Canada: The Emerging Global R&D Hub

Silicon Valley in the U.S. has long been recognized as the world’s Research and Development epicenter. However, recent trends suggest a shift. The 2019 global technology innovation report indicated that the U.S. and China are the top R&D hubs. Yet, 58% of those surveyed by KPMG believed that Silicon Valley might lose its innovation crown within four years. 

Bloomberg, in September 2020, spotlighted the challenges with the U.S.’s R&D incentives and highlighted the increasing trend of businesses relocating their R&D centers to Canada. The reason? Canada’s attractive R&D tax incentives. 

Why Canada is Attracting R&D Investments: 

• Global Recognition: By international standards, Canada provides one of the most favorable treatments for R&D. This makes it an ideal location for startups and established businesses alike. 
• B-index Ranking: The B-index serves as a metric for companies, especially startups, to gauge a country’s R&D tax treatment. Canada ranks highly for both large and small firms, indicating its attractiveness for establishing research centers. 
• Tax Benefits: Canada’s corporate income tax system is particularly favorable for R&D. Businesses can achieve significant cost savings when conducting research in Canada compared to the U.S. Among the G7 nations, Canada leads in this regard. 
• Eligible R&D Costs: Canada’s eligible R&D costs, including capital equipment, overhead, and contracted research, are more comprehensive than those in the U.S. 

Challenges with U.S. R&D Incentives: 

The Organization for Economic Cooperation and Development (OECD) annually evaluates the generosity of each country’s R&D tax credits. The U.S.’s ranking has been declining over the years, from 10th in 2000 to 26th among the 36 OECD countries in 2019. Factors like the cost of living, high business taxes, and corporate culture have prompted businesses to look beyond Silicon Valley. Canada, with its generous tax system, has emerged as a preferred destination. 

In 2007, the U.S. implemented a comprehensive tax reform. Although it reduced the corporate tax rate, it did not enhance incentives for innovation, leading to a decrease in the country’s attractiveness for R&D. 

Canada’s R&D Tax Incentives: 

To foster innovation, the Canadian government offers grants, low-interest funding, and incentives through the SR&ED tax incentive program. This program provides tax deductions, investment tax credits, and refunds for eligible businesses. Unlike the U.S., where only 65-75% of contracted research expenses qualify for R&D tax incentives, Canada offers a full 100% tax incentive. 

Research Incentive Programs in Canada: 

• SR&ED Tax Incentive Program: Encourages businesses to undertake research in science and technology. 
• OITC (Ontario Innovation Tax Credit): For corporations eligible for the federal SR&ED ITC with a permanent establishment in Ontario. 
• OBRITC (Ontario Business-Research Institute Tax Credit) 
• ORDTC (Ontario Research and Development Tax Credit) 

R&D tax credits in Newfoundland and Labrador, Nova Scotia, and New Brunswick are fully refundable at a rate of 15% of eligible costs. 

In Conclusion: 

While Canada has strides to make to top the global tech hub list, it is undeniably emerging as a new R&D hub. Businesses considering relocating their R&D operations from the U.S. or other parts of the world to Canada can benefit from numerous advantages.