IP monitor: Canadian patent box being announced in Budget 2025

The 2024 Fall Economic Statement has more concretely indicated the Canadian government's intention to implement a "patent box" regime (see page 108).  In particular, the government is reviewing feedback from consultations held earlier this year and has indicated that they will announce details of the patent box regime in the Budget 2025.

While the patent box might be impacted by potential changes in government, both the leading parties are aligned in their championing of Canadian innovation, especially in small and medium-sized enterprises.

Introduction – 2024 Consultations and Rationales

The "patent box" is designed to encourage both the development and retention of intellectual property stemming from R&D conducted in Canada (typically by providing a reduction in the corporate tax rate). 

The Canadian government ran consultations from January 31, 2024, to April 15, 2024, and in their consultation paper, they noted that patent-owning businesses grow faster and pay higher wages, and they are encouraging steps to improve Canada's intellectual property (IP) performance.  It is not clear whether the implementation of a patent box regime will remain a priority with the coming change of political leadership in Canada, but that this is a topic that crosses party lines.

Discussion points raised relate to the dynamics of a net outflow of IP related payments, and whether the mechanism would improve the competitiveness of Canadian businesses. 

What is a patent box? 

While implementation details of the Canadian patent box are yet to become available, there are reference examples in other jurisdictions. 

A patent box typically provides tax concessions for qualifying intellectual property income (e.g., a lowered tax rate for profits derived from eligible IP income), designed to encourage local R&D activities.  

Despite the name, a “patent box” is not always solely limited to patent rights. 

Reference Implementation – UK

The UK has a patent box program that has been in place since 2007, and which was last updated in May 2020.  The UK patent box is accessible through an election.

In the UK, the savings can be considerable (reducing the corporate tax rate from 19% -> 10% for eligible income), and, tax benefits are accrued even for sales while a patent application is pending, and even a patented part of an overall product may be sufficient. 

The eligible patents must be from specific patent offices, including the UKIPO, the European Patent Office (EPO), and certain countries in the European Economic Area (EEA), and the company must have also undertaken qualifying development activities.

The filing is rather complex due to the steps required for identifying relevant profits, the nexus approach and R&D attribution requirements (R&D fraction determination), and will likely require the services of a tax accountant.

Reference Implementation – Hong Kong

Hong Kong has a more recent patent box program that was passed on June 26, 2024, and gazetted in an Amendment Ordinance on July 5, 2024, starting from year of assessment 2023/2024.  

The Hong Kong patent box covers “eligible IP,” which is broader than patents: eligible IP [rights] covered are patents, copyrighted software and new plant variety rights. 

An eligible patent includes certain granted patents as well as certain patent applications, filed/granted with the Hong Kong Patents Ordinance or patent offices outside of Hong Kong. Similarly, a copyright subsisting in software can be under the Hong Kong Copyright Ordinance or under the law of any place outside of Hong Kong.

As noted in the press release for the Amendment Ordinance (emphasis added):

• The eligible IP[rights] can be registered in different places around the world and their related profits sourced in Hong Kong can benefit from the "patent box" tax incentive, the concessionary tax rate is set at 5 per cent, which is substantially lower than the existing normal profits tax rate in Hong Kong (i.e. 16.5 per cent), the eligible IPs must be developed by taxpayers themselves. 
• If the R&D process involves acquisition of other IP [rights], or outsourcing part of the R&D activities, the amount of profits eligible for the concessionary tax rate may be reduced proportionally. 
• Enterprises need to obtain local registration for their inventions or new plant varieties in order to enjoy the "patent box" tax incentive. This requirement will only start to implement two years after the "patent box" tax incentive comes into operation.

Practical Considerations for Canadian Companies

From a practical perspective, it is a worthwhile exercise to look at the existing patent portfolios alongside tax specialists to see what opportunities may be available – for example, revenue can be attributed to existing granted patents, pending applications, or applications yet to be filed (likely important to track R&D expenditures).  

The first step would be to start preparing an inventory of potentially qualifying IP assets and their associated profit streams and then gather relevant rationales / supporting evidence to demonstrate a “nexus” between R&D activities and tax benefits that is derived from the patent box.  

It is unclear as to whether the patent box will be restricted only to patents or whether it will cover adjacent IP rights (e.g., HK) or have domestic filing requirements (see both UK and HK).  Patent applications have deadlines for convention filings / national phase entries, and it may make sense to pre-emptively file Canadian applications in anticipation of domestic filing requirements, if a “local registration” requirement is implemented.

Finally, it may shift strategic decisions between using trade secret vs. patent protection. Obtaining patent protection is more costly but the costs may be offset by the potential tax downstream benefit. Depending on the R&D cycle and activities, there may be low-hanging-fruit patenting opportunities.

Although specific implementation details are not yet available, it may be prudent to begin taking steps to prepare, especially for Canadian SMEs that have access to support programs.  

Additional Reading

https://budget.canada.ca/update-miseajour/2024/report-rapport/chap2-en.html (Canada’s 2024 Fall Economic Statement)

https://www.gov.uk/guidance/corporation-tax-the-patent-box (UKIPO’s Guidance - Use the Patent Box to reduce your Corporation Tax on profits)

https://www.ird.gov.hk/eng/ppr/archives/24070501.htm (Press Release - Hong Kong’s Inland Revenue (Amendment) (Tax Concessions for Intellectual Property Income) Ordinance 2024, interestingly, the press release also makes passing reference to AI copyrights)

https://www.ird.gov.hk/eng/tax/bus_patentbox.htm (HK Inland Revenue Department Guidance)

For more information, please contact your IP professional at Norton Rose Fulbright Canada LLP.

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