Numerous studies indicate that Canada lags its international peers on many measures of business innovation. One finding is that Canadian businesses, on average, spend relatively little on research and development (R&D) despite access to some of the most generous R&D tax subsidies in the world.
This doesn't mean our R&D tax subsidies haven’t helped stimulate R&D. Indeed, research indicates that they have.
But there is room for improvement. In a recent C.D. Howe Commentary, I examine options for the federal government to achieve better innovative outcomes through the tax system, available here.
I conclude that Canada needs a tax system that recognizes both the "pull" and "push" drivers of innovation. That is, not only generous up-front R&D tax subsidies (i.e., the push), but also competitive tax rates on the fruits of R&D that come from commercialization efforts and the production of new goods and services (i.e., the pull).
Here are some policy options to address “pull” factors.
- Keep a close eye on the emergence of patent boxes – a mechanism that taxes income from intellectual property at a very low rate – in several European countries and contemplate a response to this threat.
- Ensure that small, start-up companies in their early stage of technology development are not adversely impacted by the tax system when they achieve initial R&D success and grow. The current system results in large claw backs in R&D tax support when small Canadian controlled firms reach a certain size.
- Continue to focus on offering a highly competitive tax regime on production activities.
Overall, creating a competitive tax environment across the entire innovation value chain – from research, to commercialization to production of new products – is likely to improve Canada’s innovation performance and economic competitiveness.
What do you think? Are these ways that the government can better foster innovation in Canada? Leave your thoughts and comments below.
Guest Blogger: Mark Parsons
Mark Parsons is a former Manager in the Economics team of Edmonton’s Consulting practice and is also a part of our Canadian National Tax Services group. Prior to joining PwC, Mark worked as an economist with the Federal Department of Finance.