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Budget on target for deficit elimination, but more work needed on industrial innovation, investment, and competitiveness: CME

Published by Derek Lothian on March 28, 2012

Budget 2012 establishes an enviable position for Canada in terms of overall fiscal management, containing a number of measures supported by Canadian Manufacturers & Exporters (CME) that will strengthen business growth. CME however is concerned that proposed changes to the scientific research and experimental development (SR&ED) tax credit will negatively impact Canada's top R&D performers.

The following statement was issued by CME President & CEO Jayson Myers:

The government still has a lot of work to do to ensure that Canada remains an internationally competitive place for manufacturers and exporters to invest, innovate, and grow.

The strength of the Canadian economy combined with the public sector spending restraint announced in this budget puts the government on track to eliminate its deficit by 2014. The budget sets a sound framework for fiscal management that should strengthen business confidence in Canada's future.

The budget also introduces several very positive initiatives that have been proposed by CME.
On the innovation front, we are very pleased to see more resources being invested in the National Research Council's Industrial Research Assistance Program, refocusing the National Research Council on business needs, and increasing venture capital funds for innovative business start-ups. We commend the government for its plan to speed up approvals for resource developments, increase support for the forestry sector, streamline regulations, improve border efficiency, strengthen skills development, improve immigration processes for foreign workers, limit increases in EI premium rates, and undertake an ambitious international trade agenda while strengthening our trade remedy system.

The changes planned for the SR&ED tax credit are, however, a part of the budget where we do have significant concerns. The budget announces a number of improvements in the administration of the tax credit system that are sorely needed to provide greater clarity and predictability for claimants. But, at the same time the government is going to reduce the general tax credit rate from 20 per cent to 15 per cent and exclude capital equipment costs from eligible expenditures. It will also exclude profits from third-party R&D contracts and reduce the proxy rate for overhead calculations. These steps will cut $1.3 billion out of SR&ED tax credit support for business innovation between 2014 and 2016 and further complicate the tax filing process. Bottom line is that they will seriously erode the value of the tax credit for retaining and attracting industrial investment in Canada. The changes will hurt manufacturers with capital-intensive product and process development activities most of all. It is probably true that many companies will be doing R&D anyway. The question is whether they will be making those investments in Canada.

Governments around the world are providing significant support to manufacturers to ensure that their industries are investing in next generation products and technologies. Canada needs to compete for those investments in innovation and product mandates as well. Going forward, we need to see an even stronger commitment to strengthening industrial investment in Canada. The accelerated capital cost allowance for investments in manufacturing and processing equipment should be made permanent. A strategic investment fund should be established to assist Canadian manufacturers attract product mandates. And, more attention needs to be paid to strategic procurement and direct support for skills development at the workplace and in Canada's college and apprenticeship systems.

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