A person makes their way past the Peace Tower on Parliament Hill in Ottawa on Feb. 13.Sean Kilpatrick/The Canadian Press
Alex Greco is senior director, manufacturing and value chains, at the Canadian Chamber of Commerce.
Canada’s declining productivity was called a national emergency earlier this year by the Bank of Canada, but Canadians and businesses have yet to hear any sirens.
If the government is suffering from paralysis of choice on how to tackle the situation, it should consider what it can do to bolster our manufacturing sector and help Canada compete in the economy of ideas.
Innovation in the manufacturing sector would contribute to economic growth, create more job opportunities and provide more value for customers. But innovation requires investing time and money and taking on no small amount of risk – all of which demands a return on investment. Without help or guaranteed returns, manufacturing businesses, especially the small businesses that make up 93.1 per cent of the industry, can’t justify the cost or risk in such turbulent economic times.
It will take a modernized regulatory system to encourage manufacturing businesses to invest in innovation. Fortunately, there is a potential policy solution already in the works, the government just needs to get started.
A “patent box” regime is a novel approach to corporate taxes used by some governments to encourage manufacturers to invest in and retain more intellectual property (IP). A Canadian version of the patent box could provide a lower tax rate on income made off certain types of IP – not only rewarding innovation at home but incentivizing a secondary income for Canadian manufacturers in the form of new patent rights and licensing arrangements.
For a manufacturer that can generate substantial IP income, the tax savings provided by a patent box regime would lead to a high return on investment, particularly if the business has a strategic approach to IP management. The increased profits would also make a manufacturer more attractive to outside investment.
As well, such a regime would put us on equal footing with many of our trade partners and economic competitors – Britain, France and Belgium all provide reduced corporate tax rates on income or profit generated from patents or other IPs. It would also encourage us to retain our hard work. Canada has a bad habit of selling all our innovation capabilities, which leaves us poorer economically and intellectually.
Canada is in an IP deficit – we pay more to use foreign IP than are paid by other countries for Canadian IP. Our reliance on foreign technology and innovation is caused by our weak domestic investment environment, foreign ownership of Canadian firms and the globalization of research and development. Take ATI Technologies, which was a leading developer of graphics processing units based in Ontario. In 2006, the company was acquired by a U.S. semi-conductor company, leading to a shift of high-value jobs and research and development (R&D) activities outside of Canada.
With a patent box regime in place, businesses of all sizes would be incentivized to conduct R&D, adopt new technology, register intellectual property and commercialize products. The industry would expand, productivity would increase.
More importantly, the significant amount of money that businesses save from the patent box system can be reinvested into the business and more research and development, allowing a manufacturer to grow, hire more people, innovate new products or processes and maintain a competitive edge in the market.
A patent box regime might not be the easiest concept to explain at a government press conference, but it is one that promises a substantial return on investment for relatively little cost. In 2021, the Parliamentary Budget Officer estimated the cost of a patent box regime that reduced the corporate tax rate to 7.5 per cent from 15 per cent for large businesses and 4.5 per cent for small businesses would be $242 million over five years.
And at a time when affordability is top of mind for Canadians and businesses, the government should be opting for fiscally responsible policies with real promise of returns.
Canadian products remain in demand, but we’ll be edged out of the global market if our manufacturers can’t compete against more innovative businesses in other countries. Modernizing our regulatory system to increase incentives for innovation in the sector is a triple-threat solution – it will keep one of our most economically significant industries competitive, cure our productivity paralysis and help create a better standard of living for all Canadians.