Canadian R&D tax credit programme relies on contingency-based fee arrangements

The Canadian government is scrutinising aspects of a tax credit programme, and some of the efforts have Canadian accountants concerned.
  
The scientific research and experimental development (SR&ED) tax credit programme allows companies to claim tax credits for research and development expenses. What has Canadian lawmakers concerned is the fact that many of the credit claims are prepared by accounting firms that get a slice of the federal incentives they help recoup.

A poll the Canadian Institute of Chartered Accountants conducted in September with CICA members showed that 62% of the $133.9 million in fees  companies paid contractors for preparing R&D tax credit claims during the most recent fiscal year were based on these contingency arrangements. These arrangements are essential for the programme to work, said Gabe Hayos, CICA’s vice president of taxation. 

Companies, especially start-ups, often lack the expertise or the resources to pursue a claim without skilled contractors, Hayos said. And a contingency arrangement allows companies to pay contractors a portion of the outcome.

“[Contingency-based fee arrangements are] an important tool that doesn’t take that much away from research and development,” Hayos said.

The contingency fees accounted for 2.3% of the about $3.6 billion paid out in 2011 under the tax credit programme, according to CICA.

The Canadian R&D tax credit programme has been around for years. CICA conducted the survey when the programme came under scrutiny because of some unusually large claims. Canada’s Department of Finance in August opened a public comment period on a consultation paper on the issue (the comment period closed Oct. 1). Canada’s Economic Action Plan 2012 “announced 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,” according to the consultation paper. 
 

On Sept. 28, CICA submitted the survey results to the Canadian Department of Finance and the Canada Revenue Agency, arguing for a continuation of contingency-based fee arrangements under the SR&ED tax credit programme.

“Contingent-fee arrangements arose from a need in the market among all sizes of companies for a cost-effective means of financing the costs of preparing complex [R&D] tax credit claims,” the CICA report says. Over time, they “have become integral to the SR&ED system’s smooth operation.”

Other findings from the CICA report:

• Contingency-based fees averaged 58% of standard billing rates and fixed fees averaged 65% of standard billing rates.
• Thirty-nine per cent of survey respondents would probably not have filed a claim had the programme not allowed contingency-based fee arrangements.
• The Canada Revenue Agency has the means to deny ineligible claims and curtail abuses.
• Legislation requiring companies to name contractors that helped prepare the R&D tax credit claim would promote transparency and accountability.

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.