Freeland confirms Ottawa to develop $15-billion program to help pension funds invest in AI data centres

Ottawa plans to spend billions on a program to build data centres by attracting investment from Canadian pension funds and is promising a revamp of the country’s signature R&D tax credits, measures it says are necessary to fight for capital and jobs as the U.S. takes a sharply protectionist approach.

Finance Minister Chrystia Freeland said Friday that the government aims to generate up to $45-billion in total investments to develop data centres for artificial intelligence, spurred by $15-billion of federal loans and equity investments, as first reported by The Globe and Mail.

The program is part of a suite of proposals that will be in Ottawa’s fall economic statement on Monday, intended to make conditions more attractive for major pension funds to invest in Canada.

To access government money to build AI data centres, Canadian pension funds will have to invest $2 of their own capital alongside each federal dollar and to be significant shareholders in the projects. If successful, the government’s $15-billion investment could draw in an additional $30-billion from pension funds. The government’s announcement made no mention of a requirement from an earlier draft proposal that the data centres be powered by clean energy, as The Globe had reported.

Separately, the government unveiled proposed changes to its largest innovation spending initiative, the Scientific Research and Experimental Development (SR&ED) tax incentive program that favours Canadian-controlled companies and public corporations. The government said reforms and enhancements will make SR&ED more generous, raising the threshold for eligible research and development expenses, and will amount to $26-billion in tax incentives.

Ms. Freeland said Canada is in “a global fight for capital, investment and the good jobs that they bring,” made more urgent by a rising tide of economic nationalism, particularly from the incoming U.S. administration led by president-elect Donald Trump.

She said both of Friday’s announcements are part of a plan to make Canada more assertive, securing the country’s economic sovereignty and capitalizing on its natural and intellectual advantages in building new technologies such as AI.

“We need to own the podium and say, ‘Canada is a great place to invest and we are determined to get our share,’ ” Ms. Freeland said.

For months, Ottawa has been looking for ways to boost domestic investment by Canadian pension funds, which collectively manage trillions of dollars of assets, after calls for change from senior business leaders.

Pension fund leaders have said they already invest heavily in Canada, but have also defended their independence and, at times, lamented that there aren’t more opportunities available in Canada to invest in large-scale assets such as infrastructure projects.

To make it easier for pension funds to own controlling stakes in Canadian companies, the federal government is proposing to remove a rule that limits the voting shares a fund can control to 30 per cent – although Canada’s largest funds had already developed structures to work around the cap. The government also pledged to work with airports and pension funds to encourage development on airport lands.

In addition, Ottawa will provide $1-billion in new funding for the Venture Capital Catalyst Initiative – its fourth funding envelope since it launched under a different name in 2012 – and create more generous terms for pension funds and institutional investors to take part. And the government pledged to provide up to $1-billion for investments in mid-sized Canadian companies. It will provide 25 per cent of the capital and aims to pull in the remainder from private investors.

The new measures to entice pension funds to make more investments in Canada stem from a consultation process led by former Bank of Canada governor Stephen Poloz, which was launched in April. Ms. Freeland said Mr. Poloz and pension-fund leaders worked “very collaboratively and effectively” to shape the government’s proposals, which she framed as “an important step in getting more of Canada’s money invested in Canada.”

A statement from the Caisse de dépôt et placement du Québec, the $452-billion provincial pension fund manager, said: “We welcome all additional measures to stimulate productivity and private investment in Canada, and build a pipeline of attractive projects for investors such as la Caisse.”

To modernize the SR&ED program, Ottawa plans to make $1.9-billion in new investments over the next six years – a figure that has ballooned since the government launched consultations on a “cost-neutral modernization” of the program in January.

The proposed changes will allow Canadian-controlled private corporations to earn a 35-per-cent tax credit on the first $4.5-million of qualifying annual SR&ED expenditures, raising the threshold from $3-million. That will increase their tax credit by up to $570,000 each year per company. Qualified expenses above that still qualify for a 15-per-cent tax credit.

Canadian public corporations will also be made eligible for the 35-per-cent credit.

Industry players have long called for an overhaul of the 76-year-old program and the Liberal government first promised a review three budgets ago, before pledging to launch consultations early this year after a series of disappointing efforts to translate its innovation agenda into meaningful economic growth.

Benjamin Bergen, president of the domestic technology lobby group Council of Canadian Innovators, said the SR&ED reforms “represent a long-overdue step toward strengthening Canada’s innovation economy,” but that “it must be the beginning, not the end, of SR&ED reform.”