Canadian Chamber of Commerce Submission: Consultation on Patent Box Regime

In response to the Department of Finance’s consultation on the adoption of a patent box regime in Canada, the Canadian Chamber of Commerce submitted recommendations aimed at fostering innovation, intellectual property (IP) retention and economic growth. 

To address Canada’s declining innovation ranking and economic productivity, we emphasized the importance of incentivizing businesses of all sizes to engage in R&D, register IP and commercialize products domestically. We also suggested that the timely creation of a patent box regime will be pivotal in driving growth and innovation, ultimately enhancing the quality of life for Canadians. 

Read the full submission below.

April 15th, 2024

Maximilian Baylor
Director General, Business Income Tax Division
Tax Policy Branch
90 Elgin Street
Ottawa ON K1A 0G5

RE: Canadian Chamber of Commerce Submission: Consultation on Patent Box Regime

Delivered via email: SRED-PB-RSDE-RPB@fin.gc.ca

Dear Mr. Baylor:

The Canadian Chamber of Commerce is pleased to respond to the Department of Finance’s consultation on the suitability of adopting a patent box regime to encourage the creation and retention of intellectual property (IP) stemming from research and development (R&D) conducted in Canada.

The Canadian Chamber of Commerce is the country’s largest business association with a network of over 400 chambers of commerce and boards of trade representing nearly 200,000 businesses of all sizes, in all sectors and regions of our country.

Canada has a net balance of payments deficit on charges for the use of IP, which contrasts with its G7 counterparts1. If implemented, a national “patent box” regime would support initial production scale-up by reducing corporate taxes paid on earnings from all eligible assets under the OECD nexus approach.

Given our declining innovation ranking and economic productivity, measures to incentivize businesses of all sizes to conduct R&D, register IP, and commercialize products across Canada are increasingly important. We strongly encourage the timely creation of a patent box regime to help drive growth and innovation, creating better quality of life for Canadians.

Canadian Context

Canada’s performance in global innovation rankings has steadily declined since 20113. Improving business conditions for firms that engage in research and development (R&D) can help reverse this worrisome trend.

A patent box approach has been implemented in various jurisdictions internationally and at a provincial level in Canada, notably in Saskatchewan4 and Quebec5. A nationally implemented patent box will motivate firms across many sectors to invest in innovation.

The Department of Finance has presently opened a parallel consultation on simplification of the SR&ED tax incentive program. SR&ED and a patent box have distinct but complementary roles in an innovative company’s business life cycle. This includes conducting R&D, generating and registering intellectual property, and commercializing products within Canada—all of which will drive economic growth across the country. We encourage the Department of Finance to recognize the distinct and valuable role of each and to ensure both are funded appropriately.

In 2021, the Parliamentary Budget Officer estimated the cost of a patent box that reduced the corporate tax rate to 7.5% for large businesses and 4.5% for small businesses to be $242 million over five years6. This is a relatively small price tag which will bring outsized return on investment.

This tool will complement the existing SR&ED program and provide firms with an additional incentive to conduct their R&D activities in Canada and commercialize them within the country.

That said, it is important that any new regime be underpinned by a timely, efficient and accessible patent and trademark process to ensure that an increase in applications resulting from the implementation of a patent box regime do not create further delays in Canada’s already lengthy patent process.

Recommendations

To support the Government of Canada’s consultation on the creation of a patent box regime to encourage innovation and IP retention, the Canadian Chamber of Commerce puts forward the following recommendations:

• Take an “innovation box” approach to developing this regime by ensuring that income from all IP assets functionally equivalent to patents developed from R&D in Canada, is eligible for lower rates of taxation.
  • Qualifying income under patent boxes must include not only explicit royalties and licensing fees but also implicit IP income embedded in products sold or in production processes developed from R&D performed in Canada.
• Ensure that the tool adopted in Canada is accessible and low risk to all stakeholders, from SMEs and large companies, by reducing administrative complexity and/or other cost burdens.
  • Equip the Canadian Intellectual Property Office to process increasing numbers of patent and trademark applications at a high service standard.
• Work with provincial governments to ensure existing regimes are harmonized with a national proposal and that best practices are incorporated.
• In developing a patent box regime, incent acquisition of IP in addition to development in Canada.

Conclusion

The Canadian Chamber reiterates the importance of a streamlined, harmonized, and fiscally responsible approach to improving Canada’s innovation climate, with spending focused on driving innovation and economic growth.

The implementation of a national patent box regime will incentivize businesses of all sizes to conduct R&D, register IP, and commercialize products across Canada, increasing investment in Canada and increasing quality of life for Canadians. We look forward to continuing to work with you to implement and refine a potential patent box Regime.

Alex Greco
Senior Director, Manufacturing and Value Chains

Jessica Brandon-Jepp
Senior Director, Financial and Fiscal Services Policy