What will happen to SR&ED contigency fees?

Following up on a March budgetary promise, the federal government launched Wednesday an investigation into the practice of paying third-party tax preparers contingency fees to complete business' Scientific Research and Experimental Development (SR&ED) tax incentives. 

 "The SR&ED tax incentive program is the single largest federal program supporting business research and development (R&D) in Canada, providing more than $3.6 billion in tax assistance in 2011," Finance Minister Jim Flaherty said. 

"The feedback from this consultation will be important in ensuring that the program continues to benefit Canadian businesses and the economy."

It is a common practice for businesses of all sizes and from all sectors to hire third-party tax preparers to complete their SR&ED application on a contingency-fee basis. The government estimates that as many of two-thirds of businesses that apply to SR&ED rely on third parties.

On Thursday, Finance Canada launched a public consultation on the impact contingency fees have on businesses that apply for SR&ED to support their R&D objectives, and on the Canadian economy overall.

"The Government is undertaking this consultation on SR&ED contingency fees to better understand why firms choose to hire third-party tax preparers on a contingency-fee basis, why these tax preparers charge such fees, the prevalence of this practice and the size of the fees being charged, and the impacts of this practice on the benefits derived by Canadian businesses and the economy from the SR&ED tax incentive program," reads the discussion paper.

"While this study is focussed on contingency fees, the Government is generally concerned about all types of billing arrangements that result in high compliance costs for taxpayers."

Contingency fees have oft been criticized-most recently in the Jenkins panel report on federal support for R&D-for representing a too large portion of funds meant to support business R&D. The system has also come under scrutiny on the basis that third-party tax preparers that use contingency fees have an incentive to prepare aggressive applications, thus increasing costs for the government under the program.

 There are currently no restrictions on the size of contingency fees collected by third parties, and these can represent 30 per cent or more of the claim.

"The use of high contingency fees may increase average compliance costs for taxpayers that successfully claim SR&ED tax incentives. This is most likely to be the situation for firms whose SR&ED claims are above a certain threshold, where the contingency fees are likely to exceed the amount that firms would otherwise pay had they chosen a more traditional billing system (e.g., hourly rate or flat fee)," the government notes in the discussion paper.

"In these circumstances, it is reasonable to consider whether alternative billing practices might result in lower compliance costs without affecting the quality of service."

Although contingency fees are considered the norm, some third-party tax preparers offer alternative payment models, such as hourly-based fees or flat fees. Since its launch last year, The Funding Portal has opted for a transparent flat-fee model for its expert funding services covering both contributions and tax incentives such as SR&ED, with all prices on display on its website. The Portal also offers a top team of Canadian SR&ED experts to assist companies with their applications through its Apply for It service.

Although the government's consultation document questions the impact of high contingency fees, it also highlights some positive aspects of the practice of hiring third-party tax preparers. For example, tax preparers contribute to a more widespread knowledge of SR&ED and other tax incentive programs, and businesses that would not otherwise apply may undertake an application under the guidance of an experienced third party.

Stakeholders are invited to share their submissions with Finance Canada and the Canada Revenue Agency by Oct. 1.