By and April 7, 2022

Federal #Budget2022 surprisingly heavy on innovation policy

No Canadian DARPA, SR&ED reform is coming, and our clusters are no longer super.

The federal government has published its Budget 2022, which contains a number of commitments for the Canadian tech and innovation sector.

Much desired commitments to innovation clusters, intellectual property (IP), and more have been made. Rather than large cash commitments, many of the promises are program or policy-driven.

Executive Summary

  • Establishment of a Canada Growth Fund to attract private sector investment;
  • Creation of a Canadian Innovation and Investment Agency to invest in innovation, research, and development;
  • Rebrand and $750 million for Superclusters;
  • Review of Scientific Research and Experimental Development (SR&ED);
  • Extending phase out of small business tax rate from $15 million to $50 million;
  • $45 million for semiconductor industry;
  • $30 million for CAN Health Network;
  • $875.2 million over 5 years to address cyber threats;
  • $17.7 million over 5 years for the Communications Security Establishment (CSE) to establish an academic research programs on cutting-edge technologies;
  • Amendments to the Competition Act;
  • More capital for National Intellectual Property Strategy;
  • $25 million for the Research Support Fund;
  • Creation of the Employee Ownership Trust
  • $2.6 billion for a carbon-capture, utilization, storage tax credit;
  • $2.2 billion for the Low Carbon Economy Fund;
  • $780 million to expand Nature Smart Climate Solutions Fund.

This is the first budget Prime Minister Justin Trudeau’s Liberal Party has tabled since the September election, when it made promises for the innovation sector such as creating the Canadian version of the United States’s DARPA. That DARPA idea has not come to fruition, however. Senior government officials told reporters during a briefing that “DARPA is not a model for Canada” and was more of a high-level commitment than proposed agency.

“This is an innovation budget through and through.”
– Benjamin Bergen, CCI

The lack of a Canadian DARPA is not the only surprise. While the budget did feature spending on tech, innovation, and the small business sector, it focused significantly more on policy changes and agency creation than the big spending of past budgets.
 

One reason for that? With a $113.8 billion expected deficit in 2021-22, the federal government is hoping to reach a projected deficit of $8.4 billion in 2026-27, a significant (and optimistic) deficit reduction.

The budget also follows the recent Liberal and NDP Supply and Confidence Agreement. In order to stave off an election because of its status as a minority government, the Liberals agreed to work with the NDP on a number of priorities in the areas of healthcare, affordability, the climate crisis and a better deal for workers, among others. In return, the support of the NDP on confidence and budget matters allows the Liberals to stay in power until June 2025, enabling them to deliver four budgets over that period.

With that deal, the budget mainly focused on housing affordability, public healthcare, and clean energy.

Still, “this is an innovation budget through and through,” said Benjamin Bergen, president of the Council of Canadian Innovators. “With a clear focus on supporting Canadian innovators, bolstering intellectual property generation, driving clean economic growth, and doubling-down on Canada’s fastest-growing sectors in the years to come.

“It’s good to see Canada dusting off old playbooks to update its economic strategies,” he added.

Growth fund, investment agency, and Supercluster rebrand

While the federal government has steered away from creating a Canadian DARPA, the budget proposes the creation of a growth fund to attract private sector investment, and an investment agency.

The Canada Growth Fund comes with the promise of $15 billion over the next five years to “attract substantial private sector investment to help meet important national economic policy goals.” The specifics of where the capital will be spent are lacking, but the budget does point to climate and emission goals.

A promise of $1 billion over five years would go towards the creation of a Canadian Innovation and Investment Agency. The agency is intended to invest in innovation, research, and development “at the scale required to make Canada a global leader.” Details on the agency’s operating budget are set to be determined following consultation later this year.

The agency will be independent, market-oriented, with a focus on private sector expertise. It is modelled on the Israel Innovation Authority, and the Finnish TEKES, which have both helped spur tech research and development in their respective countries.

Canada’s five-year-old Innovation Superclusters Initiative got a rebrand in this year’s budget. Now calling the program Canada’s Global Innovation Clusters, the federal government is extending the initiative, as hoped for by its participants. The budget has proposed only an additional $750 million over six years, however.

“Cluster” groups had reportedly asked for $1.5 billion in new funding in order to extend their mandate that is set to end in March 2023.

Semiconductors, procurement, and research

Much in need of domestic spending in order to modernize semiconductor tech production, Budget 2022 proposes $45 million over four years to Innovation, Science and Economic Development Canada (ISED) in order to engage with stakeholders, conduct market analysis, and support semiconductor projects.

This commitment follows the $150 million that was promised in February for a newly created Semiconductor Challenge Callout (SCC) fund. At the time, $90 million also went towards the Ottawa-based Canadian Photonics Fabrication Centre (CPFC).

Canada’s semiconductor sector currently includes over 100 homegrown and multinational companies that conduct research and development on microchips.

Lobbyists were hoping for $100 million towards healthcare procurement innovation. One spokesperson told BetaKit that an ask is not a get, however.

Healthcare procurement is another area in need of innovation and investment, and the latest budget has comments for that as well. It proposes to provide $30 million over four years in new funding to the CAN Health Network, which works to connect healthtech startups with hospitals and agencies. It also includes innovation groups like Communitech. The government hopes to expand the program nationally to Quebec, the territories, and Indigenous communities.

Communitech CEO and president Chris Albinson told BetaKit, “Communitech is thrilled by the government’s investment in Canadian-made technology through improved procurement processes.”

The $30 million was less than program partners had asked for though. The group had asked the government for $100 million for much-needed healthcare procurement innovation. One organization spokesperson noted to BetaKit that an ask is not a get, however.

Research to support the innovation sector was also part of the budget. A promise of $125 million over five years, with $25 million ongoing, was made for the Research Support Fund to build capacity within post-secondary institutions to “identify, assess, and mitigate potential risks to research security.”

Another $34.6 million over five years, with $8.4 million ongoing, will go to establish a Research Security Centre that will provide advice and guidance directly to research institutions.

As well, $38.3 million over four years, with $12.7 million ongoing, will be available for granting councils to add new, internationally recruited Canada Excellence Research Chairs in the fields of science, technology, engineering, and mathematics. This, the budget said, will support a further 12 to 25 new Canada Excellence Research Chairs.

SR&ED review, small biz tax rate extension, Competition Act refresh, and IP investments

The Government of Canada has announced plans to review the country’s Scientific Research and Experimental Development (SR&ED) program, which provides tax incentives to encourage Canadian companies to undertake research and development (R&D). The federal government referred to the initiative as “a cornerstone” of the country’s innovation strategy.

Through the review, Canada aims to measure SR&ED’s effectiveness and “explore opportunities to modernize and simplify it.” As part of this evaluation, the government plans to consider whether a tax system can support “the development and retention of intellectual property,” including the “suitability of adopting a patent box regime.”

“We’re going to review SR&ED again … again again.”
– Daniel Munro, Munk School Innovation Policy Lab

BC Tech President and CEO Jill Tipping told BetaKit she was “pleased / surprised” regarding the Government of Canada’s “re-engagement with patent box and SR&ED modernization.” Senior Fellow at Munk School’s Innovation Policy Lab Daniel Munro was less pleased about the latter move, tweeting, “we’re going to review SR&ED again … again again.”

Canada also intends to phase out access to the country’s small business tax rate “more gradually.” The federal government currently taxes small businesses at a reduced rate of 9 percent on their first $500,000 in taxable income, lower than the general rate of 15 percent. Under the current set-up, businesses lose access to this rate when they hit $15 million in taxable capital, while Budget 2022 increases that threshold to $50 million.

The country has also announced plans to “consult broadly on the role and functioning of the Competition Act and its enforcement regime,” following calls from critics to do so. The move comes shortly after Canada’s Competition Bureau recently released its annual plan, which spoke to expansion of proactive enforcement against anti-competitive activities. The budget also notes the federal government’s intent to introduce some legislative amendments to the Competition Act, including “fixing loopholes; tackling practices harmful to workers and consumers; modernizing access to justice and penalties; and adapting the law to today’s digital reality.”

Budget 2022 also carves out $96.6 million over five years towards: launching a new national lab-to-market platform; Global Affairs Canada’s CanExport program; a survey assessing its previous IP-related investments; expanding the use of ExploreIP — the country’s IP marketplace; and strengthening the Intellectual Property Legal Clinics Program.

The federal government also noted that the Strategic Intellectual Property Program Review first announced in Budget 2021 is currently underway.

Adam Kingsley, the CEO of the Intellectual Property Institute of Canada, was less than enthused about the commitments the federal government outlined on the IP front. “Budget 2022: ‘IP is vitally important to innovative economy,’” tweeted Kingsley. “Also Budget 2022: Completely ignore requests of IP sector and the innovative economy, but increase funding by $96M for existing programs (lab-to-market platform?) and surveys.”

Fighting climate change and cybercrime

Budget 2022 outlines a number of different new climate-related investments and incentives. With the $15 billion promised to the Canada Growth Fund, the Government of Canada hopes to draw on this funding and attract private sector investment to advance some of its key national economic policy goals, which include reducing the country’s emissions by 40 to 45 percent within the next 10 years, support the growth of low-carbon industries and new industrial tech, and help restructure Canada’s natural resources sector.

The budget also commits $2.6 billion for a carbon-capture, utilization, and storage tax credit, $780 million to expand its Nature Smart Climate Solutions Fund, and $2.2 billion for the Low Carbon Economy Fund to help provinces pursue emission-reduction initiatives. Rocco Rossi, president and CEO of the Ontario Chamber of Commerce, hailed these measures as a positive development, adding that they recognize “the opportunities for all sectors to participate in the green economy.”

On the cybersecurity front, Budget 2022 commits $875.2 million over five years to address cyber threats, including shoring up the capabilities of Canada’s Communications Security Establishment (CSE), expanding cybersecurity protection for small departments, agencies, and Crown corporations, and making the federal government’s own systems “more resilient to cyber incidents.” The budget also proposes funding for CSE to establish a research chair program that will focus on a combination of peer-reviewed cybersecurity research and classified work for CSE.

TECHNATION said it was was “pleased” to see this level of investment, referring to cybercrime like ransomware and nation-state actions “the two most prevalent threats to our country right now.” At the same time, the tech association said for the Government of Canada to improve its collaboration with the country’s tech sector and better mobilize the SMB companies it has operating in the cybersecurity space. The group also expressed appreciation for the research chair initiative, but added that it “would rather see a program to allow Canadian scale-up cyber companies to supply the government,” calling contracts “more important to our cyber industry than grants.”

What Canadian tech groups had been hoping to see

Industry groups representing Canadian tech companies had hoped to see a budget that addressed one of the biggest issues in the space right now – talent.

Both the Council of Canadian Innovators (CCI) and Technation, which collectively represent hundreds of Canadian tech organizations, emphasized the need for the federal government to address the country’s tech talent gap.

They called for the expansion of programs like the Global Talent Stream, and faster ways to bring in tech talent.

On that front, the government announced immigration changes prior to the budget that included extending the maximum duration of employment for the Global Talent Stream and High-Wage visa from two to three years. CCI has specifically called for easier pathways to permanent residency through the Global Talent Stream.

The groups also continue to ask for a more open procurement system, increased privacy and data laws, and a larger focus on intellectual property (IP).

Comparing past promises and mandate letters

In the December mandate letters for innovation minister, François-Philippe Champagne, Trudeau had laid out an extensive list of priorities for the innovation sector.

Beyond the Canadian DARPA; Champagne was tasked with launching or expanding national strategies on quantum, AI, cyber security, and photonics fabrication, among other things.

The laundry list of tech-related items followed recent years when innovation had seemed a less prominent priority for the federal government.

Groups like CCI have noted how commitments to the sector have lessened over the years since the Liberal’s federal budget launched its Innovation Agenda in 2016. The 2019 budget made some commitments to tech but notably lacked new, pricey innovation commitments compared to past budgets.

The following fall economic statement did, however, include several commitments to the innovation ecosystem, including new regional development agency (RDA) plans, and the 2021 federal budget included targeted tech funding to support economic recovery from the pandemic.

Some of the notable commitments from Budget 2021 include: a $450 million renewal of the Venture Capital Catalyst Initiative (VCCI); a boost to the Supercluster budget; and strategies around AI, quantum, genomics, and IP.

Movement on those profiles has been more limited though. As of the fall, the federal government was still calling for consultation on how to deploy the new VCCI capital.And while IP has been part of Trudeau’s mandate letters for ministers, there as been little movement on that front at the federal level; provinces like Ontario and Alberta have taken it into their own hands.

In terms of the 2021 promise of a Digital Services Tax, the government released draft legislation on the matter at the end of last year.

Open banking has also recently seen movement with the appointment of its lead.

“Our third pillar for growth is a plan to tackle the Achilles’ heel of the Canadian economy—productivity and innovation,” said Deputy Prime Minister and Minister of Finance Chrystia Freeland during her presentation of the budget to the House of Commons. “Canadians are the best-educated people in the OECD. Our scientists win Nobel Prizes and our cities are outshining Silicon Valley in creating high-paying technology jobs, but we’re falling behind when it comes to economic productivity.”

With files from Douglas Soltys and Charles Mandel.

Feature image of Prime Minister Justin Trudeau via Flickr.

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