Tax Firm Responds to SR&ED Contingency Fees (2012)

July 30, 2013 SRED

Reference Article (>5 Years Old)

Please note that the information herein may be outdated, links could be inactive, and policies discussed may have evolved. For the most current data, consult our latest publications. If you would like us to refresh this article as it is of interest to you, please contact us.

At SREDucation, we’re taking the time to document all of the changes that have occurred to the SR&ED program over the years. In our “From the Archives” series, you’ll be able to see how the program has evolved since its inception in 1986.

The 2012 Canadian federal budget documents announced a review of SR&ED contingency fees charged by tax preparers. ¹ These fees are charged to small- and medium-sized enterprises (SMEs) seeking third-party help for SR&ED claims, and usually are calculated on the percentage of SR&ED tax credits the business receives. ² The review was intended to determine if the fees are adequate or too expensive, in proportion to the services the tax preparers provided.

In August of that year, the government invited interested parties to submit their comments and concerns on the policy. One of those respondents was Ryan LLC, a global tax firm that is located in the Greater Toronto Area. The company has done tax work for more than 6,500 organizations around the world. ³ Ryan’s response—which is briefly summarized below—indicated that contingency fees are a vital service for Canadian SMEs. ⁴

Ryan expressed support for the government’s desire to maximize the impact of the SR&ED program, and to ensure that the research and development credit is used to the best possible extent by SMEs. According to Ryan, however, the government’s choice to focus on contingency fees is not the best way to improve the impact of the SR&ED program. ²

Ryan listed the following factors required for studying contingency fees:

Program access and equity: Third-party tax preparers are essential for those small companies that wish to transfer the risk of SR&ED preparation into experienced hands. Should the companies be forced to undertake the preparation themselves, this would be a disincentive for smaller firms to enroll in the SR&ED program. ²
Program design: A more productive approach for the government could be streamlining the SR&ED program itself to reduce the administrative burden on smaller companies, who do not have the “internal bureaucracy” to fully comply with SR&ED on their own.² As proof, it noted from government numbers that more than 60% of SMEs use external consultants to access the program. ²
Economic freedom: Should the government restrict performance-based contracts and contingency fees, this will limit the “economic freedom” of SR&ED companies. “Risk and performance based contracts with contingency fees enable SR&ED performers to immediately engage with their government while deferring the costs of engagement until they are in a position to absorb those costs,” Ryan stated. ³
Healthy competition: There is a robust market for third-party tax preparers. A large number of firms competing for services should, according to economic theory, drive down the price of services due to the abundant supply. ¹⁰ Ryan said this situation was indeed the case with tax preparers, adding that in 37 years of service the company has seen “downward pressure on pricing in the market.”⁴
Dealing with disreputable participants: Ryan acknowledged that there are certain tax preparers that charge an exorbitant amount of money in relation to the SR&ED claim. One media report placed these claims at as high as 30% of the credit. ¹² This situation notwithstanding, Ryan said the government’s approach should be to persecute these isolated cases and not to punish all companies over the actions of a few wrongdoers. ⁴