Montréal Toronto Vancouver Moncton Halifax Québec

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1 Montréal Toronto Vancouver Moncton Halifax Québec October 1, 2012 SR&ED Consultations Department of Finance 140 O Connor Street Ottawa, Ontario K1A 0G5 Dear Madam/Sir, Alma Consulting Group is pleased to make this submission to the Department of Finance and the Canada Revenue Agency. In this submission, we will respond to the Federal Government s formal call for industry input on the practice of contingency fees for SR&ED related tax services. Thank you for providing us the opportunity to comment on this initiative. We consent to the posting of our submission on the Department of Finance website. Sincerely, Alma Consulting Group Canada Inc. Terry Trotic, President & CEO 4141 Sherbrooke St. West info@almacg.ca Tel : (514) Suite Montréal, Québec H3Z 1B8 Fax : (514)

2 Montréal Toronto Vancouver Moncton Halifax Québec Submission to the Department of Finance: CONSULTATION REGARDING THE IMPACT OF CONTINGENCY FEES ON THE EFFECTIVENESS OF THE SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT TAX INCENTIVE PROGRAM The Federal Government issued a formal call for industry input on the practice of contingency fees for SR&ED related tax services. The Government is undertaking this consultation to better understand why tax payers choose to hire third-party tax preparers on a contingency-fee basis. The Government is concerned that contingency fees are diverting large portions of SR&ED tax credits to the tax preparers instead of Canadian businesses. Alma Consulting Group (formerly Pinchevsky & Co) has been providing SR&ED support and tax credit services to taxpayers in Canada for over 15 years. We also have an international perspective on SR&ED as we have offices in 10 countries. Over this period, we have filed thousands of SR&ED claims in a wide spectrum of industries. We have contributed to previous consultations, such as the CRA- Industry joint initiatives, the Review of Federal Support to Research and Development led by the Expert Panel, and CRA s current SR&ED Policy Review Project, ultimately contributing to the success of the program and the growth of Research and Development initiatives in Canada. We are pleased to have participated in the discussion group held by the CRA and Minster of Finance in Ottawa on Sept 13th, We hope that our submission and reported observations will be informative and foster productive dialogue between the CRA and stakeholders, for the benefit of the entire SR&ED community. SR&ED claim preparation is multi-faceted and requires a collaborative effort amongst numerous parties in order to: 1. Become educated about the SR&ED program, 2. Separate the SR&ED project from the business project 3. Apply CRA policies to their specific projects, 4. Develop and implement best practice documentation tracking system that effectively capture relevant documentation to support claim 5. Conduct interviews with key scientific and technical personnel to have the complete aspect of the project, 6. Determine the qualifying SR&ED activities that are eligible for tax credits 7. Evaluate and allocate SR&ED expenses to their applicable categories (salaried staff, contractors, consumed material, leasing of equipment, treatment of other money received e.g. example transactions between related companies, foreign contracts, grants received ) 8. Prepare the technical write up that provides information on the scientific and technological aspects of the SR&ED activities 9. Manage the claim process to ensure it is in compliance with the requirements of the program Sherbrooke St. West info@almacg.ca Tel : (514) Suite Montréal, Québec H3Z 1B8 Fax : (514)

3 Page 2 Our experience in the field shows that the majority of entrepreneurs are driven by the imperative to commercialize their end product and do not have the internal resources or expertise to evaluate, prepare and be certain that their SR&ED claim meets the program s requirements. They are often reluctant to invest the company s own resources in submitting an SR&ED claim after factoring in the effort required in understanding the SR&ED rules, compiling a well-documented SR&ED claim, and the perceived risk of failure to obtain SR&ED funds.. Internal preparation of an SR&ED claim requires effort from the employees most involved in the project, in turn diluting their efforts in achieving the business objective i.e. getting their product into the market. This same sentiment was echoed in the Jenkin s Report wherein it was stated that many stakeholders called the claims process cumbersome, complex and time-consuming. Uncertainties associated with qualification and timing are sometimes so great that the SR&ED program is excluded from R&D investment decisions 1. As a result, the taxpayer should have the right to align their consulting fee structure to a program that doesn t provide claim acceptance certainty. This uncertainty is what drives paypayers to demand this fee structure. Most of these companies would not be able to benefit from the SR&ED program without the guidance and assistance of consultants. In a survey of R&D-performing firms that never accessed federal programs that support business or commercially oriented R&D, 52% cited as the reason for this was that the Firm is not aware of federal R&D support programs while 35% cited the reason as being Application process too burdensome 2. The consultants promote the SR&ED program to all corners of the country, while the government seminars and brochure reach few. Without consultants educating taxpayers on the SR&ED program and risking their time to prepare claims, fewer companies would benefit for the much needed federal support. The SR&ED market offers the taxpayer the option of either preparing a claim on his own, requesting assistance from CRA or hiring consultants working on contingency fee, hourly rate or a predetermined fixed fee. Traditionally, the consulting industry has charged on a time and materials basis: billing for staff consultants based upon the hours worked plus out-of-pocket expenses such as travel costs. However, the traditional billing method offers several disadvantages that had militated in favor of contingency fees. We have identified a number of factors that account for this: 1. Certain companies e.g. startup companies, cannot afford to pay professional fees in advance of receiving the funds. The contingency fee option provides the opportunity to hire a professional firm for which they couldn t have otherwise been beyond their financial means based on a traditional billing model. 2. The SR&ED program is suppose to be an incentive program. The real driver of the cost of compliance is related to the complexity of the program and the perceived inconsistency or subjectivity in the interpretation of the legislation. This has resulted in a significant level of uncertainty for the taxpayer as to the eventual reception of funds. Again, the traditional fee model would require the performer to cut into his current cash flow in order to pay the consultant and then hope that the projected funds would be forthcoming from the program. This is a risk that many companies cannot afford to take. We suspect a significant portion of claimants would stop submitting claims due to the cost risk associated with filing and defending a claim for which they may not receive any tax credits. 1 Innovation Canada: A Call to Action, p Innovation Canada: A Call to Action, p. 5-7

4 Page 3 3. The contingency fee model promotes a relationship / partnership whereby the necessary resources and experience is provided to the performer without question of cost or upfront investment. The obvious advantage is the claimant s peace of mind knowing that he will not be obligated to pay any fee, if, until and in proportion to the tax credit received. In return, the consultant provides claim processing leadership, and espouses and supports the claim throughout the submission and verification process and assists with: CRA queries following claim submission: financial and/or technological. Preparation/submission of any further documentation requested by CRA Any meetings with CRA to review the claim Requesting and attending any Second Review meetings Preparation of a representation letters and subsequent communication and followup, and /or Notice of Objection until the claim is finalized. The market place has become very competitive and the contingency rates have been driven down by the market conditions over the past several years. The rates at which contingency fees are charged are dependent upon various factors including the complexity of the claim, the level of service the claimant requires, the estimated level of work that is required to prepare and support the claim, the risk involved, and the likelihood of success. The rates self regulate, as the market is mature and claimants can negotiate the rates and conditions that best suit their needs. The rates are reviewed and revised between the parties according to what is considered reasonable and fair. The federal Minister of State for Science and Technology has suggested that too much money earmarked for research and development is flowing to consultants. Media reports from April 2011 have gone so far as to suggest that almost one-third of the $4.7 billion being dispensed to more than 20,000 Canadian companies is ending up in the coffers of consultants. However, we believe these assertions are grossly overstated. This is not representative of what we see in the market. Furthermore, CICA conducted a survey of Canada s six largest accounting firms to estimate revenues being earned through work connected with research and develop initiatives. The survey results told us that the combined revenue of the firms is far below what is being reported. The six firms had combined revenues of $117 million, but that amount represents all their SR&EDrelated revenue. That represents a mere 2.5 per cent of the total $4.7 billion SR&ED spending 3. Although we do not know the total market share of the six firms, it is realistic to conclude from this that if the six largest firms earned revenues of $117M then the rest of the consulting industry could not have earned anywhere close to the $1.4B in revenues needed to substantiate the onethird claim. Our suggestion is that the contingency fee issue is a red herring. The consultancy market in Canada is very competitive. The taxpayer obtains a professional service that helps him navigate the program. Due to the investment undertaken by the consulting firm, claims are better prepared, in turn, this assists CRA in the review process as the tax payer is better educated. We do understand that the government may also be concerned about abuse by consultants, primarily, in the form of presenting fictitious or inflated claims. We agree that there s a need to deal with unprofessional advisors and speculative contingent fees. Our understanding is that the law has provisions for such actions, and a penalty under subsection 163(2) would be applicable in respect of a SR&ED claim. However, we believe that whatever abuse exists, it is not directly tied to the question of contingency fees. Such abuse is as likely to occur under traditional fees 3 CICA Gives Budget 2012 a B+ Grade

5 Page 4 methods as the full financial risk burden is transferred to the taxpayer. Any form of abuse should be handled accordingly by CRA to ensure claims are within compliance. We believe that federal research and development initiatives are crucial to the industry and beneficial to Canadians and Canada s economy as a whole. Any changes imposed in the consulting services plan could cause a massive loss of the high-value employment and investment that Canada desperately needs in this unstable economic recovery. The success fee model allows taxpayers to access these funds with minimal risk, allows for the hiring of professional expertise to ensure their claims meet the programs criteria and forces accountability to the claim preparer. The cost predicatability as at the forefront of the claimants mind which is why the success fee model is the fee structure of choice. The taxpayer should have the legal right to choose their preferred method of paying for their professional services. We hope CRA reviews this initiative closely, as the intent of incentive and access to the program will be seriously be hampered should a policy be put in place that will increase the cost of compliance, transfer the financial risk to the taxpayer and shift the compliance cost significantly forward. Sincerely, Alma Consulting Group Canada Inc. Terry Trotic, President & CEO