Quebec Budget ratchets back research tax incentives, introduces new targeted spending

Quebec's new Liberal government is reducing tax assistance to business by 20% across the board and providing modest spending initiatives targeting entrepreneurship, new venture and angel financing and the creation of a $150-million fund to support the innovation performance of smaller firms. The Budget sets the province on track to eliminate its operating deficit within two years, largely through a hiring freeze and a review to ratchet back program spending.

The ambitious 10-year Quebec Infrastructure Plan will remain in place, providing $90.3 million in spending between 2014 and 2024. Higher education and research will receive $6.1 billion or 7% of the total. And the province's ambitious five-year, $3.7-billion National Research and Innovation Policy (NRIP) — unveiled last year (R$, October 28/13) — also remains intact. The plan was launched in 2013 with the objective of boosting R&D spending to 3% of GDP, up from its current level of 2.5% — the highest of any jurisdiction in Canada (R$, October 28/13).

The largest (nominally) new initiative is the $150-million, three-year Créativité Québec (CQ) program to encourage more small- and medium-sized enterprises (SMEs) to undertake innovation-focused projects. The assistance will take the form of loans and loan guarantees, with an option to provide non-repayable support or equity participation. Targeted activities include the acquisition of new technologies, improvement of production processes and new product development.

CQ integrates the Program to Support Innovation currently offered by the Ministry of the Economy, Innovation and Export Trade (MEIET) with technology acquisition component of the ESSOR program for fast-growing companies. MEIET will provide Investissement Québec with $20.1 million over the three year period from its contingency fund to fund the program.It will target the manufacturing and propulsive tertiary sectors as well as businesses in the primary sector that have a secondary or tertiary processing project.

The Budget is boosting its support of venture capital with an investment in a proposed fund of funds of $62.5 million, with an overall target size of $375 million. The government anticipates success in tapping into the $350-million envelope within the federal Venture Capital Action Plan. The measure is similar to an initiative introduced by the previous Parti Québecois government's budget (R$, February 24/14).

The provincial angel capital network — Anges Québec — is also receiving a $25-million top-up to its Capital Fund, raising it to $100 million. Budget documents indicate that dépôt et placement du Québec will provide $25 million and the Solidarity Fund FTQ will contribute $15 million, building on a $20-million investment made by the government in 2012. Angel investors will co-fund investments in seed and start-up firms in the areas of information and communications technologies, life sciences, industrial technologies and innovative manufacturing, increasing the impact of the Budget initiative to $150 million.

Reduction of tax credits

The tax reduction measures aim to take $1 billion out of the system by FY15-16. It affects four credits targeting businesses conducting R&D — R&D salary, R&D university, pre-competitive research and eligible research consortiums. The R&D salary tax credit is being reduced from 37.5% to 30% while the other three are being shaved from 35% to 28%

At the same time, the Budget introduces a holiday for contributions to the Health Services Fund by exempting SMEs with payrolls of less than $5 million to encourage the hiring of specialized workers. Running through to 2020, the HSF holiday represents a tax saving of $155 million over five years, costing the treasury $7.4 million in FY14-15 and rising to $50 million by FY18-19.

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