Canadian R&D tax incentives ranked first in the world

Brace yourself: Canada offers one of the most competitive tax systems for research and development (R&D) in the world.

The very notion of stringing the words “Canada” and “the most competitive tax system” in the same sentence is enough to elicit guffaws of disbelief from many. But according to a November 1999 study by the Conference Board of Canada entitled Rating R&D Tax Incentives, the Great White North ranks a glowing first among 11 other Organization for Economic Cooperation and Development (OECD) nations. Specifically, with regards to large firms, Canada and any of its provinces outpace the United States and Australia (the two runners-up) by a fair distance. As far as small firms are concerned, the report stated Canada and its provinces rank second only to Italy.

“Canada has one of the best packages for R&D in the world,” said Jacek Warda, principal research associate for the Conference Board of Canada in Ottawa and the author of the study. “You need to be competitive with R&D in order to attract and keep (corporate) investment in the country…more countries are beginning to realize this. The United Kingdom for example is putting a tax credit on R&D – they never had an R&D tax credit before.”

For his part, Warda is not surprised at Canada’s placing in the report. After all, his 20 years of experience studying the core OECD nations’ R&D tax incentive commitments

– 10 of those 20 years with the Conference Board – has provided him with insight on the subject.

“Canada has always [provided] a high level of funding and has always been generous in creating a fiscal environment for R&D,” he explained. “There are not too many countries that are closing in on us.”

Warda employed a “B-index methodology” in the study to compare the relative generosity of R&D tax support across each tax jurisdiction. The value of the B-index depends on the tax treatment of R&D in a country and is based on the before-tax income required to break even on a $1 R&D outlay. Canada, boasting the lowest B-index, provided the most attractive tax treatment of R&D among the 11 nations examined.

“The theoretical framework for the study, the B-index, stands for ‘before income tax’ of the return on $1 of your investment,” Warda said. “The lower the B-index the better. We wanted to compare the impact of corporate tax rates (between countries)…the higher the corporate income tax rate, the lower the after-tax cost. You may come to the conclusion it’s good to have a higher corporate tax rate.”

Warda said he expects a global trend to emerge with respect to the sharing of R&D tax incentives at various tiers of the government, a reflection of increased competition amongst regions to attract international investment in knowledge-based industries.

“You can see more movement in the application of tax credits for R&D,” he continued. “The best example of this is Mexico, which recently offered a tax credit in order to make the country more attractive (to corporate investors).”

Despite the fact the Conference Board’s most current report on Canada’s socio-economic performance ranked the country low in terms of resources it devotes to R&D, Warda pointed out Canada’s federal tax support for such has not diminished over time.

“There is some serious thinking going on about applying an R&D tax credit in countries like Austria and Norway right now,” he said. “[Canada] understands we have to have an attractive investment package. I wouldn’t say it’s surprising at all.”

Warda added significant provincial sharing in the package of R&D tax incentives has contributed to Canada’s leading position. Large companies conducting R&D in the provinces need to make less than 80 cents and smaller enterprises less than 60 cents before tax in order to break even on their $1 investment.