Canada needs new approach to innovation gap

Canada should consider adopting an “Innovation Box” approach to encourage business investment in innovative processes that improve productivity, growth and incomes, according to a new report by the C.D. Howe Institute.

Read: Canada lags in business R&D spending

In Improving the Tax Treatment of Intellectual Property Income in Canada, authors Nick Pantaleo, Finn Poschmann and Scott Wilkie say federal tax policy should complement tax-based support for research and development (R&D) spending by encouraging the adoption, commercialization and use of innovative ideas — in short, a pull, as well as a push, into R&D activity.

“Canada’s apparently lagging performance presents a puzzle, because the country’s federal and provincial tax systems treat business R&D spending quite generously, as compared with international peers,” notes Poschmann. “To address this, Canada could adopt a new incentive model from abroad known as an innovation, or patent, box within which lower tax rates apply to income from applied innovation. This would encourage businesses to develop, apply for and hold patents in Canada.”

Read: Manufacturing business conditions deteriorate

Evidence for Canada’s innovation gap, note the authors, can be found in the low rate of growth in patent registrations and low rates of commercialization of new products and services vis-à-vis other member countries of the Organisation for Economic Co-operation and Development (OECD) and developing economies such as Brazil, China and India. Concerns have also arisen over the share of Canadian patents that are held and exploited abroad, and the paper presents novel data on international transactions in patent ownership.

The authors recommend a reduction in the effective tax rate that applies to income derived from the commercialization and adoption of R&D. This constitutes a new emphasis on “pull” factors, in contrast to “push” factors that encourage firms to invest in R&D, irrespective of any specific link to innovation or the adoption of new technologies or processes, as is currently the case in Canada.

Read: Canada promotes investment in innovative businesses

They provide a template for legislation as a starting point to implementing this idea in a way that safeguards against unintended consequences, such as businesses that would benefit from reduced taxation without developing and deploying the resulting innovation in Canada. “Properly framed, an innovation box can serve as a catalyst for more general economic activity, in the form of spin-offs from R&D and intellectual property work,” concludes Pantaleo.

Read the full report here.

Staff

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