ITAC calls for quick action on venture capital and reversal of reductions to SR&ED credits

Pre-Budget submission

The Information Technology Association of Canada (ITAC) is urging the government to accelerate implementation of the Canada Venture Capital Action Plan (CVCAP) and reverse reductions in the federal R&D tax credit program as part of its pre-Budget submission to the Finance department. The ITAC submission is one of more than 600 submitted annually, although this year groups are required to limit their recommendations to five and use a strict format that details expected cost or savings, federal funding, intended beneficiaries and general impacts.

ITAC's top two recommendations relate to measures announced in the 2012 Budget. It argues that, without the changes, innovation generally and firms in the broad information and communications technology (ICT) sector will be put at a global disadvantage.

The CVCAP is ITAC's top-ranked recommendation and applies mainly to small- and medium-sized enterprises seeking R&D and expansion funding. Announced in the 2012 Budget, the government committed $400 million to boost Canada's lackluster VC sector. To date, the only indications of progress are the naming of the broad areas where the funds will be allocated and the announcement of an expert panel (chaired by veteran venture capitalist Samuel Duboc, the current Clifford Clark Visiting Economist at Finance).

"Venture capital deal flow is very low so we're asking them to get rolling on this. The pace is hurting our industry," says Lynda Leonard, ITAC's senior VP. "The savings from LSIF (the federal government is withdrawing its participation from the Labour Sponsored Investment Fund program) are the source of funding for this initial pocket of $400 million for VC. "

"The key is how to operationalize the funds and right now the execution is not fully laid out," says ITAC president and CEO Karna Gupta. "Everything has ground to a halt. Companies are turning elsewhere to raise the money they need and this reduces the results the government is looking for."

A Finance spokesperson told RESEARCH MONEY that the Venture Capital Expert Panel's work is ongoing and likely to wrap up its work "in the near future".

Larger ICT firms — many of which are multinationals — as well as SMEs would benefit from ITAC's recommendation to reconsider reductions in the value to firms of the Scientific Research & Experimental Development (SR&ED) tax incentive program. In the 2012 Budget, the government eliminated capital outlays as an eligible expense and reduced the credit for larger firms from 20% to 15%. The reaction from the business community has been overwhelmingly negative with other groups such as Canadian Manufacturers and Exports slamming the changes (R$, November 9 & December 17/12).

ITAC describes the changes as adverse and prejudicial but it's unclear whether the government will consider reverting to the more generous credits. The decision for the changes stems from recommendations made by the Jenkins expert panel report on federal support for R&D. The report called for the money saved by reducing the value of the credits to be reallocated to direct support programs, which has yet to happen in any substantive way.

"There's been strong push-back from ICT companies that the changes have negatively impacted them. If you look at the Canadian ICT sector profile, there are lots of multinationals in the country and they are fighting with other countries to invest in Canada," says Gupta. "I don't know if the government will change the legislation at this point, given the political realities. But if concern is consistently raised, alternatives could be put on the table. The government needs to start tracking what the impacts (of the changes) are."

That said, both Gupta and Leonard are confident the recommendations will be heard by receptive ears, given the high priority it says the government places on ICT and the knowledge economy.

"They're on the front burner for future job creation so that gives us a good audience," says Leonard.

ITAC has rounded out its pre-Budget submission with three other recommendations. It is calling for the government to match the accelerated capital cost allowance (ACCA) granting to the manufacturing sector in the last Budget to be extended to ICT. Study after study has shown that healthy investment in ICT serves as a major boost to productivity. Canada's current rate of ICT investment per worker is just 53% of the US?rate. ITAC argues that the costly move of applying the ACCA to ICT firms (hundreds of millions) is the preferred option, but barring political will, it would settle for a $20-million outlay for a "communications campaign to encourage the use of 21st century business tools (that) would begin to address Canada's lagging productivity".

ITAC is also recommending $180 million over three years in Canada Health Infoway (CHI). The organization was created in 2001 to improve access to and management of health care through the use of ICT. To date, it has received nearly $2 billion in federal and provincial funding, with the most recent federal infusion ($500 million) coming in the 2009 Budget. This is the second time ITAC has made the request.

ITAC's final recommendation is for stepped up support for early-stage entry of Canadian firms into international markets. The government current provides this service through a variety of mechanisms (Trade Commissioner Service, Export Development Canada, etc) but ITAC says much more could be done with a modest increase of less than $20 million.

"We do a lot of trade missions but we could do a better job connecting companies into the business processes of other countries," says Gupta. "The soft landing process needs to be fine tuned. There have been a lot of ICT?successes of more than $20 million in revenue and 60-70% of those revenues come from overseas."

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