Canada: A Closer Look: Fasken's Team Examines Important Budget 2019 Measures - Some Which Made Headlines, And Others That Should Not Escape Notice

Government Relations and Strategy Bulletin
Last Updated: April 2 2019
Article by Lindsay Aagaard and Matthew Welch

Federal budgets always affect businesses and individuals throughout the Canadian economy. Faken lawyers draw attention to several important Budget 2019 measures - some which made headlines, and others that should not escape notice.

On March 19, 2019, the federal Minister of Finance, Bill Morneau, tabled his 2019 Budget in the House of Commons. The Minister frames Budget 2019 as "investing in the middle class", with a focus on jobs, housing, seniors, pharmacare and reconciliation. With an estimated $22 billion in new spending, this pre-election Budget contains specific measures aimed at real estate affordability, a portable training benefit, pension protection, and national security.

Beyond the Government's flagship measures, the Budget also touches on various industries and sets the stage for several longer term projects. Though initial reporting of such spending may have been muted, Fasken experts have rolled up their sleeves to highlight many important Budget elements, big and small.

Modernizing Broadband and Telecommunications Infrastructure to Expand Access

Budget 2019, the Federal Government created the new Universal Broadband Fund, which would invest $1.7 billion in bringing universal high-speed internet access to rural and remote communities. The focus will be on backbone infrastructure, with "last-mile" connections to individual homes and businesses as a possibility.

"This new funding is in addition to the CRTC broadband fund", says Jay Kerr-Wilson, the co-leader of the Technology, Media and Telecommunications group at Fasken. "This investment may provide new opportunities for internet service providers, telecommunications infrastructure companies and the beneficiaries of new high-speed internet access, especially for businesses located in rural and remote areas".

This supports the Government's target that 95 per cent of Canadian homes and businesses will have access to internet speeds of at least 50/10 Mbps by 2026 and 100 per cent by 2030, regardless of where they are located in the country. This $1.7 billion would be invested over 13 years, starting in 2019-2020. The $1.7 billion is to top up the Connect to Innovate program, launched in Budget 2016, and which is currently only $500 million. It appears to also include a satellite component and that the total spend could be more than this.

Dairy Producers Compensated for Canada's Trade Negotiation Concessions

Budget 2019 pledges nearly $4 billion in compensation for Canada's supply-managed sectors in response to market-opening concessions (increase in quota of zero or low-tariff market access) on imports of poultry, eggs, milk, and other dairy Canada made in the Comprehensive Economic and Trade Agreement (CETA) and Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Canada also agreed in the United States-Mexico-Canada Agreement (USMCA) to eliminate its Class 6 and Class 7 milk pricing system and provide increased market access for supply-managed products from the United States.

"The decision to provide a relief package for Canadian producers is a major shift in policy for this government that has, since 2015, preferred to provide funding to help innovate, rather than compensate," says Clifford Sosnow, co-Chair of Fasken's International Trade and Investment Group. "We must wait and see whether the government provides additional compensatory funding for Canada's dairy processors, who have said they face a similar, broad-based economic devaluation of their industry in light of Canada's new trade obligations."

In light of these concessions, this federal budget proposes $2.4 billion to help "sustain the incomes of eligible dairy, poultry, and egg farmers", of which $2.15 billion is new funding. Stating that the concessions in the CETA and CPTPP have devalued quotas held by Canadian farmers, the Government is preparing a $1.5 billion "Quota Value Guarantee Program" that will offset the reduction in quota value when they are sold by a Canadian farmer in one of Canada's supply-managed sectors.

Increasing Investment to Decrease Emissions: Clean Transportation Gets a Boost

Under the umbrella of measures aimed at targeting a "clean economy," Budget 2019 reinforces the government's target of having 100 percent zero-emission vehicles sold in Canada by 2040 with several different initiatives. This includes $130 million over five years for new recharging and hydrogen refuelling stations in certain key locations, and $300 million over three years for a new incentive program to help individual defray the cost of hydrogen fuel cell or battery electric vehicles.

"Increasing support for clean transportation options, like hydrogen fuel cell vehicles, is welcome news," says Daniel Brock, chair of the Government Relations group at Fasken. "These investments recognize that government leadership is vital for the transition to zero-emission vehicles. Incentives to help individuals purchase these vehicles, the creation of new infrastructure, ongoing work with auto manufacturers, and tax write-offs for businesses looking to transition their fleets - these are all concrete measures that will encourage movement of this sector from the margins to the mainstream."

The Budget also proposes to permit businesses to apply a full tax write-off to zero emission vehicles the year in which they are put into use, and is applicable to light-, medium and heavy-duty vehicles.

Investments in Technology Security, Enforcement and Transportation Security

Budget 2019 contained several new investments in the security realm. The Budget commits $67.3 million dollars over five years to assess and respond to economic-based security threats, such as risks related to theft of intellectual property and Canadian-made technologies. Investments were also made in the RCMP, which include $508.6 billion over five years to support policing operations, $77.3 million over five years for law enforcement at Canadian borders, and $11.5 million over 3 years to support transportation security.

"Cyber security poses a significant risk management issue for businesses", says Andrew House, counsel with the Government Relations and Political Law group. "The attention that this issue has garnered in Budget 2019 is a testament to how important this issue has become to businesses, as well as to individuals and all levels of government."

Investments related to cyber security in the 2019 Budget are aimed primarily at strengthening the protections for cyber systems in the finance, telecommunications, energy and transport sectors ($144.9 million over five years), and at promoting Canada as a leader in research and innovation in the cyber security field.

Significant Tax Measures will Impact Taxpayers Throughout the Canadian Economy

Budget 2019 also contains significant proposals to amend the Income Tax Act, the Excise Tax Act and the Excise Act, 2001 while also providing updates on previously announced tax measures and policies.

Significant Budget 2019 proposals and updates include the introduction of:

  • A $200,000 annual cap on employee stock options (based on fair market value of the underlying shares) for employees of "large, long-established, mature firms". Budget 2019 notes that further details of this measure will be released in the summer of 2019 but confirms that employee stock option benefits would remain uncapped for start-ups and emerging Canadian businesses;
  • Tax measures to support certain Canadian journalism organizations;
  • Rules to extend the foreign affiliate dumping rules to corporations resident in Canada controlled by non-resident individuals or trusts;
  • Rules intended to address the avoidance of dividend withholding tax on compensation payments made under certain cross-border securities lending arrangements of Canadian corporate shares; and
  • Updates on Canada's participation in the Organisation for Economic Co-operation and Development project on Base Erosion and Profit Shifting.

"Although specific details were not released, what attracted the most attention in the tax measures contained in the Federal Budget is the proposed $200,000 annual cap on stock options granted by large firms." says Kevin Yip, a partner in Fasken's Tax Law Practice Group "Less noticed by the public may be the significant investments that the Federal Government is making in the Canada Revenue Agency which is notable because there seems to be an emphasis this year on improving services to Canadian taxpayers and not just a focus on tax avoidance."

For a more in-depth look at new federal tax measures in the budget go to the Fasken Tax Law group's bulletin.

Spending on Pharmacare may be the core Health Commitment, but it does not Stand Alone

There are several health related measures included in Budget 2019, with national pharmacare in particular highlighted by government communications.

"The federal government has proposed several initiatives in Budget 2019 that are designed to address problems of a national scale," says Lynne Golding, the leader of Fasken's Health group. "This will require consistency across Canadian jurisdictions and willing partners in the provinces and territories."

The Advisory Council on the Implementation of National Pharmacare, launched as part of last year's budget, will be delivering its final report later this Spring. However, Budget 2019 advances three foundational elements for the national strategy based on the results of the Council's consultations and the recommendations from its interim report. Budget 2019:

  • Announces the intention to create the Canadian Drug Agency (which would assess and negotiate prices of prescription drugs);
  • Commits to working with provinces and territories on a national drug formulary to create consistent access to prescription drugs across the country, including $35 million over four years starting in 2019-20 for a Canadian Drug Agency Transition Office; and,
  • Sets out a plan to develop a strategy aimed at improving access to high-cost drugs for rare diseases. Funding for the proposed national strategy on high-cost drugs for rare diseases would begin in 2022-23, with $1 billion expended over the first two years, and up to $500 million expended annually after that.

Other measures outlined in Budget 2019 include:

  • Changes to Health Canada's approval processes with a commitment to remove regulatory requirements that are unnecessary for low-risk drugs and trials;
  • Proposed changes to permit the medical product industry to carry out clinical trials on certain products including 3D printing, artificial intelligence, and gene therapies;
  • Investments in stem-cell, brain, cancer and genomics research;
  • The expansion of tax exemption for certain health-related items;
  • Investments targeted at the challenges posed by the opioid crisis;
  • A national dementia strategy; and.
  • A national suicide prevention service.

Public Procurement Overhaul Could Improve How Suppliers Attain Government Contracts

Sometimes, the least flashy budget measures can make the most lasting impact. One such measure in Budget 2019 may be the proposed overhaul of Public Service and Procurement Canada's Industrial Security systems.

The Budget contains $60 million over six years beginning in 2019-20 to reform PSPC's Industrial Security systems. This money is earmarked for an ambitious-sounding initiative: the Industrial Security Systems Transformation Project, impacting the Contract Security Program and the Controlled Goods Program. Although observers most familiar government might note that the word 'transformation' often means anything but, there is no arguing that, in this instance, investment is long overdue.

Marcia Mills, Counsel to Fasken procurement law group, comments that "modernizing these programs, which are essential components of many government contracts, can only improve the efficiency of procurement processes".

The Contract Security Program is the program that manages access to government Protected or Classified information by non-government entities. Government contractors have to be qualified under the Program in order to access government contracts. This means that all present and future Government of Canada contractors, including IT service providers and data management firms, should pay close attention to the Program transformations to ensure they remain up to date on Program operations.

The Controlled Goods Program regulates the import, export and access to goods and technical data that have military or national security significance. In addition to modernizing the IT infrastructure that supports this program, the Budget contains new spending to "maintain service levels of the controlled goods program", $12 million over three year beginning in 2019-20.

This transformation project will allow PSPC to upgrade the IT infrastructure it uses to assess prospective bidders seeking contracts under programs. With any luck, this will result in more efficacious procurements and a system more responsive to bidders' needs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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