The Federal Government recently unveiled the 2024 federal budget, detailing $53 billion in new spending over 5 years. Of the $53 billion spending plan, $19.4 billion will be funded primarily through increases to capital gains taxes which will affect Canadian individuals and businesses reporting capital gains.
The proposed increase to capital gains taxes proposes to increase the taxable portion of capital gains from one-half to two-thirds, with individuals only feeling this increase above $250,000. Capital gains are the profits an individual or a business earns when they sell assets, such as stocks or property. This will have the effect of taxing both individuals (over $250,000) and businesses more on capital gains. The budget notes that in 2022, 307,000 corporations reported capital gains income in Canada – all of which will feel the increased tax burden.
There is a narrowly carved out incentive for entrepreneurs in the budget which exempts two-thirds of an entrepreneur's capital gains from selling a business up to a maximum of $2 million, increasing yearly by $200,000 starting from $0 and reaching $2 million in 2034. There are also several requirements that must be met to qualify.
This measure has been loudly opposed by the tech community. Investors and startups fear that any increase in the taxable portion of capital gains will inevitably result in cooling of investment in high-growth businesses, in particular startups. The measure appears to be incongruous with the government's previous budgets, mainly with those measures fostering a vibrant startup ecosystem. For example, the Elevate IP program, announced in Budget 2021 ($90 million over 4 years) helps startups articulate an IP strategy and implement that strategy with direct funding. The aim of the measure was in part to help startups acquire IP assets, and in part to make these same startups more attractive to investors on the strength of the IP created. It remains to be seen how much of an impact raising the taxable portion of capital gains will ultimately have on the Canadian startup and tech scene.
Despite the potential for increased taxation on investors and companies in Canada, some of the proposed spending should serve to offset the losses felt through increased capital gains taxes and to strengthen economic growth and innovation for Canadian companies as the budget includes $7.6 billion for economic growth measures. Some of the measures are relevant to intellectual property (IP) in Canada, which may prove to be beneficial for innovative companies looking to pursue funding and IP in the coming years.
One such measure includes a $2.4 billion AI funding package to continue to build technological infrastructure and improve access to computing capabilities in Canada (referred to as "compute"). The announcement to increase funding in compute falls in line with announcements from global AI market leaders Amazon Web Services, Microsoft Azure, and Google Cloud announcing expansion plans in Canada.
This AI funding package also has strong implications for smaller businesses in Canada. The $2.4 billion AI funding package can be roughly broken down into the following:
- $2 billion to initiate the AI Compute Access Fund and Canadian AI Sovereign Compute Strategy, which will provide the compute essential for Canadian researchers, start-ups, and scaling businesses to strengthen domestically owned AI infrastructure. While there is no mention of IP related to this fund, it is reasonable to expect that building the compute power will lead to the creation of IP assets, which arguably should be funded at least in part by the fund. However, having a domestically owned AI infrastructure does not necessarily mean that the IP assets are also domestically-owned.
- $200 million disbursed through Canada's Regional Development Agencies to enable AI start-ups to introduce novel technologies to the market and expedite the adoption of AI across critical sectors such as agriculture, clean technology, health care, and manufacturing.
- $100 million to the National Research Council's AI Assist Program, designed to aid Canadian small- and medium-sized enterprises (SMEs) and innovators in developing and implementing new AI solutions.
- $14.5 million to Innovation, Science and Economic Development Canada for the Innovation Asset Collective which supports small and medium-sized clean tech businesses with specialized intellectual property funding to grow their businesses.
Several tax incentives for businesses pursuing IP have been proposed as investments in patents and cutting-edge technology has been specifically identified as a key factor in Canadian economic growth. Over $600 million invested over 4 years starting in 2025 in the Scientific Research and Experimental Development program (SR&ED) has been announced, with the main goal of keeping innovation and IP in Canada. The plan proposes new measures that allow businesses to write off the full cost of investments through a 100% CCA rate on the purchase of "innovation-enabling and productivity enhancing" assets, which includes patents. This should spur a bit of a spending spree by companies to acquire IP assets.
Another patent-related incentive, a "patent box" regime, has been tabled for future consultation. This refers to a taxation structure where business income earned from IP is taxed at a rate below the statutory corporate income tax rate with the intent to encourage the development and retention of IP in Canada. Such a program already exists in Québec, where eligible revenues are taxed at a rate of 2%, compared to the base rate of 11%. IPIC, among others, has been vocal in its efforts to convince the federal government to adopt such a program. That said, a "patent box" regime really comes into effect a few years after the start of the innovation process: one usually needs a granted IP asset to be able to benefit from the measure. It follows that the business wanting to avail itself of the measure must have previously filed patent applications, for example, and prosecuted them to allowance. A patent box regime pairs well with the Elevate IP and IP Assist programs, and it is hoped that the government will maintain funding for these programs as they are critical components for businesses in building IP assets.
Two proposals have been brought forward that may affect the Copyright Act. The first addresses "interoperability" – requiring manufacturers to ensure the interoperability of their products with others in the space. This will prevent consumers from having to purchase additional products when existing products do not work together, with the ultimate goal being to save Canadians money. The Federal Government has proposed addressing this through amendments to the Copyright Act which will be consulted upon shortly. In the meantime, the Federal Government has called upon provincial governments to address their contract laws to allow for interoperability.
The second proposal which may affect the Copyright Act includes introducing a "right to repair" of devices purchased by Canadians to increase the lifespan of the product. This announcement includes consultations on the introduction of a framework to address planned obsolescence, durability, reparability, and interoperability of devices. The proposed amendment to the Copyright Act (Bill C-244) includes allowing the circumvention of technological protection measures (digital locks) for the purposes of repair. There is also a proposed amendment to the Competition Act (Bill C-59), which includes measures to prevent manufacturers from anti-competitively refusing to provide the parts, tools, or software necessary for repairs. In the meantime, the Federal Government has called upon provincial governments to address their contract laws to support the right to repair.
Through the 2024 federal budget, the Federal Government has placed less focus on core IP issues than in previous years but is sending a strong signal that it stands behind bolstering AI infrastructure and research. The budget speech reiterates the government's intention of fostering innovation and productivity of Canadian companies and keeping the innovation and the fruits therefrom in Canada. Time will tell if these intentions will bear fruit.
While the bulk of the budget measures have already been tabled before the House of Commons, the provisions relating to the capital gains will be presented in a separate bill.
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