Research & Development

Sources of Sarnia-Lambton's cost advantage

Among the 27 cost components examined, the most significant determinants of cost differentials for Sarnia-Lambton are labor costs, facility lease costs, and taxes.

Labour costs

Labor costs represent the largest source of cost differentials for Sarnia-Lambton in comparison to the selected U.S. cities. For R&D operations, the total labor costs for Sarnia-Lambton are approximately 20 percent lower than the average of the selected U.S. cities. This labor cost advantage stems from differences in all of the three major components of labor costs:

• Salaries and wages - the cost of salary and wages plays a significant role in the overall labor costs. Salary and wages in Sarnia-Lambton are 13 percent lower than the average of the seven selected U.S. cities, and as much as 22 percent lower than salaries and wages in Newark, NJ.
   
• Statutory benefits - the costs of statutory plans in Canada (Canada Pension Plan and Employment Insurance) contrasts greatly with the U.S. statutory plans (Medicare and Social Security) particularly for the higher income earners typically found in an R&D facility. For example, employers in Canada pay a 4.95 percent premium to Canada Pension Plan on up to C$37,600 of income earned by each employee. In the U.S., the equivalent program is Social Security, which requires employers to pay a premium of 6.2 percent on up to the first US$90,000 of each employee's income. For a highly paid research scientist, this difference can result in employer-paid Social Security premiums in the United States being more than 3.5 times higher than the equivalent Canada Pension Plan premiums in Canada.
   
• Non-statutory benefits - The existence of a publicly-funded medical system in Canada results in much lower costs to employers for private medical insurance. As a result of this difference, typical non-statutory benefits costs in the United States add an additional 8.8 percent of payroll to total labor costs in the U.S., as compared to equivalent benefit costs in Sarnia-Lambton.

Facility lease

Facility lease costs in Sarnia-Lambton are another source of cost advantage in comparison to the selected U.S. cities. The lease costs in Sarnia-Lambton are approximately 30 percent lower than the average of all the selected U.S. cities, with cedar Rapids, Iowa, being the only city offering lower facility leasing costs than Sarnia Lambton (four percent lower).

Taxes

This analysis incorporates both income and non-income based taxes. Total taxation costs in Sarnia-Lambton are between 37 and 60 percent lower than in the seven U.S. cities examined. This significant difference is a result of a combination of factors, but most significantly:

• No property tax being levied on personal property (including equipment) in Canada while such property tax is payable in a number of U.S. jurisdictions.
   
• The effective income tax rate for the R&D operations in Sarnia-Lambton is only 6.3 percent, as compared to a range from 18.0 to 24.3 percent among the U.S. cities examined. These low effective income tax rates, and the significant difference between the effective tax rate in Sarnia and the U.S. jurisdictions examined, is primarily due to the impact of R&D tax incentives available in both Canada and the United States. These incentives are examined in detail in the following Chapter.

Source: Business Costs & R&D Incentives For Research Companies In Sarnia-Lambton, MMK Consulting Inc., April 12, 2005