R&D: A fascinating view into a tech tax credit

By Laurent Carbonneau

In February, Université de Sherbrooke researchers Michaël Robert-Angers and Luc Godbout published a fascinating study of Quebec’s Tax Credit for Multimedia Titles (CTMM), a provincial employment tax credit used mostly in Quebec’s video game sector. (A small disclosure: my former CCI colleague Pierre-Philippe Lortie contributed to their research).

It is rare in Canada to get a thorough under-the-hood look at tax credits. The data live in tax agencies and finance ministries and are not usually made available for privacy reasons to researchers and the public.

That the Quebec government granted the researchers access to their records is in itself a big win for transparency, and for ensuring that our public conversation about how governments support innovation is grounded in good evidence. And the results from this look at how the sausage is getting made should also set alarm bells ringing about the drawbacks of the jobs-focused approach to federal and provincial innovation policy that is the norm from coast to coast to coast.

First, a little background. The Quebec government created the CTMM in 1996, in the long economic hangover after the second sovereignty referendum in 1995. Quebec’s unemployment rate was high and it seemed like a good idea to create jobs by promoting creative industries in the province by covering up to 30% of production costs. A year later, to help attract investment, the government allowed foreign companies to use the credit. In some ways, the CTMM has been successful, or can at least be correlated with success. The video game industry employs around 13,500 people in Quebec, out of a Canada-wide total of 32,000.

Today, the CTMM is refundable (i.e., it can be claimed in the absence of a profit) can cover as much as 37.5% of a project’s total labour costs and costs the provincial treasury around $350 million each year. About 200 businesses claim the credit, and of those, 15 of them are responsible for 75% of that $350 million total. French-headquartered Ubisoft alone books about $100 million.

Robert-Angers and Godbout find that Quebec’s credit is fairly comparable in terms of generosity to those offered by Ontario and B.C. and generous compared to the UK, France and Germany. Significantly, they find that since the credit is refundable, companies are often getting more back from the credit than they pay in taxes — an average of about 1.9 times for all companies, and a fairly staggering 2.9 times for companies using the program’s specialized stream for companies for whom more than 75% of their activities are CTMM-eligible (i.e., dedicated video game studios). After the CTMM and other credits are taken into account, only 5% of companies receiving the CTMM are actually paying corporate income taxes to the province.

The researchers suggest some remedies to this situation, such as instituting a minimum profitability threshold for companies in the specialized stream, including commercialization and distribution functions within the scope of the credit’s eligible activities, reducing eligible expenses for foreign subsidiaries that don’t own their IP, and on the flip side, raising them for subcontractors to promote growth in the supply chain. It was Robert-Angers and Godbout’s intention to propose tweaks that would steer the credit to high value-add functions instead of raising or lowering the cost of the credit — an interesting constraint that forces one to think carefully about the relationship between industry structure and policy design. The job market in the creative industries — and in tech in general — is very different from how it looked in the late 1990s. Companies are desperate for talent. Is a wage subsidy the right approach in that situation?

As I mentioned at the beginning of this post, it is a rare treat to be able to have an informed conversation about the distribution and impact of a corporate tax credit in this country, and we all owe the researchers a debt of thanks for getting this data from the Quebec government.

As Ottawa (finally) turns its mind to reforming the workhorse Scientific Research and Experimental Development (SR&ED) tax credit (hopefully) this year, this kind of transparency should be the bare minimum. Where the CTMM has always been intended to be a sectoral job-creation program, SR&ED has been the backbone of Canada’s federal business R&D support programming for a generation — and optimizing the details of reform in a tight labour market and amid productivity growth that is stagnating compared to most of our peers is genuinely critical.

CCI produced suggestions for the government to make the most of SR&ED last fall. But that should by no means be the last word on the subject. Radical transparency about whom SR&ED benefits now and how it contributes to addressing our long-term innovation challenges should be the first step towards reform.

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