Canadian Federal Budget : Post-alert
Budget 2019 provided the federal government with an opportunity to address some of the issues that have been affecting our economy, by introducing policy and spending plans that might help improve the competitiveness of Canadian businesses. Although there were some policies introduced that could have a potential positive effect on the Canadian business environment and the economy as a whole, Budget 2019 failed to deliver the real change that was needed.
Innovation and growth
As noted in Grant Thornton’s pre-budget alert, accessing capital and attracting talent are two of the biggest challenges faced by start-ups. Budget 2019 introduces several measures that aim to promote innovation and support entrepreneurs.
Elimination of taxable income requirement for refundable SR&ED credit
Under the existing Scientific Research and Experimental Development (SR&ED) tax incentive program, certain Canadian controlled private corporations (CCPCs) are eligible for an enhanced fully refundable investment tax credit (ITC) at a rate of 35% available on up to $3 million of qualifying SR&ED expenditures annually. Prior to the changes proposed in Budget 2019, this expenditure limit was gradually reduced when
- the prior year’s taxable income for the associated group exceeded $500,000 (completely eliminated at $800,000) or
- taxable capital employed in Canada by the associated group exceeded $10 million (completely eliminated at $50 million).
Budget 2019 proposes to repeal the taxable income component of the qualifying expenditure reduction formula so that CCPCs will only be subject to reductions in their enhanced SR&ED credits on their taxable capital employed in Canada. The new rules are intended to better support growing innovative businesses as they are scaling up, and the taxable capital thresholds will help to ensure that the enhanced rate remains targeted toward small and medium-sized enterprises (SMEs).
Funding provided by Futurpreneur
As discussed in Grant Thornton’s Entrepreneurship article [ 920 kb ], the overall entrepreneurship rate (number of entrants as a fraction of total number of firms) in Canada declined from 24.5% in 1984 to 12.7% in 2013. As the article explains, the 24 to 35 year old age group saw the largest drop in entrepreneurship rates—and increasing levels of student debt might be at least part of the reason for this decline.
Budget 2019 proposes to provide $38 million over five years to Futurpreneur Canada, a national not-for-profit organization, to support the next generation of entrepreneurs. Futurpreneur Canada will match these investments to help support the work of approximately 1,000 entrepreneurs per year aged 18 to 39. Additional funding invested in Futurpreneur Canada may help mitigate some of the financial pressure faced by young entrepreneurs.
Trade and Canadian business competitiveness
Over the last couple of years, Canada has continued to face increasing economic pressures from outside its borders. Some of the more significant events include:
- Large reductions to corporate and personal tax rates in the US
- Difficulties in renegotiating the North American Free Trade Agreement (NAFTA)
- Tariffs on Canadian aluminum and steel imported into the United States
- Continuing trade tensions with China
No tax rate changes
With the 2018 US Tax Cuts and Jobs Act (TCJA), US corporate tax rates were reduced from 35% to 21%. After factoring in state taxes, according to the OECD, the US statutory rate dropped from approximately 39% to 25.8%, a full percentage point lower than Canada’s combined rate of 26.8%. The TCJA also included an accelerated write-off for capital purchases, further improving the tax position of US businesses vis-à-vis Canadian businesses.
Canada-US tax comparison (based on OECD statistics)
Although the government’s response to the major issues of trade and competitiveness was largely ineffective, some measures were introduced that could have a potentially positive overall effect for Canadians.
Since January 1, 2018, prospective homebuyers have had to undergo new mortgage stress tests, which generally reduce the amount of mortgage that the homebuyer can qualify for. This, coupled with rising interest rates since July 2017, has made home-buying increasingly difficult for many Canadians. Millennials, in particular, have been negatively affected, since they often struggle with high student debt and lower-wage jobs.
Budget 2019 introduced two changes meant to specifically target this demographic and improve their ability to purchase a home:
- First-time homebuyer incentive
- Updates to the homebuyer’s plan
Helping you realize your potential
Budget 2019 offers Canadians various new spending initiatives and tax measures. However, it does little to relieve the global economic pressures faced by Canadian businesses or address the areas where Canada has lost its competitive edge in the global marketplace.
As a business owner, you continually strive to grow your business, for the benefit of your employees, communities and your own family and retirement. Grant Thornton continues to work with Canadian business owners, like you, to help you achieve your goals. Please contact a Grant Thornton advisor if you wish to know more about how we can assist you and your business in the wake of Budget 2019.