The Conference Board of Canada regularly publishes a “Report Card on How Canada Performs” in a number of sectors including, the economy, environment, innovation and health. among others. Disappointingly, Canada’s performance in innovation has been graded as “D” for over two decades and on average has been ranked as 14th out of 17 peer countries from the 1980s through the 2000s. The Conference Board defines innovation as the ability to: (i) create knowledge, (ii) transform the new knowledge into products and services, and (iii) diffuse the new products and services into marketplaces. Historically, Canada performed reasonably well at knowledge creation but did not take steps that other countries took to commercialize new knowledge, i.e., to create and market products and services from that new knowledge. A common theme in the Conference Board Report Cards was that Canada invested in university research and development but failed to support highly innovative Canadian companies to become successful on a global scale (Executive Summary 2009, How Canada Performs, A Report Card on Canada).

Two in-depth analyses of Canada’s innovation performance were published in 2011: (i) Innovation Canada: A Call to Action (a.k.a. “The Jenkins Report”; mandated by the Minister of State for Science and Technology), and (ii) Rights and Rents: Why Canada must Harness its Intellectual Property Resources (Canadian International Council; CIC).

The panelists who produced the Innovation Canada document reported that during their consultations they heard among other things that government should be more focused on helping innovative firms to grow and, particularly, on serving the needs of small and medium-sized enterprises (SMEs). They also heard that programs need to be more outcome-oriented as well as more visible and easy to access. Additionally, they heard that whole-of-government coordination must be improved and that there should be greater cooperation with provincial programs, which often share similar objectives and users. They provided six recommendations. Recommendation 2 stated “Simplify the Scientific Research and Experimental Development (SR&ED) program by basing the tax credit for small and medium-sized enterprises (SMEs) on labour-related costs. Redeploy funds from the tax credit to a more complete set of direct support initiatives to help SMEs grow into larger, competitive firms.”

The CIC authors noted that Canada does not have a cohesive innovation strategy and fails to consider intellectual property (IP) retention and revenue capture as a top priority. Much of the knowledge created in Canada’s institutions is spun-out to start-up companies and SMEs. More often than not, such ventures find it easier to sell out to large international firms than to try to grow their business opportunities in Canada and then expand globally. The CIC authors reported that during 2006-2010, 58% of the new Canadian firms started in the previous decade were taken over by foreign investors and that these transactions siphoned off more than 66% of the IP those firms developed. The loss of these companies and their IP represented a $4.5 billion technology deficit in 2009. The CIC authors provided an Action Plan with ten recommendations. Recommendation 7 states:

Governments should consider how financial incentives could help small businesses and start-ups manage their intellectual property and enforce their IP rights…To further improve competitiveness and reduce the loss of IP, the government should change its tax regime. One option is to lower taxes on income derived from patents.

The Intellectual Property Institute of Canada (IPIC) has advocated for the implementation of an “Innovation Box” program which would directly address the Rights and Rent Recommendation 7. An Innovation Box is a fiscal incentive for the commercialization of IP. Under the incentive, a company identifies on its corporate tax return the income generated from its IP by checking the “Innovation Box and is then taxed at a lower rate on that income.

Two Provinces, Quebec and Saskatchewan, are taking leadership in implementing the Rights and Rent Recommendation 7 in reference to the Innovation Box program advocated by IPIC. As many European countries have already implemented patent boxes, this first Canadian equivalent may reduce some of the incentive to move activities offshore.

In 2013, the Quebec government announced a new program, unique in Canada, to provide financial and technical support to SME companies1 that invest in their first patent application or industrial design filing (The First Patent or “Premier Brevet” program). The support takes the form of a non-refundable financial contribution, which can reach half of the project’s eligible activities, up to $25,000.2

On March 17, 2016, Quebec announced its own “Patent Box” regime known as the Innovative companies deduction (ICD), which will come into force on January 1st, 2017. Quebec’s Patent Box program will provide Qualifying innovative manufacturing corporations3 with establishments in Quebec with a lower tax rate for up to 50% of the net income derived from the sale or rental of locally manufactured products embodying patent-protected inventions developed in the province. The patent can be obtained under any patent law in the world, but the underlying R&D must have taken place in Quebec and must have generated at least $500,000 of eligible SR&ED expenditures which gave rise to refundable Quebec SR&ED tax credits. 4 The effective provincial tax rate for the qualifying portion of net income will be lowered from 11.8% to 4%.

Just like for the SR&ED tax credits, having proper documentation to support a claim will be crucial. A separate accounting will also be required. This time around, Quebec focuses on large corporations as the business must have more than $15-million in paid-up capital.Small and medium-sized businesses (SMB) in the primary and manufacturing sector already benefit from the small business deduction (SBD) and an additional deduction that brings their effective Quebec income tax rate to 4% on the first $500,000 of income. The “Premier Brevet” program is not available to these businesses.

Quebec’s Patent Box program will complement the existing SR&ED tax credit and First Patent program offered by the province. Quebec estimates that local companies will save $135 million in tax over the next five years.

The Saskatchewan Party announced on March 11, 2016 as part of its election platform that if re-elected, they will implement a Patent Box program named the “Saskatchewan Commercial Innovation Incentive” (SCII). The SCII Patent Box program will reduce the corporate tax from 12% to 6% on income earned from the commercialization of new patents and intellectual property in Saskatchewan. Additionally, the Saskatchewan Party announced that when the province’s finances strengthen, they will also provide up to 10% of the Research & Development Tax Credit as a refundable tax credit up to an annual maximum of $100,000 (the R&D tax credit is currently provided only as a non-refundable tax credit). The proposed Saskatchewan Patent Box and the R&D refundable Tax Credit programs will also complement the SR&ED tax credit.

Quebec and Saskatchewan have proactively taken significant steps toward improving Canada’s innovation competitiveness. We are hopeful that the remaining provinces and the federal government will soon follow with similar patent box programs.