Lower Tax on Innovation Output: The Uneasy Case Against an Innovation Box in Canada

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Minor, Ryan Albert
Taxation , Innovation
The innovation box (also known as a patent box) offers a reduced rate of tax for firms that create and commercialize certain forms of intellectual property (IP). The innovation box has been justified on the basis that it discourages firms from relocating valuable intellectual property to lesser taxed jurisdictions, and also that it encourages real activity including R&D and related commercialization. Some authors have argued that the Canadian government should implement an innovation box. In the 2022 Federal Budget, the federal government indicated that it would study whether an innovation box would be beneficial for Canada. This thesis investigates the arguments offered in support of implementing an innovation box in Canada. The thesis first explores the argument that the innovation would discourage firms from migrating IP income outside of the country using profit shifting techniques. The thesis then explores the argument that the innovation box would lead to greater R&D and related commercialization. These arguments are explored using several sources including a unique database of patent application for a sample of the top Canadian headquartered R&D performers in Canada (with custom computer code), corporate tax data obtained from the Canada Revenue Agency and an informal interview with the leader of international tax with a “big 4” accounting firm. In addition, numerous secondary sources were consulted including academic journals and government reports. The central claim of the thesis is that the innovation box would not offer any tangible benefit to Canada. There is little evidence that profit shifting using IP is a significant drain on the Canadian treasury. For various reasons, there is little reason to believe that an innovation box would encourage greater R&D or related commercialization in Canada.
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