What’s in #Budget2024 for Canadian tech?

The Government of Canada published its 2024 budget today and the reaction from Canadian tech was immediate and loud.

“Irreprepirable harm.” “A clear lack of ambition.” “Pain.” 

Analysts had set expectations for a budget light on net-new spending commitments after pre-announcing some $23 billion in housing commitments and $2.4 billion to AI startups, computing, and safety. Keen eyes in the Canadian tech community were looking for meaningful updates on past commitments, such as open banking, SR&ED, and the forelorn Canada Innovation Corporation.

Few were prepared for imminent capital gains tax changes that will impact those who finance, build, and work for Canadian tech companies.

Prior to the budget, it was an open question among ecosystem watchers as to whether this Liberal government would survive long enough to execute on its spending commitments. Now, the feds—already staring down a hard year—are facing widespread criticism from a constituency where they once found vocal support.

#Budget2024 has arrived and BetaKit has packaged below all the details Canadian tech needs to know.

Executive Summary

• $2.4B in AI funding commitments
• $1M to the Financial Consumer Agency of Canada (FCAC) to oversee open banking
• $4.1M to the Department of Finance to establish and maintain an open banking framework and oversight entity
• No target launch date for open banking framework legislation (¯\_(ツ)_/¯)
• $200M for Venture Capital Catalyst Initiative (VCCI) over two years, starting 2026-27
• New working group to encourage pension funds to invest in Canada
• Canadian Entrepreneurs’ Incentive to reduce capital gains inclusion rate to 33.3 percent on a lifetime maximum of $2M
• $51.6M to CRA over five years to implement OECD-agreed Crypto-Asset Reporting Framework by 2026
• 2024 Fall Economic Statement to outline legislated procurement targets for SMBs and innovative firms
• $11.1M over five years for whole-of-government cybersecurity strategy
• $27M to FINTRAC over five years to enhance its “cyber resiliency”
• The Scientific Research and Experimental Development (SR&ED) Phase 2 consultations launching shortly
• $1.8B over five years for Canadian researchers
• $14.5M to ISED over two years for the Innovation Asset Collective to help cleantech IP creation and retention
• Many cleantech tax credits updates
• $6.1M over two years for Clean Growth Hub
• $2.5B to SMBs through the new Canada Carbon Rebate
•  $158.5M over 2 years for RDAs (Regional Development Agencies)
• $60M for Futurpreneur Canada over five years to launch and scale 6,250 youth-owned business
• New guidance to EDC, BDC, and Farm Credit Canada to “mobilize more financing” and “take on greater risk” to support Canadian businesses
• Proposed amendment to the Canada Labour Code to establish right-to-disconnect policy for workers in federally-regulated sectors
• $30 million to Métis Capital Corporations over five years to provide support to Métis entrepreneurs and businesses

Open banking “Consumer-driven banking”

As expected, Budget 2024 included a few new details on Canada’s long-awaited implementation of open banking, though the budget included no targeted launch date for the system. Open banking is one of two priorities for modernizing Canada’s financial system—the other being the implementation of the Real-Time Rail.

“The devil is in the details, but in today’s announcement we see a government tangibly moving forward with open banking, and that’s good news.”

Nick Shiavo,
CCI

The Financial Consumer Agency of Canada (FCAC) will be mandated to oversee, administer, and enforce the open banking framework. The budget proposes to provide $1 million to FCAC to support the preparation for its new responsibilities and to begin development of a consumer awareness campaign.

The government said it plans to “soon” table legislation that will expand FCAC’s mandate and establish “framework elements” for open banking. The government gave no timeline for when it would table that legislation.

The budget also proposes to provide $4.1 million over three years for the Department of Finance to complete policy work necessary to establish and maintain a framework and oversight entity for open banking, which it said includes the implementation of a “national security regime.”

RELATED: FinTech leaders say “devil is in the details” with #Budget2024 open banking promises

In its Fall Economic Statement, the federal government promised to introduce legislation to begin enacting open banking—or “consumer-driven banking”—in Budget 2024, with plans to implement the necessary governance framework in 2025. 

Canadian FinTech leaders have been calling on the feds to speed up the process of implementing open banking. Initially promised in the Liberals’ 2018 budget, open banking has failed to materialize over the last six years, as the process has faced numerous delays.

Capital gains tax change baffles #CDNtech

In what it describes as an effort to make the country’s tax system “more fair,” the government has proposed an increase on capital gains taxes effective June 25, 2024. For individuals that earn more than $250,000 CAD, the government proposes increasing the inclusion rate on capital gains from one-half to two-thirds (all capital gains realized from businesses and trusts will be increased from one-half to two-thirds). The lifetime capital gains exemption will be increased from $1 million CAD to $1.25 million CAD on the same date and will continue to be indexed to inflation.

Ottawa also proposes a new Canadian Entrepreneurs’ Incentive, which will reduce the inclusion rate to 33.3 percent on a lifetime maximum of $2 million CAD in eligible capital gains (increasing by $200,000 each year, starting in 2025, until it reaches $2 million in 2034). With the increased lifetime capital gains exemption, entrepreneurs will have a combined exemption of at least $3.25 million CAD when selling all or part of a business, according to the budget. 

The new tax measures will bring in $19.4 billion CAD in revenue for the government over five years, beginning in 2024-25.

Canadian tech was quick to respond with confusion and criticism. 

Kim Furlong, CEO of the Canadian Venture Capital & Private Equity Association said her organization is “baffled” and “will work tirelessly” to reverse any proposals.

“This measure, which effectively taxes innovation and risk-taking, will significantly dampen Canada’s entrepreneurial spirit, stifle economic growth in critical sectors of our economy, and impact job creation. Such policy change undermines Canada’s position to attract the talent needed to grow and scale companies here,” Furlong said on LinkedIn.  

RELATED: Capital gains tax changes strike a nerve with Canadian tech ecosystem

Ben Bergen, president of the Council of Canadian Innovators, said in a statement the new measures on capital gains will do “irreparable harm” to the country’s innovation economy and he hopes Ottawa will adjust its proposals.

“The fact of the matter is that the best way to boost revenue for the government is to drive economic growth and productivity gains, and the best possible way to do that is by championing the success of Canada’s homegrown innovators,” Bergen said in a statement.

What VCs want to see: SR&ED & VCCI updates

The budget also included updates to another long-awaited initiative—the federal government’s review of the Scientific Research and Experimental Development tax incentives. The government is now launching a second phase of consultations (the first phase ended yesterday) to hear more from businesses and industry about proposed reforms to the program.

The government is also proposing to earmark $600 million over four years, starting in 2025, for future enhancements to the SR&ED program. The government said the second phase of consultations will inform how this funding could be targeted to boost research and innovation.

Initially promised in Budget 2022, the review has been slow to progress, to the frustration of many ecosystem players.

The Venture Capital Catalyst Initiative, renewed in the government’s 2021 budget, is getting an additional $200 million over two years, starting this year. VCCI was designed to strengthen the country’s VC ecosystem by injecting capital into the market through funds of funds and direct investments.

The budget notes this additional capital is aimed at increasing access to venture capital for “equity-deserving” entrepreneurs, and to enable investment in underserved communities and outside key metropolitan hubs.

Feds to pension funds: invest in Canada

Budget 2024 also announced the government’s plan to establish a working group aimed at encouraging Canada’s pension funds to make more investments in Canada.

“The establishment of a working group to explore domestic investment opportunities, especially in digital infrastructure, artificial intelligence (AI), and venture capital, is a commendable step forward.”

Chris Albinson,
Communitech

In March, over 90 Canadian CEOs wrote an open letter calling for amendments to the regulations governing pension funds to promote domestic investments. This call has been met with some controversy, with some detractors noting this could compromise pensions’ mandates to provide secure retirement income for Canadians.

The new working group will be led by Stephen Poloz, former governor of the Bank of Canada, and supported by the Deputy Prime Minister and Minister of Finance, to explore how to encourage Canadian pension funds to invest more in Canada.

Key areas of focus for the group include digital infrastructure, artificial intelligence (AI) investment, and venture capital investments, among others.

Cleantech: tax credit updates, silence on SDTC

Keeping with this Liberal government’s long-standing focus on cleantech and the green economy, Budget 2024 included some news on this front. The feds announced a new Electric Vehicle (EV) Supply Chain tax credit and updates on the status of the six cleantech and green-economy investment tax credits worth billions, which it announced in last year’s budget.

“Federal #Budget2024 gives #Canada a leg up in the race to attract global #cleaneconomy investment but doesn’t cross the finish line.”

New Economy Canada (via X)

Two of those—the Carbon Capture, Utilization, and Storage, as well as the Clean Technology tax credits—are set to be introduced through Bill C-59, which the feds introduced last fall and expect to pass by June. The Government of Canada said it will soon introduce legislation to deliver two more: the Clean Hydrogen and Clean Technology Manufacturing tax credits. The government also said it would work to roll out the Clean Electricity and EV Supply Chain tax credits, and enhance the Clean Technology Manufacturing tax credit.

It also announced $14.5 million over two years for ISED Canada for the Innovation Asset Collective to boost cleantech IP creation and retention, and $6.1 million over two years for the Clean Growth Hub, which functions as its main source of information and advice on federal funding and support for cleantech projects.

Last fall, the feds suspended Sustainable Development Technology Canada (SDTC) from funding new projects after an investigation uncovered conflicts of interest and governance issues at the federal cleantech investment agency. It tasked SDTC with taking steps to address these issues. This suspension remains ongoing as reviews continue, which has left many early-stage cleantech startups reliant on grant funding in the lurch. This budget did not include any new updates on the status of SDTC.

Artificial intelligence: big dollars, little detail

As other countries have ramped up their investments in AI, earlier this month, the feds announced that Budget 2024 would include a more than $2.4-billion commitment towards bolstering Canada’s AI sector and ensuring it remains competitive globally.

This figure includes $2 billion to bolster the computing power available to Canadian AI researchers, startups, and scaleups through a new AI Compute Access Fund and a new Canadian AI Sovereign Compute Strategy to increase domestically-owned AI infrastructure.

The remaining $405 million has been allocated to help AI firms bring new tech to market, boost AI adoption in critical sectors and SMBs, fund a new AI safety institute, support workers impacted by AI, and strengthen enforcement of the proposed AIDA, which is part of Bill C-27.

Budget 2024 did not include much new detail on how these new measures would be implemented. The government noted it would plan to engage with industry and researchers to implement these AI initiatives.

Crypto exchanges to be required to share client info with CRA

As part of a push to crack down on tax evasion, the feds outlined plans in Budget 2024 to introduce new measures to track cryptocurrency transactions and give the Canada Revenue Agency (CRA) more power to penalize folks who decline to disclose the information it wants.

Beginning in 2026 (with reporting to start in 2027), Canada will implement the Crypto-Asset Reporting Framework (CARF) developed by the Organization for Economic Cooperation and Development (OECD) and force crypto service providers to start reporting some new info to the CRA annually. Impacted companies include crypto exchanges, dealers, brokers, and operators of automated teller machines that are either located in Canada or do business here.

Through CARF, these firms will be required to share info with the CRA on their customers—Canadians and non-residents alike—including names, addresses, dates of birth, what jurisdictions they live in, taxpayer identification numbers, and certain transaction details. The CRA plans to exchange this info with other national revenue agencies to fight tax evasion.

The feds also plan to give the CRA more teeth to pursue tax evasion by permitting it to issue a new “notice of non-compliance” to anyone who has failed to provide the requested info, amending the Income Tax Act to allow the CRA to require any info or documents under oath or affirmation. Should the CRA obtain a compliance order from a court, the subject could face an additional penalty of 10 percent of the aggregate tax payable if they owe more than $50,000 for a single year. Budget 2024 proposes $51.6 million over five years and $7.3 million per year ongoing to the CRA to implement and administer these initiatives.

What #CDNtech expected from #Budget2024

The Liberal government revealed some big-ticket initiatives ahead of #Budget2024’s release, but Canada’s tech and innovation sector eagerly anticipated developments in a few key areas, particularly open banking, investment tax credits, and federal procurement.

This year’s budget was expected to significantly advance Canada’s long-awaited move toward an open banking system. The government indicated in its Fall Economic Statement that it would table framework legislation for “consumer-driven banking” in the 2024 budget, with plans to implement the framework next year.

The Fall Economic Statement also revealed plans to amend the Canadian Payments Act to expand membership eligibility for Payments Canada, which is also leading the much-delayed implementation of Canada’s first real-time rail (RTR) payment system, to include payment service providers and credit unions. These changes are included as part of the Fall Economic Statement Implementation Act or Bill-C59, which passed second reading in the House of Commons and was referred to a House standing committee for consideration in March.

Today, Payments Canada announced a roadmap for delivering the RTR. The organization said IBM Canada and CGI will assist Interac in the delivery of the system, adding that industry testing is scheduled to start in 2026, indicating that the process already fraught with delays will take at least two more years.

The Liberals proposed amending the Income Tax Act in the Fall Economic Statement to ensure “concessional loans with reasonable repayment terms from public authorities” aren’t classified as government assistance. This followed a Supreme Court decision that upheld a ruling treating below-market federal loans as government assistance, excluding them from being used with Scientific Research and Experimental Development (SR&ED) incentives.

As for SR&ED itself, the 2024 budget was not expected to include major new developments to the government’s long-delayed review of the program. Initially promised in Budget 2022, the review has been slow to progress, to the frustration of many ecosystem players. However, the federal government did initiate consultations for this review in January, which officially wrapped up yesterday.

Recent federal budgets have introduced several tax measures aimed at fuelling Canada’s cleantech sector, including the Clean Technology Investment Tax Credit, and a Carbon Capture, Utilization and Storage Investment Tax Credit. In their pre-budget consultation submissions, numerous stakeholders from the cleantech and energy sectors requested greater clarity concerning these tax incentives. 

Legislative proposals to implement certain clean economy tax credits were released late last year. Following consultations on these tax credits that concluded in February, the budget was expected to offer updates and additional details on how these tax credits will be structured and applied.

While Budget 2023 included no new commitments to Canada’s semiconductor sector, the Semiconductor Industry Leadership and Innovation Canada Action Network released its inaugural policy report last year, outlining recommendations to enhance the nation’s chip industry. The 2024 budget once again failed to include new commitments.

Procurement has recently been a focal point among stakeholders in the Canadian tech ecosystem. The Council of Canadian Innovators (CCI), in particular, has urged both federal and provincial governments to refine their procurement strategies to better support the nation’s innovative companies. Proposed measures include establishing a national procurement agency, setting procurement targets for SMBs, and creating new standards for innovation procurement, among others.

The amount of funding public pension funds earmark for Canadian investments has been a subject of scrutiny in the tech sector in recent weeks. Over 90 Canadian CEOs recently wrote an open letter calling for amendments to the regulations governing pension funds to promote domestic investments. What they got in #Budget2024 was a commitment to encouragement.

Beyond pension funds, there are other mechanisms being considered to increase investment in Canadian companies. In its submission to the Minister of Finance for the federal budget, the Canadian Venture Capital & Private Equity Association (CVCA) recommended the government consider a new emerging manager stream for the Venture Capital Catalyst Initiative (VCCI). The CVCA also proposed implementing a capital gains exemption if proceeds from company exits are invested in a new Canadian venture.

UPDATE (04/23/24): This story has been updated to include more info on the new crypto tax reporting requirements.

Feature image courtesy Flickr.