, research hospitals and other not-for-profit research institutions across Canada.” It also provides funding for Canada’s high-speed network project CANARIE. In addition to providing about 20 million a year to support the development of high-speed networks in Canada, CANARIE runs its own accelerator program that provides free resources to entrepreneurial businesses. It has sponsored over 300 businesses to date, allowing them to have the resources that are needed to build a world-class capability. In a country where high-speed bandwidth is often more expensive and sometimes not available, CANARIE provides a much-needed service for any company that is trying to launch a digital product set in a network-enabled world.
It also provides funding for Canada’s high-speed network project CANARIE. In addition to providing about $20 million a year to support the development of high-speed networks in Canada, CANARIE runs its own accelerator program that provides free resources to entrepreneurial businesses. It has sponsored over 300 businesses to date, allowing them to have the resources that are needed to build a world-class capability. In a country where high-speed bandwidth is often more expensive and sometimes not available, CANARIE provides a much-needed service for any company that is trying to launch a digital product set in a network-enabled world.
Canada has always been a difficult place to raise capital – whether you are a startup or an established business. When your business is technical or digital this problem exists in spades. Our traditional funding channels, including banks and other corporate lenders, have real trouble valuing digital and intangible assets. Even companies with high growth and year after year results can find it challenging to get funding.
The budget provides some much-needed assistance. The Business Development Bank of Canada (BDC) has always attempted to provide creative funding for businesses. In the budget, BDC has been given additional resources to
- help small and medium sized businesses “improve productivity and sales by financing the development and application of information and communication technologies.”
- “help high-impact small and medium sized enterprises… achieve their full potential.”
- address the needs of “high growth firms (companies with annualized growth of 20 per cent for three consecutive years) with ambitions to pursue growth through an acquisition-based strategy.
If delivered as promised, BDC can address the challenges that are faced by businesses that have real growth potential but because they are digital businesses have little in the way of “tangible” assets to pledge for financing.
The budget also promises support for venture capital from four existing funds which are partnerships with the private sector. This is an initiative started in a past budget where the government invest up to $50 million dollars in a privately sponsored venture capital fund. The government funding is supplemented by additional private money. As a result, there are hundreds of millions invested in venture capital in a number of different funds.
Encouraging women entrepreneurs
If standard businesses have trouble attracting investment, companies that are headed by women face additional challenges. The budget promises to rectify this and make available up to $700 million over the next three years to encourage and enable women entrepreneurs and businesses owned by women.
There are some established businesses which are not suffering from funding challenges. These businesses are often sitting on cash and not expanding at the rate the economy requires. Despite relatively strong profits and a lower dollar that should encourage exports, many companies are not expanding. The figures show this clearly. Manufacturing represented 16 per cent of GDP in 2005 and is now at less that 12 per cent of GDP. The work force has shrunk from 1.9 million to 1.7 million.
How to kick start manufacturing is the real challenge, one made especially important with the collapse of investment in Alberta with the plunge in the price of oil. The budget has chosen to address these in a more targeted fashion. There are modest but specific assistance programs for variety of industries and sectors from automotive to pulp and paper all aimed at investment and innovation. In addition, there are more general incentive programs with targeted results. There programs to hire and train young workers. The government’s Export Development Assistance programs are being beefed up to assist companies in exporting their products.
All in all, the budget seems to have done what most businesses have done for years. It’s embraced the constraints that are everywhere in today’s economy. It’s focused on some key aspects. It’s looked at multi-year spending, private-public partnerships and focused on loans and creative financing versus straight out grants. By doing this, it has managed to deliver a pro-business budget which while modest, still allows them to provided meaningful assistance to businesses without distracting from their real mission – in an election year the majority of funds must go to those who vote.
Dull certainly. How effective it will be, we won’t know until after the next election.