Money Talks: Government Funding’s Role in Shaping Canadian Industries

"By Nia Pietrobruno"

With substantial investments in green energy, clean technologies, agriculture, and artificial intelligence, The Department of Finance Canada’s Budget 2024 showcases the federal government’s commitment to fostering innovation and sustainability. But how do these investments reach the pockets of the innovators and business owners they are intended to support? 

Government funding programs are the primary channels through which these funds are distributed. Grants, loans, tax credits, and loan guarantees, among other forms of funding, can be powerful drivers of growth for businesses big and small, providing organizations with the funds needed to conduct key research, reach new markets, or hire the best and brightest. Yet, to many business owners, navigating the government funding landscape can seem daunting and complex. To take full advantage of these programs, business owners must understand what types of funding is available, the intentions and motivations of funders, and strategies to optimize funding for their organization. Only with this information can business owners make informed decisions about funding their business, maximizing the benefit of the government’s support. 

Government Funding Comes in Many Forms

Before anything else, it is essential to understand that the Canadian government provides several types of financial support through many different avenues. Government funding is often offered in the form of grants, tax credits, loans, and loan guarantees, each funding type presenting unique features that determine when and why an organization might pursue them. Typically, funding supports four key areas: workforce—including hiring and training initiatives, product development, marketing—including exporting and business development, and capital expenditures—including property, plant, and purchases. 

Across Canada, thousands of government funding programs are available, each with distinct goals, criteria, and targeted business profiles. There exists programs that target startups across a broad range of industries, established businesses in niche sectors, and everything in between. Additionally, government funds are typically offered through federal, provincial, and municipal government agencies, each with their own application and review processes. In other words, every program is unique, varying in the amount and form of support, the funder, eligibility criteria, and application requirements. It is no wonder the funding landscape can seem overwhelming.

Grants

A grant is a non-refundable sum of money provided to support specific projects or activities that align with the funder’s goals. Unlike loans, grants do not need to be repaid, making them highly sought after by small and large organizations alike. In addition, some grant programs, like the Canadian Digital Adoption Program (CDAP) from Innovation, Science and Economic Development Canada (ISED), are designed to support smaller, newer businesses which may be too risky to be eligible for traditional loan programs. Note, however, that grant programs often have strict eligibility requirements and may be quite competitive as each fund is limited.

Tax Credit

A tax credit is a reduction on the amount of taxes that an organization owes to the government. The credits can be claimed on expenses or investments in defined areas such as sustainability or the hiring of interns. These programs are defined in legislation, so any business that meets a tax credit program’s requirements can receive funds. Most notable among tax credits is the Canada Revenue Agency’s Scientific Research & Experimental Development (SR&ED) program, which incentivizes research and development (R&D) as well as innovation initiatives.

Loans

A loan is a sum of money that must be repaid with interest over a certain period. While interest-free loans do exist, they are few and far between. Government loans, such as those provided through ISED’s Canada Small Business Financing Program (CSBFP), typically have fewer or less stringent requirements than loans from private lenders, making them more accessible to smaller businesses. Additionally, loan programs often allow for more flexible use of funds, compared to other forms of funding, so businesses can use the capital for a range of expenses; from equipment purchases to operational costs.

Loan Guarantees

A government loan guarantee is a commitment by the government to cover a borrower’s debt if they default. In this way, the government absorbs some of the risk taken on by a financial institution when it issues a loan to a business considered high-risk due to insufficient credit history or limited collateral. Guarantees offered through programs like the CSBFP make private-sector funds more accessible to businesses that would otherwise be ineligible.

Government Funding as an Economic Tool

The Canadian government often funds sectors that are considered “priority,” believing their growth will benefit the economy and country as a whole. In fact, over the past decade, targeting particular industries through funding programs has become increasingly prevalent  (Lester, 2024, p. 10). The clean economy sector now receives the largest share of funds compared to any other industry. Canada’s net-zero economic plan, for instance, includes a massive $160 billion investment in the clean economy (Department of Finance Canada [Dept. of F], 2024, p. 14). Technology seems to be at the forefront of federal investment as well. In Budget 2024, the Canadian government pledged a $2.4 billion investment in AI over the next 5 years and $600 million in the SR&ED program over the next 4 years (Dept. of F, 2024, p. 14). These investments are in addition to the $16 billion already committed to scientific research since 2016.

These are all, undoubtedly, important sectors with pressing needs for development. As the proverb goes, “Necessity is the mother of invention.” In an efficient market, supply would meet this demand—so why, then, is government funding necessary? John Lester of the University of Calgary (2024) offers an explanation: 

A key motivation for subsidizing business is a view that some market outcomes are inefficient. While markets are generally successful at allocating society’s scarce resources to their best uses, exceptions occur when prices do not fully capture the social costs and benefits of economic activity. The direct impact of correcting these market failures is to improve economic efficiency, or more generally, to enhance well-being. (p. 4)

Lester cites R&D as a prime example: it creates knowledge, introducing new products or improving processes, with some benefits “leaking” to other firms and boosting productivity in the society as a whole (2024, p. 4). Because firms overlook this spillover when investing, government funding can bridge the gap and reflect the projects’ broader impact. In fact, roughly two thirds of funding programs aim to address a market failure (Lester, 2024, p. 19). So while necessity is the mother of invention, it seems that funding can move the process along.

Despite these efforts to correct market inefficiencies, the effectiveness of government funding is inconsistent. Lester's assessment of key funding programs revealed that approximately two thirds of government spending failed to achieve its economic objectives, resulting in an overall negative impact on economic efficiency (2024, p. 14). Small and medium size Canadian businesses, which make up about half of the country’s output, receive about two thirds of business funding, yet many still face financial challenges (Lester, 2024, p. 1). 

For business owners, however, the availability of funding is both welcome and essential for growth. Most would likely advocate for expanding government funding programs to support a broader range of organizations. As it stands, government programs tend to target particular industries, projects, and communities, leaving some businesses without access to the support they need. The reality is that even with large-scale government investment, not every organization will qualify or find relevant government funding, especially for grants. While government programs aim to address economic inefficiencies, their limitations underscore the challenge of meeting the diverse and widespread needs of the business community.

Government Funding, In Practice

For those that work in priority fields, either as entrepreneurs or employees, government support initiatives may offer valuable opportunities. However, many business owners find themselves operating in non-key industries. For these businesses, finding funding is still entirely possible, but may simply require extra time and effort to find the right program.

Most importantly, perhaps, is to remember that funding should support a business’s long-term goals, not detract from them. Business owners may be tempted to shift their activities to priority areas to “chase” available funding. Sometimes, this approach can work to a business’s benefit; however, “chasing funding” without regard to long-term goals can risk confusing the business direction, diluting investment, and spreading a team too thin. Serial founder Joe Procopio reflects on this dilemma, when considering a first-time founder who pivoted over and over again to conform to the ever-changing preferences of funders and investors: “That no longer works” (Procopio, 2024). The first step should be to determine priority activities, investment, and projects; only then should business owners look for funding that meets these needs. According to entrepreneur Assya Barrette, “It’s better to take a targeted approach [to grant funding] rather than casting a wide net” (2024). When no relevant funding is available, bootstrapping or love money—or using personal investment—may be the best choice, at least until other funding becomes available or the business becomes eligible.

Before pursuing any funding program, however, it is crucial to weigh the costs and benefits. While grants may seem like “free money,” they often involve time-consuming applications and arduous follow-up reporting (QuickBooks Canada Team, 2023). Consider programs like SR&ED, which can award large sums, but can also require hours of application and reporting work. To that effect, a program with a simpler application and fewer restrictions may be preferable if a project needs a smaller amount of funding. The key to government funding is ensuring that it makes sense for the organization: the funded projects and activities should align with long-term goals, while a program’s returns should far outweigh its time investment. Consider government funding a useful tool, not an end-all solution.

Final Thoughts

Government funding is a powerful tool for shaping industries, driving innovation, and supporting businesses as they grow. However, while these initiatives can help address market inefficiencies and foster economic growth, they often come with challenges—complex applications, limited availability for certain industries, and distinct eligibility criteria. The key to navigating government funding is to approach it strategically. Business owners should seek opportunities that support their long-term goals, rather than chasing funds that could distract them from their core mission. 

Funding should act as a driver for growth and innovation—not as a detour. When approached with the right mindset, it can empower businesses to achieve ambitious goals and contribute to Canada’s economic and social progress. But its true impact lies in how it is used and in the vision and determination of the entrepreneurs who bring their projects to life.

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References

Barrette, A. (2024, February 28). Business Startup Funding: A Beginner’s Guide. Foundr Magazine. https://foundr.com/articles/building-a-business/finance/funding-a-startup  

Canada Revenue Agency. Scientific Research and Experimental Development (SR&ED) tax incentives. Government of Canada. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program.html 

Department of Finance Canada. (2024) Budget 2024. Government of Canada. https://budget.canada.ca/2024/report-rapport/toc-tdm-en.html  

Innovation, Science, and Economic Development Canada. Canada Digital Adoption Program (CDAP). Government of Canada. https://ised-isde.canada.ca/site/canada-digital-adoption-program/en 

Innovation, Science, and Economic Development Canada. Canada Small Business Financing Program. Government of Canada. https://ised-isde.canada.ca/site/canada-small-business-financing-program/en 

Lester, J. (2024). Federal Business Subsidies: Explosive Growth Since 2014. The School of Public Policy Publications, 17(1). https://doi.org/10.55016/ojs/sppp.v17i1.78329  

Procopio, J. (2024, July 11). Startups Are Chasing Money That Isn’t There. Inc.com. https://www.inc.com/joe-procopio/startups-are-chasing-money-that-isnt-there.html  

QuickBooks Canada Team. (2023, November 16). Canadian small business grants: Tools and tips to get funding. Intuit Quickbooks. https://quickbooks.intuit.com/ca/resources/starting-a-business/grants-for-small-business