Ottawa could better foster business innovation in Canada by creating a competitive tax system across the entire innovation value chain, according to a report released today by the C.D. Howe Institute. In Rewarding Innovation: Improving Federal Tax Support for Business R&D in Canada, author Mark Parsons says Ottawa should focus its efforts on improving the tax treatment of the fruits of innovation – income from intellectual property and production of new goods and services – while maintaining incentives for investment in research and development.
One of the more troubling aspects of Canada’s innovation track record is that businesses spend relatively little on research and development (R&D) despite having access to some of the world’s most generous R&D tax incentives, notes Parsons. Canada has the third most generous R&D tax subsidies among OECD countries. Despite this, Canada ranks in the bottom half of these countries in business spending on R&D as a share of the economy. This is one reason why the federal government launched an expert panel on the subject that is expected to report later next month.
“The current system,” says Parsons, “is mainly designed to push firms to undertake R&D through one of the world’s most generous tax subsidies. Meanwhile the rewards to R&D- income from related intellectual property and production – are taxed at rates that are far less competitive.” This matters, Parsons argues, since evidence shows that R&D is responsive to not only R&D tax subsidies but also the rate at which taxes on subsequent production stemming from R&D efforts is taxed. One potential competitive threat, he says, is a trend in Europe towards the adoption of “patent boxes” – a type of pull incentive that taxes the income from intellectual property at a very low rate.
The federal government, he says, should focus its efforts on market “pull” factors by ensuring taxes on income derived from intellectual property and subsequent production of new products and services are kept at internationally competitive levels.
The federal tax regime should also not discourage the growth of small or start-up firms into larger, globally competitive companies, he concludes, noting that small Canadian controlled firms receive much larger subsidies for R&D than do large firms.