In August 2012, the Department of Finance and the Canada Revenue Agency (CRA) jointly launched a discussion paper entitled Consultation Regarding The Impact of Contingency Fees on The Effectiveness of the Scientific Research and Experimental Development Tax Incentive Program. The study about SR&ED consultants and their role was announced in the Economic Action Plan 2012. It raises the question, “Should SR&ED consultants be banned?”
The call for discussion papers was prompted by a concern that contingency fees “may be diminishing the benefits of the SR&ED tax incentive program to Canadian businesses and the economy” (Economic Action Plan 2012: Support for Your R&D).
The Study’s Conclusions: Predictability > Intervention
After reviewing submissions, the Department of Finance and the CRA released the following statement in the Economic Action Plan 2013:
[…] intervention to regulate contingency fees directly is not required: the market for SR&ED tax preparers is competitive, contingency fee rates have declined over time and there is no evidence that this type of billing arrangement results in higher compliance costs for businesses.
The study revealed that — rather than increased government intervention — SR&ED eligible businesses and claim preparers alike simply wanted a more predictable SR&ED program and to reduce the need for “aggressive positions being taken by some tax preparers and claimants” (Economic Action Plan 2013: SR&ED Tax Incentive Program). (One such aggressive position is so-called “postal code bombing”, when an SR&ED claim preparer visits every business within a given postal code, files claims of tenuous eligibility, and only withdraws a claim if it comes up for review or audit.)
As a result of the study, the government promised $5 million in funding to the CRA to implement in-person services for first-time SR&ED claimants, including greater access to program information and the creation of informational seminars hosted on the CRA’s website. An additional $15 million was also allotted for CRA reviews of high-risk SR&ED claims.
What Has Actually Changed in the SR&ED Program?
The CRA has implemented several program changes in light of the study:
- December 2012 – Released new SR&ED eligibility guidelines, including updated definitions for “technical” and “technological” activities
- October 2013 – Announced a new T661 form for SR&ED claims. The form requires more detailed information about claim preparers, but also increased liability in the event of missing or inaccurate information. (Learn more about this in our T661 (13) Part 9 Claim Preparer Info: An Unfair Disclosure? post)
- Early 2014 – Introduced the First-Time Claimant Advisory Service (FTCAS), giving selected new SR&ED claimants the chance to meet with local CRA SR&ED staff who will “educate claimants in terms of eligibility and documentation requirements, and increase predictability in subsequent claims.” (FTCAS – Canada Revenue Agency)
- September 2014 – Introduced an online, informational SR&ED video series outlining program eligibility requirements, application information, etc.
- The CRA has hired more staff to administer the program and conduct reviews/audits and updated the Claim Review Manual to show the training received by staff members.
Has this helped?
Not really. These changes have yet to foster a more predictable, less consultant-reliant SR&ED program. For instance, the recent hiring within the CRA means that new RTAs are being assigned to companies that have been claiming for several years. This, in turn, means that companies need to re-explain their work, which in turn increases the cost of compliance given that consultants are often brought in to help ease the process of re-explanation.
What Should Be Changed To Reduce The Reliance on Consultants?
If the CRA is serious about wanting to reduce the reliance on consultants, there are two small – but effective – changes that should be made.
Provide The First-Time Claimant Advisory Service Before The Company Files
While the CRA’s First-Time Claimant Advisory Service (FTCAS) is a step in the right direction (offering specifically-tailored information for participants), the timing is questionable – it occurs after a company has applied … and possibly applied incorrectly. Why isn’t this service available prior to submission, rather than after application? Reviews, by all accounts, take significantly more time than preventative and educational training on the front end.
In theory, this is covered by the new Pre-Claim Consultation service, but it seems this is directed towards individuals with more experience in the program. 1 Either this is a duplication of the effort, or it can (and should) be promoted to companies submitting their first application.
In short, all parties would benefit from having additional assistance prior to submission: the CRA would have better-written submissions and a higher degree of confidence in the applicants, and the applicants would have an idea of their eligibility prior to submitting a return.
CRA Action Item: Clarify or consolidate distinction between PCC and FTCAS, and provide the requested (or required) service prior to submission.
Bring Back The Account Executive Program
The removal of the Account Executive (AE) Service means taxpayers no longer have a designated point of contact from the SR&ED program to answer questions and provide advice about preparing and filing claims, the CRA’s review process, and more. The AE Service offered claimants “consistency and continuity in service through regular communications throughout the SR&ED process”. Given the staffing turnover and frustration by all parties subjected to the new integrated (technical and financial) reviews, returning to the voluntary Account Executive (AE) program would be particularly helpful for large, multi-year claimants. If the CRA would like to eliminate the need for SR&ED consultants, this is probably the single most effective tool that could be implemented.
CRA Action Item: Re-establish and promote the Account Executive program and assign experience RTAs to assist companies in improving their compliance with the program.
So… Should SR&ED consultants be banned?
No. We believe there is a role for professional, ethical consultants.
In all these reviews, the key point is often missed: good consultants make life easier for organizations.
The Canada Revenue Agency has no issues with accountants assisting individuals and corporations to submit their taxes but is concerned with dedicated consultants (be they SR&ED or other tax credits) assisting organizations navigating complex policies. Until the tax code is drastically simplified, there should be more support for both accountants and consultants who play a vital role in minimizing the administrative burden for individuals and organizations.
We do not believe SR&ED consultants should be banned.