Patent Box Recommendations from the Canadian Council of Innovators

CCI suggests a more general Innovation Box approach as a complement to other policy initiatives aimed at incentivizing domestic commercialization of Canadian IP

Since ISED opened their consultation call relating to SR&ED overhaul and establishment of a patent box regime, we have been hearing from innovators all over the country on how these programs can be used to incentivize domestic commercialization of Canadian IP.

Very briefly, a patent box is a policy framework that provides incentives for firms to spend money developing intellectual property, usually by providing preferential tax treatment to income generated through commercialization of the resulting assets. This approach has many benefits, not the least of which is incentivizing domestic R&D, which can include industry-academic partnerships in a way that favors Canadian industry partners.

Over the past few weeks I’ve been eagerly awaiting input from the Canadian Council of Innovators on the patent box. The report was released this morning. Below I provide some commentary and compare their recommendations with my own.

Recommendation 1: Ensuring broad access for innovators with an inclusive approach to IP

The word “inclusive” here refers to classes of IP to be included as eligible to benefit from preferential tax treatment. There is a subtlety to the language CCI uses in their introductory material: their use of “innovation box” instead of “patent box” is important. Eligible IP under established patent box frameworks is not limited to just patents, and it is critical that Canada gets this right. In my own recommendations on the patent box regime I make the argument that in the age of AI, curated, high-quality datasets that can be used for model training are now a cornerstone of competitive IP strategy, and in the case of most AI companies, the only possible moat. The CCI language around this is a bit more general, which I read as an acknowledgement of the reality that what constitutes valuable intellectual property is a rapidly moving target and that policy frameworks intended to keep Canada competitive globally must build in some flexibility.

Recommendation 2: Focusing on developing high-quality IP assets with complementary IP education services in collaboration with provinces and the private sector

CCI makes the important recommendation that any innovation box activity must be paired with robust education initiatives to ensure that the incentives produce quality rather than just quantity. In recent years I have been encouraged to see an increase in funding coming out of organizations at both the federal and provincial level focused on education and IP strategy development.

This recommendation echoes the core message of mine: an innovation box is a complement to robust policy frameworks that aim an incentivizing innovation, not a complete package. By its nature, the advantages of an innovation box are only felt after commercialization of IP developed, a process that can lag R&D by several years. If an innovation box is to be effective, the entire pipeline leading to the creation and subsequent commercialization of IP assets must be supported through other initiatives. Among those supports, continued education on IP development and strategy that evolves in response to the changing reality of what constitutes IP will be critical if an innovation box is to have any long-term impact.

Recommendation 3: Minimizing overhead and waste by aligning eligibility and administration with other federal innovation programs and incentives

This is a straightforward point that applies to essentially any policy overhaul. There is a cost associated to any program that requires major administrative overhead. I would add to the CCI point here that this overhead has a disproportionate negative impact on smaller companies that lack the resources and specialized personnel in-house to manage it. By minimizing as much as possible that overhead or including it as a natural part of the tax submissions already taking place, policymakers can ensure that small companies are able to benefit equitably from innovation box policies that might otherwise be limited to large, established firms with the resources to manage the complexity.

The last thing anyone wants is for a patent box to fuel the creation of yet another cottage industry of consultants that dilute the impact of the incentive, as has happened with SR&ED.

Recommendation 4: Keeping Canada internationally competitive with an innovation box rate that makes Canada an attractive investment destination

Canada is a tiny economy next to a giant one. To make Canada an attractive investment location requires that we do significantly better than our neighbor; it is not enough to match them. In doing so, it is important also to balance the incentive to ensure that it supports only those activities that stimulate Canadian economic activity. One of the main criticisms of SR&ED, for example, is that a huge portion of it benefits foreign firms, with little value flowing back to Canada. Careful construction of innovation box policy, learning from the successes and failures of others who have led the way in creation of these policies elsewhere, will be needed.

Recommendation 5: Using Canadian expertise to refine policy through a National Innovation and Tax Advisory Board to provide continuous feedback and advice on the design and functioning of the innovation box and other innovation-focused tax measures

The pace of technological advancement far exceeds the pace of policy development currently. Until this changes, Canada will continue to slip in the innovation rankings compared to other OECD countries. This recommendation calls for the creation of an advisory board that can iteratively steer the innovation box and other tax incentive frameworks as the impact starts to be felt. Like any complex piece of policy it is unlikely to be perfect on the first try, and having the ability to iterate in response to evidence will be critical to ensuring this has long-term value for Canada.

Of course, any attempt at evidence-based policy guidance requires evidence on which to provide guidance. As I have written more than once, data collection that effectively tracks the impact of the innovation box and SR&ED incentives will be a critical part of making any innovation policy useful in the long run.

Wrapping Up

Through following the public debate around the SR&ED and patent box consultation process, it has been encouraging to see that for the most part, contributors that are involved in the innovation ecosystem are aligned in their recommendations. This consultation call is an excellent start to what could be real, positive change in how Canada approached innovation. It is now incumbent on Canadian policy-makers to listen, and to ensure that this cohesive messaging is not lost in translation, through continuous and iterative engagement with the innovation community.