4 minute read 23 Jan. 2020
Piggy bank money

How do government incentives work for Canadian businesses?

By Elizabeth Pringle

EY Canada Associate Partner, SR&ED and Business Tax Incentives

Trusted tax professional committed to helping businesses navigate tax credits and other incentives. Travel enthusiast and avid canoeist.

4 minute read 23 Jan. 2020

EY Policy Brief is a series on public policy issues of economic and strategic significance to Canadian business, government and the public.

Government incentives have long been a key part of economic development policy in Canada. Recent incentives have focused on a variety of economic development goals, including stimulating business growth in specific geographies, increasing the number of women entrepreneurs, developing more sustainable technologies and hiring new graduates.

Incentives take a variety of forms, but are generally either entitlements or discretionary (direct or indirect). Both types can be structured and delivered differently as tax incentives, subsidies, tax rebates or other financial incentives. While various factors, such as the state of the economy or geopolitical circumstances, influence investment decisions, incentives can sometimes be the difference between adopting and rejecting an investment or project.

The most money over the last five years went to companies in the basic materials sector, which received a total of $1.2b.
Elizabeth Pringle
EY Canada Knowledge Leader, Business Tax Incentives

How much money is given out?

Some studies have suggested that incentives are more impactful when they’re targeted to specific areas of research, industries or geographies rather than funding that’s available to everyone meeting more relaxed eligibility criteria. In addition to innovation, emphasis on capital expansion and job creation can be a key focus of many incentives.

We looked at the amounts disbursed to Canadian companies through these types of incentives over the past five years, and found that they have varied considerably.

In 2014, there were 173 incentive deals relating to job creation or supporting capital expansion for a total amount of $1.0b.1 In 2015, they amounted to only $663m. In 2016 funding jumped back up to nearly $1b, but it dropped to below 2015 levels in 2017. In 2018, however, the number of deals almost doubled from 2017, and funding almost tripled, when 436 projects were awarded for a total of $1.8b.

The level of funding per dollar of capital expenditure (capex) has also varied considerably, from a low of 11.7% in 2016 to a high of 24.6% in 2015. Not surprisingly, this highest percentage of incentive to capital spending coincides with the lowest annual capital expenditure of $2.2b. In 2018, total investment in capital rose to the highest levels at $11.2b, but because of the increase in total incentives awarded, the average percentage of incentive to capital expenditure held at 15.2%, only slightly above the 5-year average of 14.9%.

Which sectors have benefited most from government discretionary incentive programs?

The most money over the last five years went to companies in the basic materials sector, which received a total of $1.2b. This sector includes chemicals, mining, plastics, steel, aluminum and wood products. The automotive sector received the next highest level of incentives at $833.6m.

Despite coming in fourth in terms of total incentives received, the non-renewable energy sector (e.g., coal, petroleum, natural gas) received the highest average amount of incentives per deal at $65.1m per deal; this is likely due to the capital-intensive nature of those businesses.

While the most deals were awarded to companies in the industrial goods sector, the average value of each deal was only $1.5m.

The basic materials sector had the highest total capital expenditures in the last five years, but the ratio of incentive to capital expenditure was only 14.6%. The information technology and telecom sector had the lowest incentive/capital dollar ratio at 9.7%.

How are funds distributed across Canada?

Québec and Ontario topped the list over the five-year period, with companies in these provinces receiving $2.5 and $1.8b, respectively, accounting for 47% and 34%, respectively, of all incentives awarded in Canada. Companies in those two provinces were also provided the greatest number of deals, with 486 and 450, respectively.

Nova Scotia and New Brunswick organizations were also well represented, with 184 and 141 deals, respectively. Although Alberta ranked third in terms of total incentives at $415.4m, this money was awarded in only 6 deals.

Deals in Alberta attracted the highest incentives on average at $69.2m per deal, as well as the largest projects on average based on capital investment at an average of $1,612m. Newfoundland and Labrador also had the highest incentive per capital investment (capex) ratio at 57.2%. Manitoba had the lowest at 4.0.

How many programs are there?

The number of incentive programs changes frequently, since some programs sunset after a certain period and new ones are often announced based on economic factors across regions. Even if a program is still active, it may have only a few intake periods each year.

The sheer number and variable life of the programs makes keeping on top of what is available and meeting application deadlines challenging because it requires time and resources that companies could better allocate to growing their business.

In the last 5 years, deals were awarded through 82 different municipal, provincial and federal programs.

How does Canada compare with other countries?

Not surprising in today’s competitive global marketplace, Canada is not alone in its efforts to support businesses through discretionary incentives.

Not surprisingly, the US provides the greatest amount of incentive dollars at $68.5b from 2014-18. The corresponding number of deals is, of course, much larger as well.

Turkey and Brazil come in behind the US but ahead of Canada, having spent $12.5b and $5.7b, respectively, in that same period. When looking at the number of deals, though, it’s important to note that the Turkish incentive dollars were awarded to only six companies. Brazil distributed its incentive funds to only 83 companies.

While Canada ranks fourth in the world in terms of incentives and third in the number of deals, it’s more important to use a normalized figure such as the average amount of incentive awarded per dollar of capital expenditure incurred by the receiving company. Comparing the top 10 countries in terms of incentives awarded, the ratio of incentive to capital expenditure ranges from 9.3% to 25%. Canada ranks 3rd in the world behind the Czech Republic and Brazil with 14.7%, well above the average.

How effective are incentives?

For incentive programs that reward job creation or the establishment of consortia with government or academia, the number of jobs created or the number of alliances established can be easily quantified.

Programs with the goal of increasing job opportunities, increasing partnerships and collaboration, establishing networks to retain researchers in Canada or advancing the commercialization of new products and processes can be quantified. Each in their own way can contribute to increasing the ability of companies to be competitive by offering products and services more effectively and efficiently. The cost to administer each program can also be determined.

What has been more difficult to determine are some metrics, such as companies’ increased ability to compete in international markets and the impact on company revenues. It would be useful on a national scale if we could better measure things like the impact of the spending on Canada’s export market or whether the incentive was more effective in certain sectors compared to others.

However, this presents a significant challenge to governments because there are no clear methods to evaluate an incentive’s performance and determine if it actually had the impact for which it was designed.

To truly evaluate the effectiveness of incentives, a holistic approach to the analysis is ideal and can more readily be achieved if measurable outcomes are identified at the outset.

Future – what can we expect?

The sheer number of programs makes navigating the landscape a daunting task. Several programs may actually intend to incentivize the same behavior. Knowing where to focus efforts for obtaining incentives can be difficult.

We have seen recent attempts to create a coordinated approach at the federal level through the development of the six economic strategy tables. These tables represent the six sectors that the federal government believes have the greatest potential for growth — agri-food, resources of the future, health and biosciences, clean technology, digital industries and advanced manufacturing.

These strategy tables have been tasked with creating long-term, sector-specific action plans aimed at meeting economic growth targets for 2025. These action plans include:

  • An approach to identify sector strengths, overcome obstacles, and improve competitiveness and growth
  • The development of business-led solutions, policy recommendations and public-private partnerships based on short-, medium- and long-term actionable areas
  • Emphasis on the inclusion of underrepresented groups such as Indigenous Peoples, women, Canadians with disabilities and older workers
  • A mechanism to champion and monitor sector growth strategies and results

This increased attempt to focus incentives and work together to achieve common targets that involve provinces and municipalities will make it easier for companies to maneuver through the incentives landscape and increase the chances of meeting the growth targets and overall competitiveness on a national scale. However, evaluations based on results are even more important than analyses based on projections, so ensuring that the necessary data are collected and available, and that the appropriate evaluation methods exist, are key factors in being able to truly evaluate the effectiveness of an incentives strategy.1

Summary

Levels of discretionary funding in Canada have varied over the last five years, with the greatest amount going to the basic materials sector. The most discretionary funds were awarded in Ontario and Québec.

Canada ranks fourth in the world in terms of total discretionary incentive dollars and third in the world when looking at the ratio of incentive dollars awarded to recipients’ capital expenditure outlay.

However, the lack of good models to truly evaluate the effectiveness of these programs remains a challenge. Incentive program strategies that identify specific economic and/or socioeconomic objectives and employ specific methodologies for measuring effectiveness will improve our ability to truly assess the value of incentive programs in Canada.

About this article

By Elizabeth Pringle

EY Canada Associate Partner, SR&ED and Business Tax Incentives

Trusted tax professional committed to helping businesses navigate tax credits and other incentives. Travel enthusiast and avid canoeist.