Budget 2013: Time for a Canadian Patent Box

On Thursday of this week Finance Minister Jim Flaherty will introduce his eighth federal Budget. It is expected that a jobs and training strategy will dominate the document. While there is no doubt that leaving training to the provinces has led to a misallocation of resources, this policy should not be the hallmark of this budget. Instead Minister Flaherty should turn his attention to creating a more dynamic tax policy which will encourage direct foreign investment in Canada. For nearly a decade now multinational enterprises have constructed elaborate international tax planning strategies to move revenue out of high tax countries into low or no law ones. The Double Irish Dutch Sandwich was one such example where Google and Starbucks were able to utilize U.S. “check the box” tax rules to construct a series of companies set up in Bermuda, Ireland and Bermuda, all bound by cost sharing agreements to move royalty income out of the U.K. Inccome associated with “intangibles”, that is Intellectual Property such as patents, copyrights and industrial design, is a common tenant of international tax planning.
Canada has made research and development, R&D, a cornerstone of our economic policy. The Scientific Research & Experimental Development (SR&ED) grant program has seen billions of dollars invested directly by the federal government in companies doing research in Canada. The problem is that while research is being subsidized, the fruits of that research, namely royalty income from the ensuing IP is frequently moved outside of Canada. Many European countries, and most recently the U.K. have introduced legislation aimed at attracting this royalty income. The Patent Box in the U.K, and Innovation Box in the Netherlands are just two examples. In many cases the costs of research are subject to higher deduction rates and the royalties generated are taxed at preferential rates. This has led to an expansion of R&D in these countries, and acquisition of existing IP to friendly jurisdictions. The immediate “spill over” effects are increased employment and an expansion of the tax b base.
Canada already exempts most income earned by foreign affiliates from taxation, so to create a preferential tax regime to attract R&D dollars would be no challenge. Canadian universities and other research organizations would benefit. Industry which would use the IP would expand as would the services associated those industries. It is truly a win-win for the Canadian economy and government. Using consumption based taxation, G.S.T, we would see a marked increase in revenue.
Minister Flaherty should be looking across the pond to see innovative tax policy in force. As the U.S. remains mired in political apoplexy Canada has a unique opportunity to attract investment. Our proximity to the U.S and membership in NAFTA make us an attractive place to do business. A Patent Box simply multiplies reasons to want to invest in Canada.

Trevor Parry

I am the National Sales Director for Gordon B. Lang & Assoc. Inc, Canada's largest IPP and RCA provider. I was called to the Ontario Bar in 1996 and hold a Masters Degree in History from the University of Toronto. I am currently compeleting a LLM in Taxation Law at Osgoode Hall. I am particularly interested in Tax Policy and how it may be fashioned to facilitate economic prosperity.