Innovation

Federal budget not good enough for growth companies

Written by Rebecca Gardiner

Canada’s entrepreneurial community offered a lukewarm reaction to the 2005 federal budget released yesterday. While the elimination of the 18-year-old corporate surtax, a reduction of the general corporate income tax rate and the elimination of content restrictions on pension and RRSP investments mean good things for entrepreneurial firms, critics say more could have been done. And they cite massive spending initiatives as a backwards step.

“I think there is nothing really in the budget that directly helps entrepreneurs,” says Eric Morse, director of the Institute of Entrepreneurship at the Richard Ivey School of Business in London, Ont. “The fact that the government is going to retire some debt will help the economy and anything that helps the economy will help entrepreneurs. But I’d love to see them do less on the spending programs and more on tax cuts and debt reduction.”

Nancy Hughes Anthony, president and CEO of the Canadian Chamber of Commerce agrees. “A unique window of opportunity was available to the government for a serious and immediate boost to our economic growth—the chance to make fundamental investments in productivity for all Canadians has been missed,” she says. “We are disappointed that the government continues to deal with crucial areas like health care and the environment by simply throwing more of Canadians’ hard-earned money at them, without addressing the fundamental issues in a planned and productive manner.”

On the bright side, the corporate tax cuts introduced yesterday mean business tax rates remain significantly below those of the U.S. and should attract more investment and jobs to Canada. Nevertheless, the cuts offer no immediate relief for exporters dealing with the fast rise of the loonie. David Stewart-Patterson, executive vice-president of the Canadian Council of Chief Executives, says the budget is “little comfort” to exporters who need to make major investments now to stay competitive and keep growing from a Canadian base.

Venture capitalists are also ho-hum about the Liberal budget. “We believe that removal of the foreign property ceiling is a necessary, but by itself not a sufficient, step to improving the supply of venture capital in Canada,” says Robin Louis, president of the Canada’s Venture Capital and Private Equity Association (CVCA) and Toronto-based venture capital firm Ventures West Management Inc. “We expect that additional measures will be required to encourage Canadian pension funds to make new commitments to this asset class and to encourage investment in Canadian venture capital and private equity by others that are not covered by the foreign property rule, such as investors from outside Canada.”

Small business owners were pleased to see Registered Retirement Savings Plan and registered pension plan contribution limits increased to $22,000 annually, as well as a promised increase in the amount individuals can earn tax-free (at least $10,000 by 2009)—a measure the Liberal government says will provide about $7.1 billion of relief for all taxpayers over the next five years.

“We support the measures that were taken on the tax side, and we lobbied hard for the increase in the RRSP contribution limit,” says Ted Mallett, vice-president of research for the Canadian Federation of Independent Business. “But this is clearly a pre-election budget. For every $3 in spending increases, there is only $1 in tax-relief, and most of that relief doesn’t start until 2008. The issue is how many pre election budgets can we afford?”

Highlights of the budget include

Tax strategies

  • The 4% corporate surtax, originally introduced to fight the federal deficit, will be eliminated Jan. 1, 2008.
  • The general corporate income tax rate will be reduced to 19% from 21% by 2008.

Regional investments

  • $800 million for regional economic development agencies in Atlantic Canada, Western Canada, Quebec and Northern Ontario.
  • $120 million for the Northern Strategy to help Canada’s three territories promote economic development.

Financing

  • $55 million over the next five years for Community Futures Organizations, which provide loans to small businesses.

Green enterprise

  • Part of the $10 billion dedicated to the environment will build on existing tax measures that encourage Canadian businesses to invest more in efficient and renewable energy generation.
  • Increase to 30% in the capital cost allowance rate on efficient and renewable energy equipment.

General

  • A promise to reduce overlap and duplication between federal agencies that regulate Canada’s financial sector.
Originally appeared on PROFITguide.com