Silicon Valley North Jan'99

The Way I See Itů by Michael Volker

R&D incentives may be a good start on the taxation issues plaguing tech companies in B.C.

At the recent B.C. Business Summit Conference (Vancouver, Nov 8-9), taxation gripes were at the top of the list. There was unanimity in the conclusion that the high levels of personal income taxation are making it tough for companies to attract and keep their main resources - their talent pool. As George Hunter of the TIA often says: "It's as if B.C.'s other resources, like the trees, could get up and leave the Province".

To make a meaningful difference, we would need to reduce personal income tax from 54%, the marginal rate in B.C., to less than 40%. Talking to provincial politicians alone won't get us very far. This is a National issue. Fortunately, CATA (Canadian Advanced Technology Alliance) does have the ear of Finance Minister Paul Martin. In B.C., we tend to think somewhat provincially in this regard and it's time for us to get out of this rut. Because B.C. taxes are based on 50.5% of federal taxes (plus additional surtaxes), B.C. would have to reduce its tax take by 50% just to be noticed. Not likely!

And we all know that national change is not going to happen quickly. Only a few visionary officials realize that by giving up a few percentage points, they will actually increase gross tax revenue. What we need is some immediate relief to stimulate investment from the private sector. New investment would immediately, in the same fiscal year, generate more tax dollars from all the new jobs and expenditures arising from such investments.

But, notwithstanding a national campaign, there are some B.C. tax-related corporate issues which can be addressed with enormous potential for improving commercial competitiveness.

This starts with the number one driver for technology enterprise: research and development. R&D is the basic ingredient on which tech ventures are founded. It is this R&D that gives companies their proprietary competitive advantage. The one tangible reason, lifestyle considerations aside, given by company CEOs for being in B.C. is the R&D capacity in the province and the associated talent pool.

What are we doing to build on this key strength and nurture it along the way? We're missing some real opportunities in this area. B.C. is the least attractive province for doing R&D. Ontario, in contrast, has three programs to encourage technology development and investment. B.C. has none.

An Ernst and Young study summarizing the after-tax costs of performing research in Canada shows that the costs are higher in B.C. by a range of from 10 to 20% (depending on size of corporation) as compared to Ontario and Quebec. What is very interesting here is that Alberta does not have a competitive advantage over B.C. (although we often point to Alberta as offering lower personal and social taxes). Here's an opportunity for B.C. to get back some of the ground lost to Alberta.

It costs a small technology firm in B.C. $50.62 on an after-tax basis to do $100 of R&D. It would cost the same company only $33.51 in Ontario and $33.90 in Quebec!

Not only that, but visionary provinces like Quebec understand the economics of building a knowledge based industry and have set aside special facilities and incentives (i.e. $600 million) for the new media industry. Why not do that for New Media companies in B.C.?

So, the way I see it, and borrowing the words from SFU and UBC, \"Research Matters - Think About It". And if you can't think about R&D, at least think about the returns from an expanded tax base and new jobs.



Michael Volker is the Director of the University/Industry Liaison Office at Simon Fraser University, Chairman of the Vancouver Enterprise Forum, and a technology entrepreneur. Contact: mike@risktaker.com.

Copyright, 1999.