Friday, 4 October 2013

SR&ED tax incentive regime is not sufficient to make Canada competitive globally

IP is an intangible asset and is as such moveable once you have the proper valuation  and proper transfer pricing documentation in place to a lower tax jurisdiction.  Of course proper structuring must be ensured so that the move does not trigger the Foreign Affiliate Passive Income (FAPI) rules of the Income Tax Act. The moveability of IP and the combination of  Canada's exempt surplus regime enables active foreign business income derived from the commercialization of the IP - to return to Canada on a tax-free basis.

However removing IP and commercializing it offshore however does not make for a viable economy.  This is why countries such as the United Kingdom, the Netherlands, China and Ireland have implemented what is referred to as "a patent box regime" to ensure that their IP does not go offshore and alternatively to attract IP to their shores.

The patent box regime was established in Ireland as early as 1973.  The patent box regime in essence taxes income derived from IP at a very low tax rate which can be as low as 2.4% (Ireland) if planned correctly. This is why names we are all familiar with are in Ireland (Dell, HP, Google to name a few easily recognizable names).  The United States similar to Canada has not adopted the patent box regime hence the easily recognizable American names.  

In Canada, our tax legislation (the Income Tax Act) encourages the development of IP through the SR&ED program.  A program not without flaws as highlighted in the Jenkins Report.  Some of the flaws pertain the difficulty in obtaining SR&ED credits.  CRA has listened and has undertaken steps to improve the SR&ED Investment tax credit process by implementing for 2013 a pre-approval process  so as to combat the difficulty in filing for SR&ED investment tax credits after R&D expenses have been incurred.  However the focus of the SR&ED program does little to encourage firms  here in Canada to maintain their IP here in Canada or to commercialize their IP here once developed resulting in transfer of the IP to a low tax jurisdiction and to the commercialization of the IP offshore.

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