Federal budget a step in the right direction for IT: analysts

Much negativity may abound over the federal budget tabled by Finance Minister Paul Martin on Feb. 28 but according to Oliver Kent, services e-business leader for PricewaterhouseCooper in Ottawa, the budget contains hidden benefits for the Internet economy.

“There’s certainly a glimmer of hope,” Kent said. “People would like to see more from the federal government, but they are moving on…stock options, (for example). Obviously the government moved to some degree on these.”

The feds are aiming to make Canada the most connected nation on the planet by 2004, as recommended by the Canadian E-Business Opportunities Roundtable’s Jan. 17 report. To achieve that goal Ottawa plans to offer all federal government services on-line. Ergo, the budget provides $80 million annually from 2000 to 2002 to launch this initiative and help stimulate the growth of e-commerce. However, Kent dismissed Ottawa’s funding as insufficient.

“If the federal government is serious, this level of funding is grossly inadequate,” he said. “Perhaps they don’t realize how other jurisdictions are moving…such as the provincial governments.”

Some might charge Canada’s Internet economy is drifting precariously close to back-seat status as the world drives forward. Gordon Ross certainly believed so. The president of Net Nanny Software International moved his head offices from Vancouver to Bellevue, Wash., recently to situate his enterprise in an environment more conducive to his business’ needs.

“There’s a lack of understanding in the political market (in Canada) with regards to high tech,” Ross said. “There’s no support for (Internet) start-ups…a small, garage entity can’t raise the necessary capital and you have to turn to your friends. In high-tech, you just can’t wait four months for a grant to come through.”

Despite the gloomy outlook of some, Derrick Novis, a partner with KPMG Canada in charge of taxation for Toronto North, said Canada holds many opportunities for small businesses and Internet start-ups.

“I don’t think taxes drive businesses to the United States, business opportunities drive business decisions…let’s not forget things do exist here for the benefit of small business corporations,” Novis said. “Canada’s corporate tax rates are competitive with the United States…it’s a whole lot easier to raise (venture capital) funds now…business considerations are more relative (to moving to the U.S.) than tax considerations. The Internet is a virtual society, so you shouldn’t have to move to the United States.”

Novis cited the successes of Toronto-based 7/24 Solutions Inc. – a software provider which enables financial institutions to deliver personalized financial information and services using a range of Internet-enabled devices – as an example of an enterprise which managed to accrue $11 billion in valuation as well as a NASDAQ listing, all while remaining north of the 49th parallel.

Jean-Michel Catta, a spokesperson for the federal government’s Finance Department, said Ottawa believes it is responding to the challenges laid before it.

“The government on-line will promote e-commerce in Canada by making the government itself a model user and thereby encourage other users and businesses (to get on-line),” he said. “There’s $160 million of new funding over two years to launch the government services on-line, which is a significant amount. Together with existing resources in other department’s budgets, we believe this new funding is another step towards realizing that goal.”

The budget contained $900 million (over five years) to bolster post-secondary education and research and development, as well as an increase in the tax exemption for income from scholarships, fellowships and bursaries to $3,000 from $500.

“[We have made] the tax system more competitive, not just for personal income tax but also for corporate tax,” Catta said. “The personal income tax reductions began in 1998, and now with Budget 2000 we’ll see a combined $58 billion worth of income (personal and corporate) tax reductions.”

While the Liberal government characterized Martin’s budget as visionary, the Canadian Chamber of Commerce’s reaction to it wasn’t nearly as complimentary. After acknowledging that the government has at long last recognized the importance of tax cuts, the Chamber said the budget does not provide a fundamental shift in direction for fiscal policy. Moreover, in an on-line statement, the Chamber said, “Instead of taking the necessary bold steps, this budget took short strides towards rectifying some significant problems that will negatively impact Canada’s long-term growth prospects.”

The Chamber also criticized Ottawa for being tuned out to the economic realities facing the country. “This (the budget) is a gross misreading of economic realities and a missed opportunity to significantly improve the standard of living of Canadians. It is a missed opportunity to aggressively position Canada in the international competitive arena.”

Novis called the Chamber’s criticisms unfair.

“[The government is] directionally right,” he said. “The access to capital for start-ups has never been freely available before…it’s an unfair criticism, they delivered moderate tax cuts but left the opportunity to sweeten the pot over the next few years.”

Kent said the government addressed a number of points raised in the Roundtable’s report – by reducing the income inclusion rate of capital gains from three-quarters to two-thirds and allowing a tax-free rollover for capital gains on qualified small business investments, as well as the deferral of income inclusion of benefits from employee stock options.

Catta said he disagreed with the Chamber’s view, adding Ottawa has made sound financial management decisions with regards to eradicating the deficit, promoting production growth and job creation.

“If you take an overall look at Canada vs. the other G7 nations, Canada’s economic growth is close to leading the pack,” he remarked. “The size of the Canadian economy will surpass the trillion mark this year.”