Thank you very much, Mr. Chairman and representatives.
My name is Andrew Dunn and I'm the managing partner for tax at Deloitte in Toronto.
Canadians are blessed with a high standard of living relative to the residents of most countries. Forbes recently ranked Canada number one for doing business, and a key part of that ranking was the competitive and stable corporate tax regime. However, a key element of prosperity is productivity and Canada lags behind other major trading partners on that measure. In particular, the most recent ranking by the OECD put Canada at only 86% of the U.S. output per worker.
At Deloitte, our view is that we must close this productivity gap in order to stimulate prosperity in the future. For that reason we produced the study “The Future of Productivity: An eight-step game plan for Canada”. I won't go through all eight of our recommendations, but the three elements of that study in which tax policy plays the major role are innovation, incubation, and population.
I'll just go very quickly through each of those key elements. On innovation, the government has demonstrated a commitment to reinvigorating the R and D regime as a key core element of innovation in Canada. We applaud the recent decision to appoint the Jenkins panel. It made a number of recommendations. One recommendation was to increase the availability of funds for start-up and later-stage companies. I'm going to come back to that when I talk about incubation, but in general, the limiting factor, the ground rules for the Jenkins report, was a cost-neutral approach.
We point out that 11 of the top 24 economies enhanced their R and D incentives over the last three years. Australia, China, Ireland, Italy, Japan, Russia, and Singapore increased their credit percentages. France, Ireland, and Japan increased their carry back and carry forward mechanisms. France, Australia, and Ireland introduced refundable credits. Some countries introduced patent boxes, and in fact there are two additional countries that are contemplating introducing a credit regime—they are Germany and Sweden. They are jurisdictions that are frequently mentioned as being grant-based in their support of innovation.
We believe in a mosaic, but we also believe that there is a value and a need for Canada to remain competitive in stimulating innovation.
One element in particular that we would suggest is the expansion of refundability for R and D tax credits. Just as a very quick example of why that is an important thing, first of all, it provides cash flow to early-stage organizations and organizations struggling to innovate. But I would also point out that a U.S. multinational by virtue of its tax regime is in a position only to get tax deferral, not tax savings, as a result of lack of refundability. If a U.S. multinational repatriates earnings on which there has been a tax credit, in effect the way the U.S. tax regime works is that the multinational pays the difference of the tax credit back in U.S. taxes upon repatriation, and that situation changes qualitatively when the credits are refundable. When they are refundable, it simply reduces the expenditure, and in effect, the U.S. multinational that repatriates a refundable credit gets to keep substantially all of the credit, and that stimulates the U.S. multinational to conduct R and D activities in Canada. We think that's an important difference.
We also think that, regardless of when a U.S. multinational repatriates, the accounting treatment reflects whether it is a permanent difference or a timing difference and so it has an immediate effect on earnings. We can make Canada a more attractive jurisdiction for innovation simply by making tax credits refundable on a broader scale.
One of the things I wanted to talk about briefly is the importance of early-stage financing for innovation. Currently Canada has less than half of the funding proportionately of the U.S. We like the angel tax credit approach that the British Columbia government introduced a few years ago with a 30% credit for up to $200,000 annually.
I do want to give a quick example of a Quebec-based company that we spoke to, a life sciences company that is in second-stage financing. In order to get to third stage financing it needs to raise more capital. In order to raise more capital it can only find investors in the U.S. not in Canada—angel-stage investors are not around. Yet if it does raise money in the U.S. that will jeopardize its Canadian-controlled private company status and its refundable R and D credits.
Last, just very quickly, is the importance of population. A key element of improving Canada's gross domestic product is in fact to have more workers, and not just more workers but more highly educated, more highly skilled entrepreneurial workers.
A key part of that is immigration policy. But part of it is also tax policy, having a competitive jurisdiction, and having as competitive a situation on the personal tax scale as we have created on the business tax front. And we believe this could be done by simply indicating a point on the horizon, a 10-year to 15-year window in which we articulate a reduction in personal tax savings. And that can be done with little or no cost in the current term.
Thank you.