For a while, Silicon Valley in the United States has been a Research and Development hub in the world.
Well, that may change soon. According to the 2019 global technology innovation report, the US and China grab the topmost place in the list of emerging research and development hubs. 58% of respondents to the survey conducted by the KPMG thought that silicon will not be the innovation centre of the World in the next four years.
In September 2020, Bloomberg highlighted the problem with the Research and Development Incentives in the United States and why businesses are moving their R&D Centres to Canada.
Yes, this is the new trend! Foreign businesses are setting up their R&D divisions in Canada. Why shouldn’t they after all?
Canada offers generous R&D tax incentives.
Let us look at the brief overview of what attracts businesses and why foreign corporations should consider Canada to carry out R&D activities here.
Benefits of Doing Research in Canada
Choosing Canada as your next R&D centre offers a range of benefits. By global standards, Canada offers the most attractive treatment for R&D. If you’re opting for Canada to set up your start-up venture, you’re in for a good deal of benefits. Here are some of the key aspects as to why Canada is the new research and development hub.
- For all the companies performing R&D, the B-index acts like an indicator, especially for start-ups. It shows how each country values the R&D tax treatment. Canada stands top in the B-index ranking in both the categories: large and small firms. This means it is easier to set up research centers for your start-up in Canada than in other nations.
- Canada’s corporate income tax system is one of the most attractive when it comes to the R&D tax system. There will be a drastic reduction in business costs if involved in research activities here than in the United States. Among the G7 countries, Canada tops them in this very aspect.
- Some of the R&D costs eligible for tax incentives in Canada vary when compared to the US. While capital equipment, overhead, and all contracted research are eligible in Canada, it is not so in the US. Making research in Canada is more feasible.
Problems with U.S. R&D incentives
The Organization for Economic Cooperation and Development (OECD) measures the generosity of each country’s credit yearly. In the recent 2019 report, it shows that the United States ranks 26 among the 36 OECD countries.
While the rank varied from high in early 2000, it gradually reduced as the years passed, that is, it was ranked 10th, 18th, and 25th in the years 2000, 2008, and 2016 respectively. The rank only kept decreasing over the years.
It clearly shows that conducting research and development in the US is not very attractive even though it ranks higher in the most promising tech markets in the world.
Several factors such as cost of living, high business taxes, corporate culture, and other business practices are making the businesses move their R&D centers to other countries other than Silicon Valley. And Canada is one of them. The tax systems of the US or other countries are not as generous as that of Canada, hence making Canada the new R&D hub for budding start-ups and other businesses.
In 2007, the United States passed comprehensive tax reform. While the reform lowered the corporate tax rate, the incentives to carry out innovation, unfortunately, were not increased. But the after-tax cost was increased. Due to this, its generosity of the tax incentives reduced, making the US rank way below in the OECD list for years constantly. Meanwhile, other countries became more considerate when it came to tax incentives surrounding Research and Development.
So, the principle problem to conduct research and development in the United States is that the R&D tax incentives are not as generous as other nations. The result is the businesses are exploring their options in other countries.
The attractiveness of Canada’s R&D Tax Incentives
In order to encourage innovation activities in Canada, the Government of Canada provides grants, low-interest funding and incentives under the SR&ED tax incentive program. If you’re an entrepreneur setting up your new start-up venture that involves major research work, then you will find that R&D is cheaper than ever here! Find out the innovation and funding support in Canada here.
The program offers incentives in three different forms: a tax deduction, investment tax credit and a refund if eligible. You do not need to worry about specific expenses such as wages and salaries of employees engaged in the eligible R&D work, overhead costs, and materials.
All the costs can be reduced, provided they are eligible under the SR&ED program. Well, it’s not the same with other countries, and when compared to the US only, 65-75% expense of all contracted research is eligible for the R&D tax incentive. Canada offers a complete 100% tax incentive for contracted research.
Some of the Research Incentive Programs Offered are:
At the federal level, the Government of Canada provides volume-based tax credit which is fully refundable for Canadian Controlled Private Corporations (CCPC). Then there are incentives at Provincial and territorial levels as well. Canada’s Provincial and Territorial R&D research incentives are primarily administered by the Canada Revenue Agency.
SR&ED Tax Incentive Program
The SR&ED Tax Incentive program drives young entrepreneurs and businesses to research in the field of science and technology for the advancement of the same. Though Canada is not at the top three among the rising tech hubs, it is definitely the new R&D hub. The generous SR&ED program is the prime reason why businesses are setting up their research centres here in Canada.
OITC(Ontario innovation tax credit)
OITC is available for the corporations that are eligible for the federal SR&ED ITC and have a permanent establishment in Ontario.
- OBRITC(Ontario business-research institute tax credit)
- Ontario research and development tax credit (ORDTC)
- Ontario transitional tax debits and credits
Saskatchewan Research and development (R&D) tax credit
Alberta Scientific research and experimental development (SR&ED) tax credit
British Columbia Scientific research and experimental development (SR&ED) tax credit
Yukon Research and development (R&D) tax credit
R&D tax credit for the provinces Newfoundland and Labrador, Nova Scotia, and New Brunswick are entirely refundable at the rate of 15% of eligible costs.
As a tech hub Canada, though, has a lot more to do to be at the top of the list right now, but it is for sure is becoming the new R&D hub.
Are you a business looking to move your R&D to Canada from the United States or anywhere else in the world? Get in touch with us for the business advisory and corporate tax planning for your R&D business in Canada.