The next federal election may still be six months away, but the Conservative government is already in campaign mode.
Last week, Finance Minister Joe Oliver summoned the ghost of Pierre Trudeau's fiscal record to attack his son, Liberal Leader Justin Trudeau. The government is poised to spend millions on TV ads touting next week's federal budget. And across the country, ministers are gleefully sprinkling business subsidies like fairy dust.
But things aren't always as they appear.
Take business subsidies. While it's true that Ottawa is generously giving companies more direct cash to encourage innovation, it has been quietly taking away with the other hand by making it much tougher for companies to qualify for research-and-development tax credits.
Ottawa has cut payouts under its flagship Scientific Research and Experimental Development (SR&ED) program by more than $1-billion a year since 2008, when the cost of the scheme peaked at more $4-billion, according to a recent report by the Canadian Advanced Technology Alliance. (Matching R&D credits in many provinces add roughly another $1-billion a year to what is the largest single government support program for R&D in the country.)
Ottawa tightened up the rules to the program in 2012 by making it less generous for larger companies and limiting eligible R&D expenses.
But that's not the only reason the SR&ED program is costing the government a lot less money these days.
The Canada Revenue Agency is being much more aggressive in challenging tax claims made by companies. And claimants are pushing back, resulting in an explosion of disputes between companies and tax authorities.
"What we've seen over the last two years is this big backlog of [disputes]," said David Hearn, managing director of Toronto-based Scitax Advisory Partners, a Toronto-based firm that specializes in SR&ED tax credit claims.
There are now 80 SR&ED-related cases before the Tax Court of Canada, and the number of new cases jumped to 42 in 2014 from 20 in 2012, Mr. Hearn pointed out.
Before disputes reach court, companies are fighting back by filing a flood of so-called "objections" to the tougher SR&ED rulings by tax authorities, he said. Notices of objection by claimants multiplied 25-fold from 2007 to 2014, according to figures released to Mr. Hearn under the Access to Information Act.
"The government wants to impose its austerity regime on the SR&ED through Canada Revenue Agency policy, rather than changing the law," he said.
The recipients of all those business subsidies could be in for a rude surprise when they make their next claim for R&D tax credits. Last month, the Supreme Court of Canada declined to hear a case involving double-dipping by a company that was receiving both tax credits and government loans for the same R&D projects. The result is the CRA is now treating subsidies – even those structured as loans – as government "assistance" when they aren't made on strictly commercial terms. Businesses may find they have to reduce the SR&ED tax credits they claim to reflect any loans they may also be getting for the same R&D projects, Mr. Hearn explained.
That could affect the value to businesses of grants from agencies such as the Federal Economic Development Agency for Southern Ontario (FedDev), the Atlantic Canada Opportunities Agency (ACOA) and Western Economic Diversification Canada. Ottawa has deliberately structured many of the payments from these programs as loans to make them more politically palatable.
Speaking last month after cutting a $10-million cheque for a business in Ancaster, Ont., Minister of State for FedDev Gary Goodyear told the Hamilton Spectator that making the money repayable means the government can "help a company grow, create jobs and the taxpayer gets their dollars back, so we can continue to do it."
That, in a nutshell is what the Conservatives have been doing – squeezing R&D tax breaks and giving more money directly to businesses in the form of loans.
The policy shift is also consistent with a 2011 expert panel report on Canada's R&D record, which concluded that too much of the government's innovation spending is delivered through tax breaks.
The legal push-back from businesses over the SR&ED crackdown suggests it won't be easy to cut much deeper into the steady diet of tax breaks so many of them are hooked on.