Quebec Budget unveils modest measures to grow province’s innovative economy

The Quebec government has balanced its books and is launching several initiatives to stimulate private sector investment including relatively minor measures in support of R&D and innovation. S&T measures include an increase in the R&D tax credit for smaller business from 35% to to 37.5%, a proof-of-concept funding program for university research, an expanded tax credit for design in product development and a so-called SME Growth Stock, allowing investors to claim a 100% tax deduction on shares of eligible firms.

The April 21 Budget speech delivered by Finance minister Michel Audet took pains to lambaste the previous government’s interventionist approach to economic development, stating that losses on the $1.7 billion invested in Société générale de financement and Innovatech corporations totalled $1 billion. Audet recounted the restructuring of the provincial venture capital landscape following the release of the Brunet report (R$, March 18/04), which called for less government participation, fewer tax credits for business and revamped vehicles focused on public-private partnerships.

“We had to redress a situation that was both untenable and costly for our society. The previous government assumed the role of private enterprise by taking risks that it is not the state’s vocation to assume,” stated Audet.

ENHANCED R&D TAX CREDIT FOR SMES

The increase in the R&D tax credit for smaller firms applies to all four categories of existing tax credits — R&D salaries, university R&D (contracts), pre-competitive R&D and dues and fees paid to a research consortium. The full 37.5% tax credit applies to Canadian-controlled corporations with $25 million or less in assets, dropping to 17.5% for those with assets of $50 million.

The proof-of-concept program for promising university research is a new program, albeit a small one, with only $4 million allocated for the next two years. The program targets pre-seed projects, a high-risk area where few private sector investors are willing to venture. Program funding will flow through the Ministry of Economic Development, Innovation and Exports.

The current design tax credit provides a refundable credit of 15% for larger firms and up to 30% for smaller companies, typically in the clothing, textile and furniture sectors..The new legislation will broaden the eligibility, increasing the number of firms that can take advantage of it from 300 to 700.

The SME Growth Stock plan is aimed attracting venture capital to firms with less than $100 million in assets and allows for a 100% deduction rate for investors. A holding period of three years will apply. Budget documents estimate that there were 25 public companies in Ontario with a market capitalization of less than $100 million, compared to just six in Quebec.

INNOVATECH CONVERSIONS CONTINUE

The Budget also continues with the conversion of the provincial Innovatech corporations. The latest Innovatech to be converted is Société Innovatech Régions ressources. An agreement in principle has been reached between Capital régional et coopératif Desjardin (CRCD) and Desjardins Capital de risque for the creation of a mixed public-private capital corporation. CRCD will inject $30 million into the new entity.

The Budget encourages a similar conversion for Innovatech Québec et Chaudiére-Appalaches and Innovatech de sud du Québec. It will provide $10 million more to be split between the two to help attract private investment.

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