A recent legal ruling brought to light the issue of what happens when Scientific Research and Experimental Development (SR&ED) consultants and their clients do not agree. The answer is in the contract. This ruling highlights the importance of both sides reading and agreeing to the details in the agreement as it is legally binding.
This post will look at lessons learned from this legal ruling for SR&ED consultants entering into contracts with clients and a summary of the case itself.
Leyton Finder Expert Group Inc. v. The Ultragen Group Ltd. (2014)
In this recent legal ruling, Leyton Finder Expert Group Inc. was a SR&ED consulting firm under contract with the Ultragen Group Ltd. The contract stated that Leyton would receive 20% of the SR&ED investment tax credits at the federal and provincial levels plus taxes and interest.
Leyton advised Ultragen on two projects and filled out the proper forms for these projects totalling $24,262 in anticipated SR&ED ITCs for the tax year ending January 31, 2010. Their contract with Ultragen was renewed and Leyton helped write the technical narrative for one project for the fiscal year ending January 31, 2011. Leyton discovered in March 2011 that the CRA granted Ultragen SR&ED ITCs in the amount of $216,231 for the fiscal year ending January 31, 2010. They also discovered the CRA granted Ultragen SR&ED ITCs in the amount of $220,368 for the fiscal year ending January 31, 2011. Leyton claimed to be entitled to 20% of the ITCs which amount to $99,479.08.
It was revealed that Ultragen submitted a technical narrative for a separate project in which Leyton was not involved, despite requests to the individual in charge of the project by Leyton. Ultragen argued that because Leyton was not involved in the project they were not entitled to 20% of the ITC.
The Tribunal ruled that while Ultragen acted in bad faith Leyton was only entitled to 20% of the SR&ED ITCs which it helped to prepare, an amount totalling $5,528.10 (plus 18% interest per annum). The tribunal also ruled Ultragen must pay $20,000 for disturbance and inconvenience plus interest due to Ultragen’s dishonest conduct and inconveniences.
Lessons for SR&ED Consultants
The contracts used did not explicitly state that 20% of all SR&ED investment tax credits (ITCs) would be paid to Leyton. If Leyton had clarified this point, the client would not have been able to use the knowledge shared by Leyton without compensation. Leyton did not anticipate their clients filing additional projects. While this is not a normal situation it is a good reminder for SR&ED consultants to review their contracts before signing new clients.
- Signed contracts are legally binding. Read all contracts carefully before signing and be sure that any issues or disagreements are thoroughly addressed prior to signing.
- When seeking the services of an SR&ED consultant a legally binding contract should be signed before the services are provided. The purpose of the contract is to protect all parties from legal complications and ensure that all parties have an understanding of what services are to be provided and the compensation that will be provided in return. Attention to detail on SR&ED consulting contracts is important.
- Specific clauses to consider include: legal jurisdiction in the case of legal affairs, compensation (including a payment schedule), contract termination and the associated payment responsibilities, and document submission responsibilities.
- Respectful, clear, and timely communication between clients and consultants is imperative to improving the likelihood of claim acceptance and decreasing the likelihood of complications by ensuring the expectations and contractual requirements are clear.
SR&ED consultants should remember to protect themselves and their clients when creating and signing contracts. These contracts are legally binding and we recommend having a lawyer review your contracts periodically to ensure that the wording and details are inclusive of all services and compensation. For further details on this legal ruling and to review the unofficial translation you can sign up for our legal ruling database. The original ruling can be found here.