The emergence of US tariffs has forced Canada out of complacency, with business leaders in Canada agreeing that there needs to be a ramp-up of technology and innovation investments within the country.
Canada is now focusing on implementing environmental tax incentive policies that encourage long-term economic growth, direct investment, innovation, and financing opportunities.
This new direction also strives to address the ongoing productivity concern in Canada, which historically has relied on its access to the large US market.
Government and business leaders in Canada are now taking action to address the need to increase competition and productivity of the Canadian economy, while navigating the uncertainty of changing global order and policies.
For tax professionals and their clients, this could mean a potential wave of policy changes, new financing opportunities that enhance returns on investment, and more tax-friendly measures aimed at achieving these needs. Consequently, tax professionals should prepare to engage in conversations to ensure that clients succeed in what could be a new operating model—and integrate the impact of these changes in their strategic tax and financial planning scenarios.
As for US-based businesses, they might wish to closely monitor how these new Canadian tax policies can shape US business decisions operating or planning to operate in Canada.
‘One Canadian Economy’
Bill C-5, known as the “One Canadian Economy Act” became law in June. It’s divided into two parts. The first covers free trade and labor mobility, minimizing federal interprovincial trade barriers of goods and services and improving labor mobility within the country.
The second focuses on “building Canada” to develop and accelerate critical infrastructure projects of national interest. This will be done by fast-tracking the regulatory authorization processes helping foster investor confidence for projects throughout Canada designated as “national interest projects” by the government.
To qualify as a “national interest project,” a project must show its ability to strengthen Canada’s autonomy, resilience, and security; provide economic benefit to Canada; and contribute to clean growth and meet Canada’s objectives to address climate change through clean energy, electricity production, and infrastructure projects.
Clean Economy Credits
Businesses can take advantage of six federal investment tax credits, along with grants and incentives, when they invest in clean energy equipment or projects.
The available ITCs provide funding to assist with capital expenditure returns on investment, and they span the following segments: clean technology, clean electricity, clean hydrogen, clean technology manufacturing, carbon capture, and electric vehicle supply chain.
ITCs generally target non-emitting power generation systems such as wind, solar, hydro, nuclear, geothermal systems, critical mineral mining, and much more.
In addition, some ITCs provide up to 60% in tax credits for specified capital expenditures further enhancing the process to finance investments and build in Canada. They also include labor regulation benchmarks that aim to uphold the strength of Canadian workers, as they provide for a potential 10% tax credit reduction for not adhering to certain labor requirements.
The government expects to provide $93 billion in refundable tax credits by 2034 for eligible equipment and projects, ensuring investors confidence for long-term projects.
R&D Tax Incentives
Canada has a comprehensive federal scientific research and experimental development program designed to encourage R&D by way of an investment tax credit (ranging from 15% to 35% of eligible costs).
It is the largest tax incentive program in the country, and it acts as an indirect funding tool to support innovation by Canadian businesses by mitigating some of the financial risk created by pushing knowledge and technology to remain competitive.
There are also many government innovation funding programs available with varying funding eligibility. And many provinces have, for example, significant tax credits and grants for the production and marketing of interactive digital media productions.
This could help businesses compete in a growing digital media market and promote Canada as the new hub in the digital media sector, putting pressure on other existing international hubs, such as the US.
AI Infrastructure Development
Last year, Canada unveiled a national strategy to develop technology infrastructure and build out an artificial intelligence computing capacity to position Canada at the forefront of AI development.
The country is planning a multi-year investment of up to $2 billion to support AI for years up to 2027. The investment includes funds to increase computing infrastructure and capacity funds to strengthen the commercialization pillar.
Canada also has launched a new ministry dedicated to AI, whose strategic initiatives include developing the economic potential and commercialization of AI. This reflects the crucial importance these technologies represent for the future, their potential to position Canada as a global leader, and Canada’s strong commitment to addressing and finding solutions to the evolving technologies of AI.
Businesses operating in Canada should benefit from this national AI strategy, as AI has the potential to improve the way work is done and greatly enhance productivity. Both workers and corporations should seize this economic change.
Looking Ahead
Several initiatives have set the tone in Canada for increased infrastructure development, direct business investment, and economic growth, while continuing to stay committed to progressing sustainability policies within the country. Immigration programs initiatives are also in place to attract worldwide top talents.
Provincial incentives are also available. Coupled with the suite of federal financial incentives, Canada is positioning itself for increased investment and growth in key industries.
Domestic and multinational firms operating within Canada should expect market opportunities as a result of such federal and provincial incentives. Specifically, businesses should consider and plan for the development of industry hubs emerging in Canada for infrastructure and natural resources projects, AI technology, and R&D.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Sonia Gobeil is a senior manager at KPMG Canada’s National Tax Centre in Montreal.
Yara Bossé-Viola is a partner in the Tax Incentives Practice of the KPMG Montreal office.
Tom Nicholls is a staff accountant at KPMG Canada’s National Tax Centre in Toronto.
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