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10 areas where the new budget will impact the channel

Channel Strategy

Looking for ways in which the recently announced Canadian Federal budget will have an impact on the channel?

Then you have to dig deep and have an understanding of technology and the channel.  CDN asked ITWC CIO Jim Love to stay up late with the budget documents to provide some insights and new ideas on how the budget might encourage or discourage channel providers. Here are the Top 10 budget areas the channel community in Canada should know about.

1. Direct Tax Incentives

Anything that frees up funds for investment by companies is a good thing for the channel.  This budget has some good news.

The decrease in small business tax rate from 11 per cent to nine per cent at a rate of .five per cent per year for four years is certainly a welcome incentive for businesses that make less than $500,000 per year.

Why is this great news for the channel?  When business taxes are high there is an incentive to take money out of a small company.  When taxes are low, there is an incentive to retain profits and reinvest for long-term capital growth.    In fact, when businesses are close to the $500,000 limit, there may be an added investment to actually take on costs and invest in the business rather than move to a higher tax regime.

The budget also reports that “90 per cent of Employment Insurance (EI) premium-paying businesses, about 780,000 in total, will see their EI premiums cut by nearly 15 per cent.”  “Any firm that pays employer premiums equal to or less than $15,000 in those years will be eligible for the credit.”

But even large businesses will see their EI costs go down over time.  For larger companies the government has proposed a “reduction in the EI premium rate, from $1.88 in 2016 to an estimated $1.49 in 2017, a reduction of 21 per cent.”

In effect, this provides yet another tax reduction for small and medium sized businesses.  It provides more money to spend and encourages hiring – which for many channel providers is good news.  New employees require a range of products and services provided by the channel.

Those are the simple and straightforward benefits.  There are other points in the budget that are of benefit to the channel, but these are a little more complex or indirect in nature.

2. Accelerated Capital Cost – Encourages Spending On Hardware

Accelerated capital cost allowance allows businesses to deduct a capital asset more rapidly.   Put simply?  It allows a company to deduct 90 per cent of the cost of the asset over four years.  Under the old CCA, lower annual deductions would have taken seven taxation years to deduct 90 per cent of the cost of the asset.

Is this good for the channel?  The answer is…it depends.

In technology, where the average life of an “asset” is rarely more than three years, this is a welcome change. It encourages companies to invest in equipment, particularly technological equipment.

For those companies that invest in their own hardware this is significant.  Technology become obsolete faster than the old depreciation rules allowed for.  When your servers are obsolete in 3 years, a 10 year depreciation schedule is not an incentive to refit and retool.

From a channel perspective, if you are selling servers directly to companies or service providers, you win on this one.  If you are a company that buys equipment to provide cloud-based services, you win.  But for the average small or medium sized business that uses Software as a Service (SaaS) there are no capital assets to depreciate.   With SaaS onus is on OPEX (aka operating expense) versus CAPEX (aka capital expense) the budget provides no incentives.

3. Innovation

When customers of the channel invest in technological transformation, it’s good news – both in terms of products and services.  So it’s encouraging to see the budget making reference to the need for technology led innovation in a number of areas.  Hidden in the 2015 budget text are a few gems.

4. IRAP and CFI – Investment in Technology and Infrastructure

The budget document noted that it is “doubling the budget of the Industrial Research Assistance Program, with a further $110 million per year, to better support research and development by small and medium-sized firms through advice and financial support.”  While few know of the IRAP program, those who work with it regard it highly as one of Canada’s most successful programs.  It is remarkably free from bureaucracy.  IRAP great track record encouraging new and growing businesses of all sizes with expert advice and financing.   But it is no “pushover” – they have an expert crew that carefully vets investments.  As such they and the businesses they assist have a great track record of success.  Those businesses go on to invest in services and equipment that make them valuable customers to channel businesses.

Other investments in innovation include “$1.5 billion over five years to advance the renewed science, technology and innovation strategy’s objectives, including long-term sustained advanced research support through the Canada Foundation for Innovation.”  The CFI is a “not-for-profit corporation that supports the modernization of research infrastructure at universities, colleges, research hospitals and other not-for-profit research institutions across Canada.”

For the channel, any action that encourages business growth – particularly in technical innovation and infrastructure is a good thing.  Where this infrastructure investment is aimed at creating and sustaining high-speed digital networks it’s even better.

5. CANARIE – Canada’s High-Speed Network Investments Encouraging Cloud Investments

CFI – the Canadian Foundation for Innovation also supports CANARIE – Canada’s high speed network.  In the budget, CANARIE will receive a little over $20 million a year over 5 years.  CANARIE has a Digital Accelerator which provides Canadian entrepreneurs with “free access to high-performance cloud resources.”  For companies trying to develop new world-class products and services for the digital world, this program has already been used for 300 small and medium-sized businesses to develop products and services.

6. Automotive Innovation Fund

There are some other modest funds aimed at encouraging leveraging technology for innovation.   Automotive Innovation Fund is one such example.   According to the government description this “program will help research and development projects to become commercially viable by supporting product development and technology demonstration.”   It is a modest investment averaging 20 million per year, but it does encourage technology and innovation.

7. Targeted Investments in Specific Companies

The budget document also notes a series of direct investments in targeted companies, aimed at innovation – most often technological innovation.  There are a number of automotive companies, as might be expected with a federal election and the prospect winning the hearts and minds of vote rich Southern Ontario.  But the investments are not restricted to automotive and include everything from pulp and paper to aerospace companies.

8. Growth and Investment Financing

All Canadian businesses, particularly privately owned small and medium sized businesses have trouble finding financing.  Channel businesses can be even more problematic.  Where the assets of the business are intangible, classic financing is next to impossible.   Many channel business started – some still exist – financed by the personal assets of the founders.

The budget acknowledges this challenge, stating that “entrepreneurs seeking financing in these situations can have few tangible assets to pledge as security.”

The budget proposes that the BDC will take a more active role in funding and financing with some innovative programs aimed at high growth companies.  A variety of scenarios are discussed in the budget, all of which are good news for the channel. BDC will:

  • help small and medium sized businesses “improve productivity and sales by financing the development and application of information and communication technologies.”
  • “help high-impact small and medium sized enterprises achieve their full potential.
  • address the needs of “high growth firms (companies with annualized growth of 20 percent for three consecutive years) with ambitions to pursue growth through an acquisition based strategy.”

In addition to the funding from BDC the budget continues the support for a “Venture Capital Action Plan” with up to $350 million available from 4 private sector partnership funds.  Much of this appears to be a renouncement of earlier programs, but in combination with the new BDC funding, its worthy of notice.

9. Women in the Channel

The budge even gives a reason why you might want to reserve your seat and support the CDN’s “Women in the Channel” event.  This event has been a show case for the depth of talent and leadership of women in the ICT industry.  It may also be a place to meet your next boss or partner.  The budget promises that the “Business Development Bank of Canada” will make “available $700 million over three years to finance women-owned businesses”

Given the restraints on the government, the amount of money available is appears quite generous – with hundreds of millions available yearly according to the budget documents.  Certainly the fact that these are loans and not grants makes a difference, but to a company that is struggling to find financing to seize new opportunities and at a time when interest rates are at an all-time low, alternative access to capital for expand or to acquire (or be acquired) can only be a welcome development.

10. Export Development Assistance

For decades and through a range of different governments, Canada has always tried to increase exports and support companies who are trying to export.   Export Development Canada, which has provided this assistance in the past promises to expand its efforts aimed at small and medium sized businesses.   With the dollar at its current low levels and in a global economy, with rising costs in India and other areas, the time may be right for service providers to look beyond Canada to provide competitive services from Canada to the world.

Summary

This budget was criticized by many as rather dull and given the various pre-announcements – not much of a surprise.  But for those in the channel, it offers good news. Lower taxes, incentives for innovation, financing, and encouragement to expand outside of Canada offer some meaningful incentives to the industry.

How the government could afford this and still balance the budget at a time of low oil prices should cause some caution.

As some analysts have pointed out; many of these promises are multi-year commitments and most don’t engage until after the next election.  And as we all know, elections don’t come with a money back guarantee.