Canadian companies will be able to deduct 10 per cent more off the capital costs of their computer equipment based on measures in the budget introduced late Monday by the Federal Department of Finance.
The increase in the capital cost allowance (CCA) rate to 55 per cent from 45 per cent was included among several other measures, including the rate for non-residential buildings and natural gas distribution pipelines. It will apply to IT equipment purchased after today’s date. Finance minister Jim Flaherty’s office said the combined increases in CCA rates will reduce the tax burden on new business investments by 2.5 per cent by 2011 and will cut federal revenues by $60 million.
“Where a CCA rate is too low to reflect an asset’s useful life, an increase to that CCA rate can reduce the tax burden on investment and increase the efficiency of the tax system,” the budget document, titled Advantage Canada, said.
Accelerated capital cost allowance was one of the measures proposed by the Information Technology Association of Canada (ITAC), though the government stopped short of addressing some of its other recommendations.
“Capital and sales taxes are a big barrier in our industry,” ITAC president Bernard Courtois said shortly before the budget was announced. “What’s encouraging to me is their plan seems to have the right analysis and the right elements . . . Dealing with capital cost allowance could help us tackle the productivity problem we have in this country.”
ITAC had been hoping to see substantial elements of the federal Scientific Research and Education Development (SR&ED) tax credit program changed. Specifically, ITAC and others want to make the credits more accessible to businesses that grow past the early startup phase. In many cases, Courtois said, companies can no longer receive credits just as they are starting to take off.
“(The government) considers it an expensive program. It should be more expensive, because it’s not generating enough R&D,” he said. “The payback is enormously positive from it.”
ITAC is not alone. The Canadian Advanced Technology Alliance (CATA) has also been in ongoing discussions with Minister Flaherty’s office, and its most recent e-mail update to its members showed little signs of progress.
“Finance officials clearly understood the need for broader access to the credits. However, they seemed to see it as a question of balance. In this respect we disagreed,” the CATA message said. “We emphasized the net improvement in the tax base that would be achieved if a much broader base of firms were encouraged to perform R&D. There was considerable discussion about areas of legislation that is not working as originally conceived by Finance.”
CATA has also expressed concern that the policy on recognizing contracts for SR&ED credits is not appropriate for the way many firms do business. Spokespeople for CATA were not available at press time.
Bob Glandfield, president of the business advisory not-for-profit Innovation Synergy Centre for Markham (ISCM), pointed out that many businesses pay scant attention to other tax credit programs available to them. These include the National Research Council of Canada Industrial Research Assistance Program (NRC-IRAP); Ontario Centres of Excellence (OCE); and Foreign Affairs and International Trade Canada, Trade Commissioner Service.
“You don’t have to be making a profit to get that money back,” he pointed out, adding that many companies are distracted by their day-to-day goals to look for tax credits. “Their accountants don’t understand it.”
ITAC had also recommended the government do more to support Canada Health Infoway, a pan-Canadian agency charged with setting up a national electronic health record (EHR) by 2009. The government responded by earmarking $400 million to support early movement towards EHRs. Budget 2007 also earmarked $510 million to the Canadian Foundation for Innovation and $120 million to CANARIE in 2006–07 to maintain CA*net over the next five years and to develop the next-generation network, CA*net 5.