Productivity and innovation

While many Canadian businesses and the Canadian economy have recovered impressively after the pandemic slowdown, there is concern that interest rate hikes, coupled with geopolitical instability, could hinder Canadian competitiveness. Canada currently ranks behind all other G7 countries in R&D spending by businesses. To boost Canada's growth potential at home and globally, productivity and innovation need attention.

The innovation economy is nevertheless showing resilience and the digital economy has propelled a great deal of transformative change. Responding to the accelerated uptake of digital technology across all areas of Canadian life – from eCommerce, to healthcare, education, and culture – last year's budget demonstrated support for helping small businesses scale up through digital transformation. Digital innovation is now having transformative effects in banking, financial services, and cryptocurrencies.

To stimulate growth, investments are best made where Canada shows strength and competitive advantage. With strategic support, the country can become a leader in remote workforce management, life sciences and clean technology, and in game-changing sectors such as semiconductors, critical minerals, broadband infrastructure and deep learning. Policy modernization in intellectual property, patents, and trade will fuel the development, monetization, and protection of Canadian know-how.

Budget 2022 invests in the health of the Canadian economy and the talent and skills of Canadian people to spur productivity, grow innovative capacity, increase Canadian competitiveness, and build prosperity. Key measures focus on research and development, supply chain and digital innovations, and regulatory modernization.

Budget 2022 announced $1 billion over five years to launch a market-oriented, private sector-led, and operationally independent innovation and investment agency to boost R&D efforts and bring ideas to market with greater efficiency and success.

The budget also proposes an investment of $750 million over six years in Canada's Global Innovation Clusters, which address industry and government needs on a competitive basis. The Scientific Research and Experimental Development (SR&ED) program will undergo a program review to modernize, simplify and ensure the effectiveness of the tax incentives it provides.

To help support and maintain the integrity of the Canadian financial system, the government plans to review financial digitalization and digital currencies with several aims: to promote competition, secure the Canadian financial system and uphold national security. The government is also putting funds into the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), developing legislative proposals to combat money laundering and terrorist financing, and boosting investment in cybersecurity.

The government is exploring tax measures to support the continued competitiveness of small and medium sized Canadian businesses. Currently, small businesses are taxed at a 9% rate on up to $500,000 of their first active business income [DS1] until their taxable capital reaches $15 million, at which point, they are taxed as the regular rate of 15%. Since a sudden and sharp rise in tax burden can be hard for smaller companies to sustain, the government will phase out the lower rate more gradually and increase the taxable capital threshold amount to $50 million.

Pandemic lockdowns and ensuing freight interruptions pointed to critical gaps in Canada's supply chain infrastructure. These challenges are now being further tested by geopolitical instability and trade protectionism. To keep Canadian goods and services flowing into Canadian communities and around the world, the Budget 2022 provides $603.2 million over five years to support and develop supply chain projects, improve their efficiency and resiliency, and reduce red tape. Given the economic benefit of reducing barriers to interprovincial trade and labour mobility, the government will review and provide leadership in these areas.

This year's budget measures intend to help Canadian businesses compete and succeed. Still, new regulations and tax incentives can be complex, and many businesses need assistance to understand, comply with, and navigate new initiatives to make the most of public support. KPMG advisors can help organizations plot a course through the changing trade and innovation landscape and help bring products to market efficiently, cost effectively and in compliance with local and international regulations. Our tax advisors have multifaceted experience and can help business leaders develop strategies to support and protect the launch of Canadian-led R&D, or to reinvigorate their business operations through digital transformation.