2024-25 Federal Budget: Significant Support for Innovation and Research, and Several Anticipated Tax Reforms

The 2024–2025 federal budget aims to address certain affordability issues, particularly for younger generations, through measures designed to accelerate the construction of new housing and reduce the impact of inflation on the cost of living.

This budget also includes significant measures to foster growth in the Canadian economy in specific sectors, such as artificial intelligence, while revising certain tax measures to stimulate innovation. However, despite the lofty ambitions behind some of the financial support measures, execution during the remainder of the current government’s term will be the greatest challenge in implementing this budget.

In terms of innovation, the largest funding allocation in the 2024–2025 budget is for artificial intelligence, with more than $2.4 billion in targeted support for several initiatives, including $200 million to help regional development agencies support startups and promote the adoption of AI in strategic sectors. This measure received significant media coverage prior to the budget’s release on April 16 (see this article in La Presse).

In addition to investment in artificial intelligence, several measures in the research sector—totaling 3.5 billion—will help develop new solutions to today’s problems. In particular, increased basic research grants from federal granting councils (NSERC, CIHR, and SSHRC) and enhanced scholarships for graduate and postgraduate students will help retain academic expertise. However, the lack of additional financial support for bringing these ideas to market will not help resolve Canada’s challenge in commercializing inventions stemming from university research.

We welcome the new capital cost allowance for research and development investments, as well as the commitment to establish an advisory council on science and innovation—composed of leaders from academia, industry, and the nonprofit sector—to guide priority-setting and maximize the impact of federal investments. While it may not have a mandate similar to that of the Quebec Innovation Council, let’s hope this new advisory council can breathe new life into our efforts to turn our research into commercial successes.

Speaking of tax deductions, the 2024–2025 budget is full of measures aimed at changing the current corporate tax system and adding beneficial deductions in key sectors, such as a tax credit for the cost of buildings used for key segments of the electric vehicle supply chain and the expansion of eligibility for the investment tax credit for the manufacturing of clean technologies.

The two changes that will most affect innovative businesses are the reduction of the inclusion rate to 33.3% on a lifetime maximum of $2 million in eligible capital gains—allowing entrepreneurs who sell their businesses to keep more money—and the increase in the cumulative capital gains exemption on the sale of small business shares. Conversely, the increase in the capital gains inclusion rate from one-half to two-thirds on capital gains exceeding $250,000 could have an impact on venture capital investment.

Furthermore, in addition to a legislative amendment to establish “regulatory sandboxes” to facilitate innovation, several consultations are expected in the coming months to accelerate the adoption of innovations, including a second round of consultations on the reform of tax incentives for scientific research and experimental development, Canada’s first-ever survey on interprovincial trade, and consultations on government procurement. Once again, time will be the biggest obstacle to completing these reforms.

In addition to general investments in innovation, certain key sectors receive additional financial support, reflecting the government’s policy priorities. It is also worth noting that innovative fintech companies will welcome the detailed action plan for implementing an open banking system.

Certain budget allocations support the implementation of new initiatives such as theCanadian Space Agency’s Lunaracceleration Program and the Fund for Innovation and Technology in Residential Construction with NGen, and the Regional Economic Growth through Innovation program run by regional economic development agencies (DEC in Quebec), particularly for innovation in housing.

In addition, other funding programs provide financial support for beneficial initiatives in the clean technology sector, such as the specialized intellectual property support offered by the Innovative Asset Collective and the Clean Growth Hub. Finally, in the area of national security, the Department of National Defense aims to support startups developing dual-use technologies essential to Canada’s defense through the NATO Innovation Fund. We also commend the government’s financial support for Futurpreneur, which empowers young business owners to achieve their ambitions.

Finally, the Government of Canada recognizes the investments made in recent years in strategies for entrepreneurship, as well as those targeting women entrepreneurs, the Black community, and Indigenous peoples. Indigenous entrepreneurship will also receive a significant main government through the implementation of a loan guarantee program for Indigenous peoples, with a maximum budget of $5 billion, as well as additional funding to renew Canada’s investment in Indigenous financial institutions.

The Government of Canada’s 2024–2025 budget sets the stage for pre-election announcements and aims to support the Canadian economy with targeted measures that build on several announcements made in recent years that are now beginning to be implemented.

However, this budget will not reassure innovative companies that were counting on existing programs—most of which have seen their funding cut, such as Innovative Solutions Canada and the Strategic Innovation Fund—or, in some cases, good ideas that have been relegated to an uncertain future, such as the launch of the Canada Innovation Corporation.