montreal

Irresistible offer: tax breaks are luring companies to Montreal (above) and other Quebec cities. Credit: CORBIS/YANN ARTHUS-BERTRAND

Tax incentives and other measures introduced in Canada's budget last March appear to be turning Quebec into the country's most attractive province for high-technology companies that carry out research and development (R&D).

Most other provinces also have generous R&D tax subsidies for manufacturers, making the average rate for Canada the highest in the industrialized world. Defining tax subsidy rates as the net cost of investment after taxes and subsidies puts Canada's rate at more than twice those of Australia and the United States, the next highest.

But for foreign-controlled non-manufacturing firms in particular, Quebec's corporate tax rate of 9.15 per cent is well below the average for the other nine provinces of 16.1 per cent. When added to the savings afforded by Canada's weak dollar, this makes Quebec the cheapest place in North America to conduct research.

During the past seven months, new institutes have opened in Montreal, Quebec City, Hull and Laval, where new (and not-so-new) companies can locate and gain benefits including a five-year holiday from income, capital and payroll taxes.

In their first three years there, companies can obtain tax credits of up to 40 cents for each Canadian dollar spent on wages for eligible employees, and on the purchase or lease of equipment. The institutes have advanced telecommunications equipment and infrastructure.

Vorton Technologies, for example, a software company based in Ontario, found that by moving about 25 kilometres across the Ottawa River to Hull, in Quebec, it could save more than Can$100,000 (US$65,000) a year through tax benefits.

The saving is enough to pay the rent in one of the new institutes. The company will also be able to hire more professional staff, so it can do more R&D, according to Vorton's chief technology officer, Tony Davidson. Many more companies are considering making similar moves.

Over the past three years, seven other provinces have offered tax credits, and British Columbia plans to do so. Ontario's R&D tax incentives tottal Can$100 million.

But the tax subsidies have their critics. In a report last September, the Organization for Economic Cooperation and Development (OECD) said such subsidies should be “rationalized”. It said tax breaks should be incremental, rising with the level of R&D performed rather tthan offering a set value per dollar of R&D investment.

The report says that: “A comparison (between) Australia, Canada and the United States concludes that volume-based tax incentives do not generate much R&D beyond the tax exppenditure incurred by the government”.

One study it cited of 55 Canadian firms found that the value of R&D performed “did not amount to more than 40 per cent of lost tax revenues”. Incremental tax credits, on the other hand, have generated as much as $2 in R&D for every dollar iin tax credits.

Canadian officials contest this, however, claiming that their R&D tax incentives havve sometimes generated more than three times the value calculated by the OECD. Pierre Etienne Gregoire of Quebec's Ministry of Economy, Industry, Science and Technology, says Canada has tried incremental tax credits, but results were not good.

Jack Mintz, professor of business at the University of Toronto and author of a major study of corporate taxation, says the Canadian tax subsidies are not working. Canada's ratio of private R&D expenditure to grooss domestic product (about 1 per cent) is much lower than that in Sweden (2.3 per cent), for example, as well as those of other countries with smaller populations.

“The question is whether the tax system is the best way to deliver all the R&D assistance that wee expect,” says Mintz. He also thinks that Quebec's use of the new low-tax institutes will not be the answer.

The institutes may result in more R&D being performed thhere, he argues, but they will not necessarily provide a proportional commercial spin-off or job creation.

The political uncertainty of locating in Quebec, whose Parti Quebecois government is committed to separating from Canada, does not seem to deter companies from moving there.