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Intellectual Property Institute of Canada Submission in Response to Joint Finance Canada Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives:

Extending the Scientific Researchand Experimental Development Tax Credit ProgramTo Cover Patent Costs

Introduction - IPIC

The Intellectual Property Institute of Canada ("IPIC") is the professional association of patent agents, trade-mark agents, and lawyers practicing in all areas of intellectual property law. Our membership totals 1,700 individuals, consisting of practitioners in law firms and agencies of all sizes, sole practitioners, in-house corporate intellectual property professionals, government personnel, and academics. Our members' clients include virtually all Canadian businesses, universities, and other institutions that have an interest in intellectual property (e.g. patent, trade-marks, copyright, and industrial designs) in Canada or elsewhere, and also foreign companies who hold intellectual property rights in Canada.

This submission was prepared by IPIC's Emerging Issues Committee, and has been approved by IPIC's Governing Council.

Executive Summary

The creation of technological innovations arising from research and development activities in Canada is financially supported by the Scientific Research and Experimental Development tax credit program (the "Program").

To capture the full potential of those technological innovations, the Program should also support the acquisition of intellectual property, and in particular patents, which:

Patent costs under the Current Program

In general, costs related to the acquisition, preservation, enforcement or commercialization of patents do not currently qualify as eligible expenses under the Program.

Proposition

The Federal Government should extend the Program to include patent costs as eligible expenses.

Initiatives in Other Jurisdictions

Provincial Initiatives

As a result of an initiative introduced in the Quebec Government's April 2005 budget, the Ministère du Développement Économique, de l'Innovation et de l'Exportation (MDEIE) operates a financial assistance program intended to further the development of technology and innovation in Quebec. The MDEIE program provides financial assistance for expenditures that include the costs leading up to the filing of a patent application.[1]

Foreign Jurisdictions

At least Belgium[2] and France[3] have research and development support programs that are believed to be similar to Canada's Program. However, the Belgian and French programs appear to include financial assistance/tax credits relating to certain types of patent costs.

Reasons to Cover Patent Costs

Patents Are Needed to Realize the Full Value of Technological Innovations

As a preliminary comment, it should be noted that some technological innovations may be protected by trade secret law. However, many technological innovations can be effectively protected only by patents.

The Program, which is funded by the taxpayers of Canada, supports the creation of technological innovations that result from research and development activities conducted in Canada.

If technological innovations created in Canada are not secured with intellectual property protection, they become freely available to the world at large. The result is a reduction of the commercial advantage to the innovator, and little, if any benefit to the Canadian economy as a whole.

In the absence of appropriate intellectual property protection in important geographical markets such as, for example, Canada, the United States, Europe and some countries in Asia, the investment of resources made in creating technological innovations may be lost or dissipated. This results in a reduced return on the taxpayers' investment made through the Program.

The Program's return to the Canadian economy on its investment could be significantly increased by encouraging those involved in creating technological innovations to also secure related intellectual property rights.

Although the technical focus of the Program is on scientific and experimental activities, the overall purpose of the Program is to enhance the Canadian economy by stimulating innovation, and not simply to fund pure research. It is noted that even universities recognize the importance of obtaining patents to protect their own technological innovations and to enable them to extract value from the same.

Research and development activities often output only ideas. However, there is rarely significant commercial value in raw ideas per se. Extracting value from such ideas often requires further development and various other inputs. Only then will a commercially viable product or process be generated.

In the last few decades, the global marketplace has developed many possible paths leading from research towards commercialization, with various intermediaries often playing a role. For example: angel investors, venture capitalists, junior stock exchanges, strategic alliance partners, joint ventures, acquirers, and licensees are often involved in converting a raw idea into a commercially viable product or process. Although there are many ways to achieve a marketable product or process from a technological innovation, it is difficult to successfully transact in a technological innovation per se. Indeed, to enable commercial transactions involving a technological innovation to take place, the innovations usually need to be secured with appropriate intellectual property protection.

In fact, in our less vertically-integrated economy, achieving commercialization often demands handing-off intellectual property from one entity to the next along a chain of entities. By way of example, a business involved in the pharmaceutical industry with special technical abilities and an appetite for risk may be successful at discovering a promising new drug candidate, but have no resources for clinically testing the candidate, no channels for distributing the drug, and so forth. Without intellectual property protection to facilitate the hand-off and development of the promising new drug, no party is likely to be willing or able to successfully commercialize the drug.

Intellectual property protection provides further benefits for the Program, because a good idea that is properly secured can still be commercialized even if the original innovator fails and exits the marketplace; in such circumstances the intellectual property can be resold or re-licensed to a more successful entity for another chance at commercialization.

Patent Applications – Costs and Timing

Even when owners of technological innovations recognize the value of intellectual property rights, and in particular patents, the costs to secure these rights can be a deterrent. Companies with limited financial resources may decide not to protect, or to delay in protecting, their innovations.  It should be noted that patent law rewards the early disclosure of such innovations by the filing of patent applications; serious penalties can arise from filing delays, such as the awarding of a patent to a competitor or the barring patent of protection altogether. Therefore, it is important to encourage owners of such innovations to seek a patent sooner rather than later.

The Canadian Government Has Already Recognized the Importance of Patents in Protecting Innovations

The following extracts from Innovation Analysis Bulletins published by Statistics Canada further illustrate the importance of intellectual property rights, and in particular patents, to Canadian innovators and the cost deterrent associated with trying to secure the same:

"Biotechnology firms that have patents - especially those with many patents - have a higher success rate in obtaining funding than do those with no patents".[4]

"Theories of business growth lead us to believe that, to grow, a company needs to be innovative, conduct R&D, have access to multiple sources of funding, protect its intellectual property (IP)..."[5]

"Patents are growth factors but there are three major reasons that may limit their use (in order of ascending importance): loss of time, cost and concern about revealing innovations"[6]

"The second-most striking difference is in the likelihood to apply for patents. In this characteristic, the small high-growth firms were at least 41% higher than all others."[7]

In 2005, the Government of Canada formed an "Expert Panel on Commercialization" (the "Panel"). The Panel issued its report on April 24, 2006.[8] The recommendations / comments of the Panel included the following:[9]

Section IV, Priority areas going forward

Modernization of Canada's Intellectual Property Laws

There exists a strong body of work on the role of intellectual property regimes on commercialization. In reviewing this field, possible questions could include the following:...

How can Canada get the most impact from the commercial potential of publicly financed research?...

What approach to intellectual property protection for publicly funded research would ensure effective and efficient commercialization?

Improvement to Canada's Tax Regime

We also recognize the debate over the effectiveness and possible changes to the scientific research and experimental development (SR&ED) tax credit program.

Possible questions to consider regarding Canada's tax regime could include the following:

What specific tax measures, such as changes to the SR&ED tax credit, or additional tax credits, would encourage greater investments in commercialization?

What tax measures would expand access to angel and venture capital investment or stimulate greater protection of companies' intellectual property?

It should also be noted that the Panel's report specifically acknowledged various submissions of stakeholders that included the following:[10]

Enhance Tax Treatment for Expenses Related to R&D and Intellectual Property

Cover, through the SR&ED tax credit program, the costs of obtaining a patent, including professional fees, as obtaining a patent is a key step toward commercialization

Furthermore, the following recommendation was made in the February 2007 Parliamentary Report of the Standing Committee on Industry, Science and Technology, entitled "Manufacturing: Moving Forward – Rising to the Challenge" (the "Report"):[11]

"That the Government of Canada improve the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program to make it accessible and relevant to Canadian businesses. The government should consider making the following changes:...

4. Expand the investment tax credits to cover the costs of patenting, prototyping, product testing, and other pre-commercialization activities." (emphasis added)

Summary of Reasons

To help the Program achieve its intended goal of enhancing the Canadian economy by stimulating innovation, it is suggested that the Program should help fund the creation of intellectual property, not just technological innovations. To fully encourage the realization of this higher-value output, the Program should explicitly include costs associated with patents as eligible expenses.

Case Study

Canadian Companies Need Patent Costs To be Included in the Program

The following case study has been provided by Mr. Kelvin Cole of Performance Plants based in Kingston, Ontario:

"Performance Plants is a pre-revenue, agricultural biotech company that has been in business for eleven years. The SR&ED tax credit program has been an integral part of the companies' development and survival. Since its inception as a start up company, spun out of Queens University, the company has been fueled by equity investment from the private sector. However, start-up companies are virtually always cash starved and possess defined runway limits. The ability to recoup the SR&ED credits has extended the life of Performance Plants. Without the SR&ED program Performance Plants may not have survived through several critical periods in its history. SR&ED credits have aided in extended operations which has allowed for the closing of equity investment and continued survival of the company.

The time line from developing a technology initiative to generating income through commercialization of that R&D is significant. In the agricultural biotech sector the time horizons can easily be 7 to 15 years. For a technology development company it is the intellectual property rights generated that are the commercial assets. The scope of the ag-biotech industry is global in nature and therefore requires the pursuit of patents in major world-wide markets. This comes only at significant cost but is mandatory for effective protection of any new Canadian technology. The cost of obtaining Canadian patents, while significant, is only a portion of the total required in obtaining a global position from which the Canadian developed technology can be successfully commercialized.

Extension of the SR&ED program to include patent costs would represent a significant advantage for all companies, from early- and mid- stage start up companies to larger corporations having a R&D component. Inclusion of all patenting costs would be an effective means of supporting and providing incentive for investment in R&D. "

IPIC's Specific Proposal

That eligible expenses under the Program be extended to cover the following:

1. Costs associated with prior art searching and preparing an original patent specification;

2. Costs associated with filing an initial patent application in a Patent Office utilizing the prepared original patent specification;

3. Costs associated with filing one or more patent application(s) corresponding to initial patent application (as per item 2 above) in additional foreign jurisdictions;

4. Costs associated with prosecuting and maintaining the applications filed pursuant to items (2) and (3) above;[12]

5. Costs associated with appeals, re-examination, conflict and re-issue proceedings;

that are paid to a governmental authority or to Canadian intellectual property services firms.

Additional Information

IPIC's submission was prepared having regard to our understanding of the current objectives and philosophy of the Program. If broader changes to the Program, or the design of a new program, are being considered, to create incentives for activities beyond R&D, we would be pleased to provide suggestions. In the research we conducted to prepare this submission, we found interesting ideas that more broadly relate to the commercialization of technological innovations, such as tax credits for the costs associated with defending patents and tax credits/exemptions for revenues derived from patents. A commercialization incentive program could also consider costs associated with other forms of intellectual property such as trade-marks.

Footnotes

1. http://www.mdeie.gouv.qc.ca/page/web/portail/en/ministere/nav/programs.
html?&page=details.jsp&iddoc=43566. [Return]

2. http://www.proinno-europe.eu/docs/reports/documents/Country_Report_Belgium_2006.pdf.[Return]

3. See generally,



pdf http://media.education.gouv.fr/file/42/6/20426.pdfpdf http://media.education.gouv.fr/file/42/0/20420.pdfpdf http://media.education.gouv.fr/file/42/4/20424.pdf and pdf http://www.proinno-europe.eu/docs/reports/documents/Country_Report_France_2006.pdf at 39. [Return]

4. Innovation Analysis Bulletin, Catalogue Number 88-003-XIE, Vol. 7, No. 3 (October 2005),



pdf pdf http://www.statcan.ca/english/freepub/88-003-XIE/88-003-XIE2005003.pdf at 14. [Return]

5. Innovation Analysis Bulletin, Catalogue Number 88-003-XIE, Vol. 6, No.3 (October 2004),



pdf pdf http://www.statcan.ca/english/freepub/88-003-XIE/88-003-XIE2004003.pdf at 12.[Return]

6. Ibid. at 14. [Return]

7. Ibid. at 15. [Return]

8. http://strategis.ic.gc.ca/epic/site/epc-gdc.nsf/en/tq00068e.html.[Return]

9. http://strategis.ic.gc.ca/epic/site/epc-gdc.nsf/en/tq00025e.html.[Return]

10. http://strategis.ic.gc.ca/epic/site/epc-gdc.nsf/en/tq00039e.html.[Return]

11. http://cmte.parl.gc.ca/cmte/CommitteePublication.aspx?COM=10476&Lang=1&SourceId=202169 at 51. [Return]

12. Note: "Prosecuting" means the activities associated with advancing a patent application towards the issuance of a patent; "Maintenance" means attending to the payment of government maintenance / renewal fees. [Return]