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Budget 2010 promises a digital economy strategy

The Conservative government's 2010 budget offers some targeted IT investment and promises a digital economy strategy, but is short on details

The IT community’s expectations were low going into last week’s federal budget. They did get some targeted investments and a tax change that should help foreign investment, but the most promising development was consultations to develop a digital economy strategy – if it moves just beyond talk.

Before the budget and Wednesday’s speech from the throne, representatives from the Information Technology Association of Canada (ITAC) and the Canadian Advanced Technology Alliance (CATA) outlined the priorities they’d like to see addressed by the Conservative government. They included a process to develop a broad-based innovation strategy to address challenges such as commercialization, investment, productivity and the skills shortage. Also, the industry was looking for a strengthening of the SR&ED (Scientific Research and Experimental Development) Tax Incentive Program, more funding to help start-ups, and changes to tax rules that are viewed as a disincentive to foreign venture capital investment.

The budget did see action in many of these areas, although perhaps not as much or as quickly as the industry would have liked. Around specific measures, the government did announce changes to section 116 of the Income Tax Act that will remove the withholding tax foreigners pay for certain investments in Canadian companies, making investment in Canadian IT stat-ups by foreign investors more attractive.

Around the SR&ED program, no changes were announced, but the government did promise to “conduct a comprehensive review of all federal support for R&D to improve its contribution to innovation and to economic opportunities for business”

The other key IT take-away was a promise to create a digital economy strategy, with the government acknowledging the IT sector’s role in creating high-paying jobs in Canada, and the role of the adoption of IT in improving productivity. However, the budget was short on details of just what the strategy will involve.

“The government will develop a digital economy strategy that will enable the ICT sector to create new products and services, accelerate the adoption of digital technologies, and contribute to improved cyber security practices by industry and consumers,” said the government in the budget.

Otherwise, new spending was limited in a budget geared towards restraint and setting the table for future deficit reduction measures. There was, however, some promises of new IT spending that could lead to opportunity for the channel community.

Extending broadband to rural communities will be a focus in 2010/11, with the government budgeting $180 million for this initiative as part of the second year of its stimulus program, a portion of which was unspent in year-one and carried over. There’s also $336 million to develop clean energy and environmental technologies, such as carbon capture and storage technology, and a $157 million program to renew federal laboratories.

The IT industry also stands to benefit from a $135 million boost over two years to the National Research Council‘s regional innovation clusters program, which support the development of nascent technology firms across Canada. Also, $8 million over two years will go to the International Science and Technology Partnerships Program (ISTPP), which promotes collaborative R&D between Canadian companies and foreign partners.

One thing the industry didn’t get was a continuance, and expansion, of one of the biggest channel-friendly items in last year’s stimulus budget: the accelerated tax write-off of the capital purchase of select IT hardware and software. The normal two-year timeframe will return after 2010/11.

Russ Roberts, CATA’s senior vice-president, tax and finance, said he was looking for an acknowledgment around the innovation and commercialization gap, and a concrete plan to address this. What he got was the digital economy strategy that, while still to be defined, is a step in that direction.

“The development of an economic strategy for the IT sector, which was referred to as a digital economy strategy, if developed effectively is potentially important,” said Roberts. “We’d like to have seen a plan but this is perhaps appropriate, given the times.”

While he’s remaining optimistic, Roberts said the plan will need to show meat on the bones quickly.

“I’d like to be convinced we’re going to get a plan but, to be frank, the innovation issue and lack of productivity has been with us for 20 to 25 years,” said Roberts. “If they come up with a concrete plan though, we’ll be more than satisfied. We really want to see results. We’re encouraged by what we’re seeing, but we want to see a plan and implementation.”

He is pleased with the removal of the withholding tax on certain foreign investments, which should open new capital funding sources for Canadian IT start-ups. He would though have liked to have seem more action on SR&ED tax credits.

“They’ve committed themselves to working with and consulting business to determine how make that productive and effective as possible to achieving innovation,” said Roberts. “Assuming something comes of those consultations that could be very positive.”

ITAC also noted the lack of details or provisions for the digital economy strategy, and noted the budget contained few references to the capital crisis facing many emerging knowledge-based firms. It did, however, welcome the tax changes to encourage investment, as well as the creation of a two-year, $40-million pilot program where Federal agencies will adopt and demonstrate the use of innovative products and technologies developed by small and medium-sized businesses.

The SMB program didn’t impress Paul Edwards, research director for SMB and channel research at IDC Canada, who said that considering that SMBs form the bulk of Canadian companies, the government has failed with its budget to address this sector’s needs.

“There’s really nothing much to say for SMBs because nothing has changed, there’s still not enough money to sustain growth,” Edwards said.

The budget provides $40 million over two years to support up to 20 demonstration projects. To help SMBs avail of this initiative, the government will organize trade shows where companies can showcase their innovative concepts to various federal departments.

“Forty million dollars for 20 projects is really not significant when you consider that SMBs make up the bulk of businesses in Canada,” said Edwards.

This is especially regrettable, he added, since many SMBs are eager to move forward after being pulled back by the recent recession. “Many small businesses are looking for help to make it through the growth phase after the recession.”

— With files from Nestor E. Arellano