TORONTO, July 18, 2002 — Canada has only 31 million people, but it’s among the world’s most populous nations when it comes to micro and nanotechnology companies. A key reason for this is its tax system.
Unlike the United States, where research and development is generally funded through direct government contracts, Canada has seeded its cutting edge corporations with grants, subsidies, tax credits and reimbursements that can shave the cost of R&D in half.
“We would be crazy not to” take advantage of Canada’s tax breaks, said Gary Whipp, president and chief executive of Nanox Inc., a Quebec City-based company in beta-testing of its nanocrystals.
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Since discovering its now-patented chemical process for making these nanomaterials in the mid-1990s, the company has received direct and indirect government support for its (U.S.) $660,000 in research through collaborations with nearby Laval University, Canada’s National Research Council and federal and provincial tax credits
Small companies spending heavily in R&D, he added, not only get tax credits against earnings, but actual reimbursements, “a check in the mail,” during the startup phase.
“Here in Quebec City and in Montreal, companies that set up in the downtown areas that have been designated for growing the new economy” get worker subsidies of up to $13,200 a year for up to 10 years, plus tax breaks for the first $132,000 of profit or five years and for any international scientists the company hires, he explained.
“It will save you an average of 50 percent,” he said. “When you add all these things together, it’s easy to do R&D here.”
Indeed, according to a 1997 Conference Board of Canada study of R&D tax treatment in the 25 main industrial countries, Canada came out second only to Italy in tax incentives.
Since the early 1980s, it said, Canada’s federal tax system — in combination with provincial incentives in Quebec and Ontario — has “the most generous tax incentives” among nations in the Organization for Economic Cooperation and Development (OECD).
Along with general and small business tax credits that range from 20-40 percent of expenses in Quebec and up to $1.32 million in expenses on the federal tax side, Canada also allows an immediate write-off for R&D capital costs, such as machinery and equipment, that can be fully deducted in the year incurred.
Additionally, in high-tax Quebec, new companies are eligible for a tax holiday of up to five years.
These tax breaks are key to Canada’s efforts to maintain and grow its cutting edge industries, particularly in its competition with the United States and Europe.
In the United States, funding is mostly through direct government contracts, rather than tax write-offs, explained Marlene Bourne, a MEMS analyst with In-Stat/MDR.
“From an R&D standpoint, there’s no tax credit at the national level and most state credits are on a case-by-case basis, usually aimed at keeping big companies in place so they don’t lose jobs,” she said. As a result, she added, small MEMS and nanotech companies don’t get the breaks, and funding has to come directly through contracts with some division of the government.
But taxes aren’t always a make-or-break reason for a company to set up its R&D facilities. Nevada, she explained, has no state income tax, but very little investment, while New Jersey waves a big tax incentive flag when competing with New York.
Whipp said the U.S. emphasis on funding through contracts means American companies get into the market and see revenues much faster than their Canadian competitors.
Maher Boulos, president of the nanotech company Tekna Plasma Systems Inc. of Quebec, said that while Canada’s tax credits are “very significant in the high risk area of research, they only apply to the research phase and not commercialization.”
Since most countries like to keep R&D within their borders, and Canada’s population cannot sustain the industry alone, its tax credits and other incentives help keep its companies in the game.
Canada always depends on its export market, Whipp explained, and that means confronting a lot of unwritten rules, like European contracts being dependent on having a European corporate and academic partners.
But relatively inexpensive manpower, the tax system, low Canadian dollar, a reputation for serious new work in an Old World city like Quebec, means “it’s not hard to interest Europeans and Americans to come over,” he added.