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On March 17, 2016 Quebec’s provincial budget had an early Easter egg for innovative companies across the province. Specifically, a tax deduction for qualifying innovative manufacturing corporations (called the “DIC”) was announced, which will allow Quebec companies to pay a lower corporate tax rate (4% rather than nearly 12%) on any revenue derived from qualifying intellectual property rights.

In this case, the qualifying intellectual property rights would relate to patents and patent applications resulting from research, development and labour performed in Quebec. This type of corporate tax deduction is commonly referred to as a “patent box”; the term refers to the idea that revenue derived from the qualifying IP rights are taxed separately from the company’s remaining revenues.

The previous week, Saskatchewan Premier Brad Wall announced that a corporate tax cut aimed at innovative companies would be a plank of his upcoming re-election platform. Wall’s proposal is of course less certain to be employed, but indicates that the idea of incentivizing innovation in the form of highly specific corporate tax cuts is catching on across Canada.

Over the last decade, various European governments have introduced “patent box” tax cuts in the interest of financially incentivizing innovation. Under these regimes, revenue that is derived from qualifying patents is taxed at a reduced corporate rate. In this way, the thinking is that companies will be encouraged to generate, pursue protection and commercialize high-value innovations, and therefore the overall economy will be more diverse, robust and competitive as a result.

These ideas have been discussed at a policy level for some time now, but these latest pronouncements by the Quebec and Saskatchewan governments represent the first time this economic theory will be tested on Canadian soil.

Note that any tax savings realized under the program may be subsequently clawed back if any identified patent applications are not eventually granted as patents. Therefore, Canadian innovators and legal practitioners will be well-served to have a consistent and thorough due diligence process in place to ensure that any patent applications relied upon have been thoroughly vetted with respect to patentability. Otherwise, program participants could encounter a significant and unforeseen tax assessment down the road if the patent application is not eventually granted. This could lead to economic uncertainty and weaken the overall perception of the program in the eyes of Canadian business leaders.

Nevertheless, these provincial programs represent progressive first steps for Canadian corporate tax policy. As a result, observers in other provinces will be certainly watching these developments with a close eye. A patent box may be coming soon to a corporate tax return near you!

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2021 Nelligan O’Brien Payne LLP.

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