Is the government hoping no one notices their contingency fees “study” isn’t really a study?
The Department of Finance launched a Consultation Regarding The Impact of Contingency Fees on The Effectiveness of the Scientific Research and Experimental Development Tax Incentive Program. Here’s why it matters – but not for the reasons you would think.
Those who fail to learn from history are doomed to repeat it – Sir Winston Churchill
Background on SR&ED Contingency Fees
For those just entering the debate, the Economic Action Plan 2012 came with the announcement that the government would implement “a study of contingency fees charged by tax preparers, on the basis that the Government is concerned that contingency fees may be diminishing the benefits of the SR&ED tax incentive program to Canadian businesses and the economy.” Sounds great, doesn’t it? Let’s find out if consultant fees are taking money away from innovation!
This isn’t a new topic. In light of heavy criticism in the media, there has been considerable debate around the amounts that SR&ED consultants charge and whether or not there should be contingency fees. It’s a topic that gets everyone hot under the collar – companies ripping off the government, big tax breaks, etc. – but nowhere in the allegations are concrete numbers to back up what is being thrown around as a “big issue”.
Does a Problem Even Exist?
In short, it appears that the government is shadow-boxing. No one – not the CRA, the Department of Finance, the press – actually knows if there is a problem that needs to be solved. No facts have been provided, just dramatic sweeping statements. The Canadian Advanced Technology Alliance (CATA) Alliance does an excellent job of pointing this out:
Dr. Roberts has attempted to raise the profile of whether there is an issue of systemic abuse by some, as senior CRA officials have indicated to us. To date, officials have not shared the facts that support their statements. We do not see evidence of a problem requiring a solution.
Only with a clear understanding of CRA’s perspective on abuse, can we provide intelligent input as a community. If there are problems, undoubtedly there are way(s) to address them – solutions may or may not include adjustments to contingency fees.
– CATA Alliance, Accessed 2012-10-26, Original text here
What Are You Measuring? Opinions?
There is undoubtedly a need for a study to determine the issues at hand, to determine the extent of the problem (and whether or not one actually exists). It could start with a review of the “systemic abuse” that the CRA has identified and other facts that support their statements. There is plenty of data at the CRA. There are plenty of ways this issue could be examined to generate concrete results that will help improve the program. For guidance, the government could turn to the many excellent studies that were conducted in the 1990’s.
Instead, what has been put forward is a qualitative consultation process. In reading through the call for submissions document, it quickly becomes apparent that this is a vague and ill-defined attempt at a “study”. The parameters are not sufficiently defined to allow the generation of any sort of meaningful results. Given that what is under review is a program that focuses on quantitative procedures, it seems ironic that if this were an SR&ED claim, it would be rejected by any Research and Technology Advisor. Put bluntly, this isn’t meaningful research that will help identify issues and improve the SR&ED program.
Does History Repeat Itself?
One wonders though, if the underlying purpose of this “consultation” is to do something meaningful to improve one of the longest standing tax incentive programs, or to placate the masses who are the most vocal in the press? Are votes being courted in this process? Perhaps this cynicism isn’t too far fetched; similar views were expressed in the 1996 Industry Canada Working Paper Measuring the Compliance Cost of Tax Expenditures: The Case of Research and Development Incentives. There were a number of individuals who “declined to participate because they believed that the results would not have any significant impact on the behavior of government departments in the design or administration of the SR&ED tax credit program.” [Measuring the Compliance Cost of Tax Expenditures: The Case of Research and Development Incentives. Industry Canada Working Paper. p. 5]
The Need For “No Risk” Fees – and What It Implies
Let me be clear about my personal bias: I dislike contingency fees. I firmly believe they shouldn’t exist; however, my view is not that the government should regulate contingency fees but should work towards eliminating the need for contingency fees (and SR&ED consultants) altogether.
I have spoken with many companies that wish to utilize this model because of the “no risk” approach and deferred payment. It points to a very clear underlying issue – the increasingly unpredictable nature of SR&ED. Even when claimants meet the criteria, they are encountering RTAs that ignore evidence, hyperfocus on irrelevant elements of projects, and simply do not return any calls. The time spent trying to track down an individual at the CRA – especially with Government Electronic Directory Service (GEDS) being especially useless for SR&ED due to the constantly-changing staff roles as a result of internal politics – would drive hourly fees (as well as frustration levels) through the roof. Not an ideal climate for eliminating SR&ED contingency fees or SR&ED consultants.
Business Doing $1M in R&D = Probably Not Idiots
If a company can generate over $1M in R&D expenses, no doubt they’ve learned how to shop around for the best vendors and service providers. They’re not your average taxpayer; most have higher-education degrees and considerable work experience. In short, they are intelligent enough to make the choice to use or not use contingency-based fees. Government intervention in regards to how they compensate their service providers implies they are idiots. Not very flattering.
Even if the government puts in place some measures to constrain the fees, sends out press releases about how they are improving SR&ED so that “more goes to the taxpayer”, and make enough noise to drown out the complaints coming from all directions that small firms are being systematically denied refunds without coherent explanations by the CRA, it will not solve the issues that have caused this industry to appear. Even outlawing them will not work; consultants already find ways around the “no success fees” regulations regarding grants. (We have heard of at least one group in Ontario that has billing practices that are technically legal, but clearly designed to circumvent the law. No doubt there are others.) They are a symptom, not the underlying problem.
Just Eliminate SR&ED?
When do we say that enough is enough? Perhaps it’s time SR&ED went the way of the Industrial Research and Development Incentives Act (aka IRDIA, the predecessor to SR&ED) – toss it out and reintroduce a new tax credit program that isn’t saddled with the baggage of internal politics and subject to “legislation bloating” from too many Information Circulars. Indirect funding works – it allows companies to select their projects, not rely on the government to “pick winners,” but perhaps it’s time to clean the slate. Start with (1) a clearly thought-out policy and legislation in (2) a results-oriented working environment that (3) has clear and meaningful measurement criteria evaluating the effectiveness of the program, while (4) employing individuals who have real-world experience that (5) understand that Research and Development isn’t always done in a lab coat. In short, a program that recognizes that sometimes you have to get your hands dirty when changing the world and that finely-detailed notebooks aren’t always a priority. A group that looks to find eligibility, not disqualify companies based on technicalities.
No matter what, let’s keep focus where it needs to be: reducing unnecessary costs that keep money out of the pockets of the innovators of this nation (e.g., politically-charged consultations masquerading as “studies”) and instead conducting legitimate research that will actually lead toward the improvement of indirect funding programs for innovation in Canada.