Canadian Manufacturing

Budget 2016: Big deficits, but this is about a different kind of green

With a focus on innovation and clean technology, Budget 2016 aims to lay the groundwork for Canadian companies to leverage their technical advantages

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OTTAWA—Prime Minister Trudeau’s big spending budget is more than a financial plan, it’s a recognition that the world is changing.

The social and cultural spending is certainly a change from Stephen Harper’s conservative budgets, but Canada’s industrial sector is about to see a lot of changes as well.

A big part of the story is that Finance Minister Bill Morneau is projecting a $29.4-billion deficit this year, which is almost three times the $10 billion shortfall that was promised. But everyone seems remarkably not worried about it.

“This is essentially what we expected. The size of the deficit is higher than some people thought, but the government said they were going to create a significant deficit and they certainly are planning to do that,” says Jim Menzies, Partner and National Manufacturing Industry Leader at Grant Thornton LLP.

“But when you are in the circumstance we are in [in Canada], economically the advantage of having a low debt-to-GDP ratio—the lowest in G7—and low interest rates, if you are going to take this kind of measure this would be the time do it. So while there is concern over the deficit, the rationale for the government’s move here is fairly obvious.”

Menzies says that for businesses, the focus here should be on finding ways to participate in research and innovation, and the budding cleantech economy.

Small and medium-sized manufacturers won’t be happy with a claw back of small business tax cuts—the scheduled rate cut to nine per cent from 11 per cent in last year’s budget has been repealed, keeping it at 10.5 per cent—but there are many elements of Budget 2016 that benefit the manufacturing sector.

And it all starts with what the government is calling its Innovation Agenda.

“When I think of manufacturing, I think about innovation, and governments can really help the manufacturing industry by supporting the innovation process,” says Menzies. “Anything innovation or clean tech oriented that the government does to support manufacturing is welcome, and it seems like they are focusing on that now and I think it’s a good thing.”

Indeed,there’s more than $1 billion over four years to support future clean technology investments, including in forestry, fisheries, mining, energy and agriculture, plus $130 million over five years to support clean technology research and development.

There is also $2 billion over three years, starting in 2016–17, for a new Post-Secondary Institutions Strategic Investment Fund for post-secondary institutions and affiliated research and commercialization organizations, in collaboration with provinces and territories.

“This will partner with all sections of the economy, but bear in mind that there is a direct relation between innovation and manufacturing,” Menzies says. “Although this program is geared to partner with all sectors, manufacturing will be a beneficiary. The funds will enhance on-campus research and commercialization. It’s a serious injection into the whole innovation infrastructure.”

And then there is infrastructure—Phase 1 of the government’s infrastructure plan provides $11.9 billion over five years, starting in 2016.

“With spending on infrastructure, though not directly impacting manufacturing, there is certainly collateral benefits that the manufacturing industry is going to feel, specifically spending into transportation, water treatment and housing. there is going to be collateral benefits from much of the infrastructure spending.”

The shift to clean energy is another segment of the budget that can have large-yet-indirect impacts on Canada’s manufacturing sector.

“Clean energy was throughout the budget, from youth employment to trade promotion, it was really presented as an economic opportunity for the country, as a way for us to strengthen the economy,” says Clare Demerse, senior policy advisor at Clean Energy Canada, a program of the Centre for Dialogue at Simon Fraser University that works accelerate Canada’s transition to clean and renewable energy systems.

“One thing that jumped out at me was support for electric vehicles and charging with direct support and also through the tax code for those who deploy electric vehicles, charging and the power for it.,” says Demerse, who added that this budget was a downpayment on the Liberal campaign and the clean energy agenda it announced in Vancouver earlier this year.

“We look at this package as having some smart investments that lay the groundwork for what we hope will be more significant funding for clean energy action in a years time.”

Here’s a look at some of the proposed budget measures that offer some opportunity for manufacturers:

$50 million over four years, starting in 2017–18, to Sustainable Development Technology Canada (SDTC) for the SD Tech Fund. These resources will enable SDTC to announce new clean technology projects in 2016 that support the development and demonstration of new technologies that address climate change, air quality, clean water, and clean soil.

$82.5 million over two years, starting in 2016–17, to Natural Resources Canada to support research, development and demonstration of clean energy technologies. These resources will accelerate the innovation required to bring clean energy technologies closer to commercialization, reducing the environmental impacts of energy production and creating clean jobs.

62.5 million over two years, starting in 2016–17, to Natural Resources Canada to support the deployment of infrastructure for alternative transportation fuels, including charging infrastructure for electric vehicles and natural gas and hydrogen refuelling stations.

$50 million over two years, starting in 2016–17, to Natural Resources Canada to invest in technologies that will reduce greenhouse gas emissions from the oil and gas sector.

$56.9 million over two years to Transport Canada and Environment and Climate Change Canada to support the transition to a cleaner transportation sector, including development of regulations and standards for clean transportation technology.

$3.4 billion in public transit spending over three years, starting in 2016–17. Funding will be provided through a new Public Transit Infrastructure Fund.

$125 million over the next two years to the Federation of Canadian Municipalities to enhance the Green Municipal Fund, including for projects that reduce greenhouse gas emissions

$2.1 billion towards repairs and retrofits to government-owned properties and buildings, as well as the greening of government operations. Examples include funding to improve military housing, upgrade border infrastructure, modernize the generation of energy for marine communication and traffic services, and reduce the carbon footprint and energy consumption of federal buildings in the National Capital Region.

$379 million over eight years, starting in 2017–18, for the Canadian Space Agency to formalize negotiations with the National Aeronautics and Space Administration and undertake the necessary activities to extend Canada’s participation to 2024.

$800 million over four years, starting in 2017–18, to support innovation networks and clusters as part of the Government’s upcoming Innovation Agenda.

Gearing up for innovation
A new initiative starting this year will help “high-impact firms” scale up and further their global competitiveness. Using a client-centric approach, firms will be able to access coordinated services tailored to their needs at crucial transition points, from key organizations starting with Innovation, Science and Economic Development Canada, the Business Development Bank of Canada, Export Development Canada, the National Research Council’s Industrial Research Assistance Program, Global Affairs Canada’s Trade Commissioner Service and the Regional Development Agencies. The initiative aims to target 1,000 firms in the first few years, and expand to more firms thereafter.

Extending captial cost allowances to cleantech
Budget 2016 expands eligibility for accelerated CCA in two important emerging areas: electric vehicle charging and electrical energy storage.

The incentive will include electric car charging stations, with the most generous treatment provided to chargers that provide enough power for long-distance travel. Electric vehicles and stationary renewable energy generation are complementary technologies; providing an incentive for both helps to maximize the potential environmental benefits of renewable energy generation.

Second, a much broader range of equipment ancillary to eligible generation equipment. In addition, stand-alone electrical energy storage property will be included in Class 43.1 when the round trip efficiency of the energy storage is greater than 50 per cent.

The deferral of tax associated with these measures is expected to reduce federal revenues by $19 million from 2016 to 2021.

Cleantech with a regional focus
Canada’s six Regional Development Agencies support economic and community development by leveraging local networks and capabilities. The Agencies’ combined support to clean technology activities amounted to $50 million in 2015–16. Budget 2016 announces that the Regional Development Agencies will double their annual aggregate support for clean technology to $100 million per year, from existing resources, starting in 2016–17. These regional development agencies are: Atlantic Canada Opportunities Agency (ACOA); Canada Economic Development for Quebec Regions (CED); Canadian Northern Economic Development Agency (CanNor); Federal Economic Development Agency for Southern Ontario (FedDev Ontario); Federal Economic Development Initiative for Northern Ontario (FedNor); Western Economic Diversification Canada (WD).

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