Alberta is launching new financial programs targeted at its innovation and technology sector less than one year after startups said that slashed tax credits and grants caused investment to leave the province.
The United Conservative Party government used its first budget in 2019 to outline more than $1-billion in spending cuts, including eliminating incentives for the technology industry. The government reversed course this week as it outlined research-and-development grants, as well as a $175-million program designed to help startups access venture capital.
People within the industry said the move signals a change in the government’s approach to diversify the economy at a time when investors and startups had started looking outside of Alberta.
“There was pretty big push-back after that first budget and, to the credit of the government, they’ve listened,” said Cory Janssen, chief executive officer of Edmonton-based AltaML and a member of the province’s working group mandated with finding alternatives to the tax credits.
“Alberta is quite behind the rest of the country when it comes to our tech ecosystem. Things had been pretty good here for a long time with our other core industries and I think one could argue that it pushed out the tech ecosystem a little bit.”
Alberta’s innovation community has criticized the UCP government for reducing financial support for small businesses and technology companies while funneling resources to resurrect the province’s struggling oil and gas industry. But at a news conference on Wednesday announcing the new programs, Premier Jason Kenney pointed to the province’s technology and innovation startups as key components of economic development.
“We identified a number of important sector strategies to accelerate the diversification of Alberta’s economy,” Mr. Kenney said. “The oil and gas sector is a smaller segment of our economy today than it was 40 years ago, while other sectors like services and technology have continued to grow year after year.”
In the new year, the Innovation Employment Grant will provide funding for research and development spending at small and medium-sized businesses. The grants range from 8 per cent on expenditures and up to 20 per cent on increasing R&D spending. The province also committed $175-million to Alberta Enterprise Corp. (AEC) to help startups access venture capital.
Last fall, the UCP government’s first budget eliminated several tax credits introduced by the NDP, including the Alberta Investor Tax Credit, which provided a 30-per-cent rebate on equity capital invested for Alberta small businesses working in technology research, development or commercialization. It also dropped the Interactive Digital Media Tax Credit and Ottawa’s Scientific Research and Experimental Development Tax Credit.
The government estimated cutting those programs would save more than $400-million by 2022-23 and said it was focused on broad corporate income tax cuts rather than targeting specific sectors.
The province’s entrepreneur and investor community decried the government’s decision that offered no alternative support, and said a corporate tax cut is of little help for startups since it often takes several years to turn a profit.
In December, Alberta announced the creation of a working group mandated with finding alternatives to the tax credits. With the recent announcement, the startup sector has renewed hope the government will refocus on its startup sector along with other industries, said Sandi Gilbert, chair of the National Angel Capital Organization.
“We were all very vocal in saying that they needed to do more to help diversification and innovation,” she said. “In their minds, the corporate tax reduction would encourage companies to come here and encourage investment in Alberta businesses, but clearly early-stage innovation companies do not have to deal with corporate tax. That’s a missed opportunity to bring in people who are building companies.”
The new programs will more effectively benefit the industry overall compared to the more niche tax credits that were targeted toward specific industries or the UCP’s broader corporate tax cuts, according to Mr. Janssen at AltaML.
In its report released on Wednesday, the working group said Alberta has the least competitive environment for tech startups in Canada.
Venture capital investment in Alberta lags other provinces. Canadian venture capital funds invested about $6.2-billion into 539 deals in 2019 – of which Alberta garnered 39 deals worth a total of $227-million, 3.6 per cent of the national total, according to the report. This indicates that corporate tax cuts are not effective for startups, Mr. Janssen said.
“The ability to ramp up as you increase R&D spending is really powerful,” he said. “If you’re increasing your spending and hiring more people and continuing to grow, that’s the activity that we’re trying to attract.”
But the new programs neglect some of the needs of early-stage startups that were included in the previous tax credits. The AEC invests in Alberta-focused venture capital funds that finance early stage, technology startups both in and outside the province.
But most provinces provide a tax credit or fund to help startups directly attract investors and mitigate the risk of investing in early-stage technology companies. Without it, Alberta’s startups have missed several opportunities for fundraising.
Edmonton-based 2S Water lost several investors after the province cancelled the Alberta Investor Tax Credit last year, said founder and CEO Anthea Sargeaunt. While her company can use the employment grant to build her team, it will be more difficult to raise funds for product development without a tax credit.
And with the employment grant beginning in 2021, Ms. Sargeaunt said that left businesses scrambling after losing the previous tax credits in October and then struggling with economic uncertainty amid the COVID-19 pandemic.
“We had investors that had been promised that rebate who did not receive it because it was pulled, and investors who walked away from the table because it wasn’t an option anymore,” she said. “It removes the impetus to invest in an Alberta company when I could go to B.C. and invest in a B.C. company and get an investor tax credit there.”
Economic Development Minister Tanya Fir said the province needed to take the time after cutting the tax credits to assess how to support the industry and that the pandemic caused delays in finalizing the working group’s report.
“Maybe there was a bit of time between ending the [NDP] programs and introducing ours, but we wanted to take the time to do it right,” she said. “This shows a substantial dedication to technology.”
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