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economy lab

Researcher Lian Leng at the University of Toronto demonstrates a prototype for printing tissue. A new report from the C.D. Howe Institute suggests tax changes that would make research pay off in economic activity in Canada.JENNIFER ROBERTS/The Globe and Mail

Canada's innovation gap is one of the enduring public policy mysteries of the past decade.

Though the country has some of the world's most generous tax incentives for doing research and development, Canadian companies chronically lag rivals in other leading developed countries in doing R&D and patenting their work.

The answer may lie in creating a so-called "patent box" that would give companies a tax incentive for exploiting intellectual property in Canada, according to a report released Thursday by the C.D. Howe Institute.

"This would encourage businesses to develop, apply for and hold patents in Canada," explained Finn Poschmann, vice president of research at C.D. Howe.

Mr. Poschmann, along with co-authors Nick Pantaleo of PricewaterhouseCoopers LLP and Scott Wilkie of Blake, Cassels & Graydon LLP, argue that federal tax policy should do more to spur the adoption, commercialization and use of innovative ideas.

"In short, a pull, as well as a push, into R&D activity," the report concludes.

"The force of attraction is a powerful thing, and new ideas and their development and use tend to attract more of the same, with spillover benefits for their surroundings."

The authors recommend lowering the effective tax rate on income from the commercialization and adoption of R&D.

They warn, however, that such a system would need tough safeguards to ensure companies don't just get lower tax rates without developing and deploying the resulting innovation in Canada. They estimate that creating a patent box system would cost $1-billion a year in lost tax revenue. But Ottawa could recoup at least some of the cost by making its Scientific Research and Experimental Development tax breaks less generous.

"Properly framed, an innovation box can serve as a catalyst for more general economic activity, in the form of spin-offs from R&D and intellectual property work," concluded Mr. Pantaleo, the lead national tax services partner at PricewaterhouseCoopers LLP.

Britain plans to introduce a patent box regime this year, joining Ireland, the Netherlands and China, which already have versions of the scheme, according to the report.

Canada may already be losing by doing nothing, according to the authors. The report points out that the number of patents transferred internationally, as a share of Canadian patents granted or applied for, has increased steadily over the past 30 years. And those patents are winding up in island tax havens or countries that have patent box tax regimes.