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Last year’s billion-dollar Shopify IPO represents a great demonstration of how made-in-Canada innovation and entrepreneurial energy can succeed.

Kevin Van Paassen/Bloomberg

Canadian startups got their wish Tuesday as the federal government abandoned an election pledge to increase taxation of stock options in a budget that put renewed focus on Canada's innovation sector.

Technology and natural resource startups alike voiced alarm after the Liberals campaigned last fall to fully tax individual stock options gains exceeding $100,000, part of their overall push to increase taxes paid by the wealthiest Canadians.

Canadian startups urged the new government to reconsider after the October election. They argued that options are a critical tool used by early-stage ventures to attract employees. They accept lower salaries, hoping they'll get wealthy from their options on the remote chance their employers succeed. With more heavily taxed option gains, Canadian startups warned they would struggle to recruit and keep employees.

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"I heard from many small firms and innovators that they use stock options as a legitimate form of compensation, so we decided not to put that in our budget," Finance Minister Bill Morneau told reporters. Asked if his government might increase options taxes in future budgets, he said: "It's not in our plan."

Bank of Montreal chief economist Doug Porter said "the last thing the government wanted to do was introduce a measure that would ricochet back and hurt the sector."

The decision was greeted enthusiastically by the tech sector. "I'm glad to hear that," said Tobi Lutke, CEO of Ottawa retail software firm Shopify Inc."It's a vital ingredient in the risk-reward foundation of what makes a tech company work. This is very positive. It's good we had a dialogue" with government.

John Ruffolo, CEO of Toronto-based OMERS Ventures, a leading venture capital firm, said he "welcomed" the government's decision. Options "are an essential tool for innovative technology companies to scale up [and become] globally competitive firms," he said.

The Liberals offered few innovation-related pledges during the election. Since then, however, Prime Minister Justin Trudeau has been pitching himself as the Innovation Prime Minister, championing Canadian "resourcefulness" and making appearances at the Canadian offices of foreign tech giants. The same tech startup lobby group – the Council of Canadian Innovators – that pleaded for status quo on stock options also pressed a trio of ministers in December to help the sector by improving their access to customers and streamlining immigration rules to make it easier to recruit.

The budget contained a few immediate goodies, including a $2-billion, three-year infrastructure fund to help modernize campus research, commercialization and training facilities; a $95-million boost to federal research granting councils, commitments to boost cleantech investments and a vague pledge to co-ordinate efforts among several federal agencies and departments to help startups.

But the government acknowledged it had work to do to catch up to the PM's newfound appreciation for the tech sector, and to help achieve the kind of long-term productivity gains that have eluded Canada in relation to the U.S. and other OECD nations. It referred to this year's new budget items as "interim" measures and "first steps" in advance of something more substantive yet to come.

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"You can see that we're setting ourselves up for a longer-term innovation strategy," said Mr. Morneau. "That's something we're going to be working towards over the next six months." Mr. Trudeau has mandated new Innovation, Science and Economic Development minister Navdeep Bains to develop the strategy.

"I think what they're trying to do is get [the innovation agenda] right rather than being rash about it," said Craig Wright, chief economist with Royal Bank of Canada.

Even the government's big innovation-related campaign promises – giving $200-million annually to incubators and accelerators that help launch startups and another $100-million to the Industrial Research Assistance Program [IRAP] granting body – have shifted.

The government said it would now provide $800-million over four years "to support innovation networks and clusters." But the first $150-million will not be disbursed until the 2017-18 tax year, giving Minister Bains time to consult the industry and draw up his agenda. Likewise, the government has only earmarked a single $50-million boost to IRAP, while promising "a comprehensive review of all elements of federal support for fundamental science" this year.

One of the few innovation measures from the Liberal campaign to make it into the budget intact was a promise to restore a 15 per cent tax credit on investments of up to $5,000 in provincially registered labour-sponsored venture capital corporations, which the previous Conservative government had started to phase out.

Such funds have been widely criticized as inefficient and ineffective tools for boosting economic returns, and were seen by critics as an attempt to score points in Quebec, as the powerful Quebec Federation of Labour and its Solidarity Funds are major beneficiaries. The measure is at odds with the government's innovation stance – particularly since the $815-million cost in tax relief to labour-sponsored funds over six years is more than the government is committing to its main $800-million innovation fund.

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