Budget breakdown: although some of CMA Canada's recommendations for small business support were adopted, the federal budget could have gone further.

The 2004 federal budget, tabled by Finance Minister Ralph Goodale on March 23, contained few surprises for anyone with their ear to the ground in Ottawa. Many of the measures outlined had been announced or leaked to the press in the preceding days.

CMA Canada had a variety of recommendations for strengthening the position of small and medium-sized businesses in Canada that it wished to see expanded upon in the official budget presentation. However, the budget fell short of expectations in a number of areas.

"We are pleased to see the government partially adopt some of the proposals we made in our pre-budget submissions," said Michael Tinkler, CMA, FCMA, a member of CMA Canada's board of directors. "However, the government could have gone much further in helping to improve productivity and stimulate growth in the small to medium enterprise (SME) economic engine."

Recommendations reviewed

The following are a number of changes announced by the government in the budget that directly affect small businesses.

Increasing capital cost allowance rate for computer equipment to 45 percent from 30 per cent: This measure will reduce the time to write off computer equipment from seven years to five years. "This is an improvement, but still doesn't match the average life of business computers," said Tinkler. "Our proposal would have seen the depreciation take place over three years, because older, obsolete equipment hampers productivity."

Extension of education tax credit to employees who pay for career-related studies: "Providing a credit for the employer would have provided more incentive to ensure employees are undertaking training and improving their skills," said Tinkler. "Employers are more likely to have access to funds for training than employees in the first place."

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Moving to 2005 from 2006 the increase in the small business deduction limit to $300,000: While moving the increase in the small business deduction limit ahead one year is positive, CMA Canada had strongly recommended that the lower corporate tax rate threshold for small businesses (12%) be increased immediately to $500,000. "This would give small business owners greater flexibility and the ability to concentrate on growing their businesses faster, instead of having to do complicated tax planning to minimize liability," said Tinkler.

Other measures proposed by CMA Canada included:

* Raising the lifetime capital gains exemption to $1 million from $500,000; and

* Establishing a royalty tax credit mechanism to stimulate research and development in Canada, and encourage commercialization of innovation.

Although these measures weren't adopted, small and medium-sized enterprises (SMEs) may benefit from other initiatives aimed at increasing research and innovation that were announced, such as the following:

* Adding $90 million annually to the budgets of the country's three federal granting councils.

* Infusing $20 million a year into Canada's universities and research hospitals to offset indirect research costs.

* Committing $200 million to Sustainable Development Technology Canada (SDTC), an arm's length foundation for the development of environmental technologies. Over the next seven years, $800 million more will be put into the program.

* Adding $5 million a year to the Industrial Research Assistance Program (IRAP) to strengthen regional innovation initiatives.

* Pledging $270 million for new investments in venture capital financing.

It will be important for SMEs to carefully monitor the initiatives the government has introduced to make sure they are able to take full advantage of the opportunities presented.

A narrow perspective?

Overall, Finance Minister Ralph Goodale should be commended for continuing the federal government's track record of fiscal prudence. However, CMA Canada is concerned with the government's narrow focus on debt reduction.

For instance, the government announced its plans to reduce the debt to gross domestic product (GDP) to 25% in 10 years from the current 40% level.

"It may be dangerous to focus exclusively on debt reduction at the expense of increased investments in health care, education and infrastructure," said Tinkler. "In the past the government has achieved this at the expense of other levels of government, which ultimately throws it back on business and other taxpayers."

The government's approach to the EI surplus and premiums has also been questionable. As of this budget, the surplus in the Employment Insurance Fund stands at $42 billion, and is rising at $1 billion annually despite regular reductions in premiums. "Even in a deep recession, the government might have a worst-case scenario of a shortfall of $3 to $4 billion a year in payouts," said Tinkler. "The government should bring the surplus down to a more reasonable level of $20 billion, and can do this by substantially reducing EI premiums, which in turn would reduce the burden on employees and employers."

Despite some positive steps toward change, much more could be done in future budgets to boost the viability of SMEs in Canada. Small business remains Canada's lifeblood, but it will only thrive if given the right taxation and economic policies to do so.