4 ways the Liberals’ 2016 budget could help Canada’s tech industry

As Department of Finance staff toil away in Ottawa to deliver the Liberal party’s first federal budget under Justin Trudeau, many in the tech industry are waiting with bated breath to see what, if any, measures they will be taking that could help or hinder Canada’s tech industry.

ITBusiness.ca spoke to four experts connected with the sector for our feature story about what the industry can expect from the upcoming budget. Below, we share four ways they said the government’s fiscal policies could improve your company’s financial outlook over the next year.

Update the Scientific Research and Experimental Development (SR&ED) tax incentive program

If the Liberal government wants to signal that under its leadership, the federal SR&ED tax incentive program will work as effectively as possible, they could improve the program’s redress process and adjust its refundable funding policy for smaller technology firms, which can depend on government funds for as much as 40 per cent of their operating costs during their first four years, Russ Roberts, senior vice-president of advocacy for the Canadian Advanced Technology Alliance (CATA), says.

By improving the program’s redress process, “when people got into disputes they would be confident that they would have an efficient, effective second opinion available to them from somebody who was impartial,” Roberts says. “And not only the CRA – they say they’re impartial – but that everyone agrees is impartial.”

As for its refundable funding policy, historically the government allowed the CRA to provide smaller firms with tax refunds unless something went significantly wrong, such as a company making a fraudulent claim, Roberts says. That changed after 2008 updates to the T661 SR&ED expenditures claim form, providing smaller firms with a new, unwelcome distraction.

“By going back to the previous policy, you’re indicating the refundable program will be managed as an incentive,” Roberts says.

Improve the nation’s technological infrastructure and access to technology

A major investment that Albert De Luca, a partner and national leader with international consultation firm Deloitte’s global government incentives, R&D, and tax departments would like to see is the Liberal government offering technology companies greater access to procurement, or international free trade, policies in order to make their work more accessible on an international stage.

“I realize there are limitations,” he says. “But I would urge the government to look at [their policies] carefully and see how its massive ability to spend for its own purposes could be used as a vehicle for the technology sector to develop itself even further.”

For example, he says, international procurement policies that benefit Canada’s IT industry could lead to the construction of a dedicated 5G network across the country, as is already happening in parts of Europe.

“We have options here to make Canada a centre of excellence for 5G,” De Luca says. “So what’s required? Procurement, and an improved tax environment.”

By giving manufacturing companies the necessary tax incentives to incorporate technology solutions into their day-to-day operations, De Luca says, Canada could spark a technological revolution. Otherwise, it risks being left behind.

“We are the only developed nation with no fundamental research going on with 5G,” Information Technology Association of Canada (ITAC) president and CEO Karna Gupta says. “It’s going to happen over the next six years, and if we don’t start now we will always be on the back end of figuring out how to deal with it.”

Retain current stock option-related tax breaks

Under existing income tax rules, individuals who exercise employee stock options can claim a deduction equal to 50 per cent of the funds received, effectively cutting the tax rate for stock option income in half.

However, the federal Liberal party has pledged to limit the amount that can be claimed through stock option deductions to $100,000, potentially making stock options a less attractive payment strategy, Ian Heine, a Vancouver-based partner with the Canadian arm of international consultation firm PricewaterhouseCoopers (PwC) LLP’s Tax Services practice who advises clients in the technology, information, and communication industries, says.

That $100,000 cap might make sense in, say, the banking industry, where a steady increase in a company’s stock price is unlikely to affect the majority of employees, Heine says, but not in the technology industry, where it’s common for startups to pay a large percentage of their employees – like the CEO at many enterprise companies – through stock options, so that if the company takes off, so does employee compensation.

And when companies take off in the tech industry, they take off quickly, he adds.

“Typically what happens with emerging technology companies is there is no annual [returns] – the value of the company is really only realized at a point of exit,” such as during the company’s sale, Heine says. “So typically what happens is that stock option benefit, if you will, is all realized in one year” – and the prospect of being taxed at full income rates during that one year of windfall makes it a much less exciting proposition to sign on with a Canadian startup.

“I think it’s going to impact a lot of emerging companies and their ability to hire employees, I think it’s going to impact their ability to retain employees, and I think if you look at what’s happening globally, particularly in jurisdictions where technology is very, very strong, like the U.S., and combine that with a declining dollar, I think it could really hamper our technology industry in Canada,” Heine says.

Revise the temporary foreign worker program

While the phrase “temporary foreign worker” may conjure images of seasonal agricultural workers, that type of portrait hardly applies to the tech industry, ITAC’s Gupta says.

“Our temporary foreign workers are well-paid,” he says. “You cannot paint the service, agriculture, and technology industries with the same brush. There’s nothing common between them.”

A foreign worker in the tech industry simply reflects the sector’s already-mobile workforce, Gupta says, and the desire among its leading companies to hire the most skilled people available for leadership positions, regardless of where they come from.

“If I have an IT issue at TD bank, I want the guy who solved the problem for Barclays, Standard Chartered, and CitiBank to come and solve it, not some green guy from Mississauga,” Gupta says.

Unfortunately, Canada’s temporary foreign worker policies are so convoluted that if the right CTO is found in, say, Germany, it takes the company nine months to get him to Canada, Gupta says.

So what happens? In this hypothetical scenario, the company sends its new CTO to its American subsidiary.

“Close enough, but what do you think happens after that?” Gupta says. “All of the organization… gets built around the CTO.”

To address the issue, Gupta says the Liberal government could process immigration applications more quickly for in-demand industries such as IT, or increase the number of workers available to certain industries through the Temporary Foreign Worker program in the first place.

“We need to figure out a way to have the tools and policies in place to attract the top talent here,” he says. “If you have the top talent here, companies will build their teams around them.”

So… what can we actually expect?

As for what the industry can realistically expect, CATA’s Roberts anticipates the government will retain the present low tax rate for stock options to support economic growth, and revise the temporary foreign worker program – though how, he cannot say.

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Jim Love, Chief Content Officer, IT World Canada

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Eric Emin Wood
Eric Emin Wood
Former editor of ITBusiness.ca turned consultant with public relations firm Porter Novelli. When not writing for the tech industry enjoys photography, movies, travelling, the Oxford comma, and will talk your ear off about animation if you give him an opening.

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