RDP Associates Spearheads Innovation Learning Lab with the YTA this Thursday!
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Why is CRA Rejecting SR&ED Projects?
What is Happening?
There is absolutely no question now that CRA has changed their definition of what is eligible SR&ED. No, no actual amendments to the tax act have been passed to alter the definition; the definition itself is broad enough to allow different interpretations.
What we are seeing are companies that have claimed SR&ED for years without any problems, now being told their claims do not qualify.
CRA is using two main reasons. The first being lack of documentation to support the costs and activities within a project. The second is a lack of technological advance, due mainly to use of standard practices to achieve the SR&ED. Documentation is the easiest to fix. We have talked about it enough in our broadcasts but our Innovation Connection Program solves this problem.
The use of standard practice is a more difficult problem. Essentially it relates to “appreciable improvement”. CRA is rejecting SR&ED projects on the basis that a particular SR&ED project is too much like the former project claimed by the company. They argue only standard practice was necessary to develop the product and no new technology was required to be developed.
Attention really needs to be paid to how the project is described. Often, project descriptions fail to truly describe the new technological advance being achieved. If this can’t be done, CRA will reject the project.
It is a new world out there and many companies over the next few years will be shocked to find out that CRA is treating their claims in a way they have not been accustomed.
Again, the Innovation Connection Program deals with all these issues.
If you have any questions, please do not hesitate to contact us.To speak to a specialist, simply call 416-368-9341 or visit us online at www.rdpassociates.com
Brian Cookson Interviewed by Ontario Chartered Accountants’ Association
Get Government Help to Build a Better Mousetrap (As Seen in the Globe and Mail, May 2, 2011)
Every year, the federal government gives out about $4-billion to help businesses develop new products and processes. About 25,000 companies make claims, but there are many more that probably could – and would – if they knew where to start.
That’s not all! Chartered Accountant Brian Cookson, a partner with RDP Associates Inc. in Toronto, says that many claims could be bigger if companies really knew what the Canada Revenue Agency (CRA) looks for in its evaluation. And, others could avoid having their claim amounts reduced by the CRA if they did the paperwork properly and had better systems to track and document their work.
Here are Cookson’s top tips for helping your business cash in on the incentives and savings that could, just possibly, be yours for the taking.
Most goes to the big four – With much of Canada’s economy rooted in manufacturing, it’s not surprising that half of the SR&ED funds have traditionally gone to industries like auto parts and tool-and-die making. The next-largest beneficiary is software and IT, which accounts for roughly another 30 per cent, Cookson says. The remaining 20 per cent is split largely between “farms and pharma” – agriculture and pharmaceutical companies. But things change. Many companies that are not in typical SR&ED claim-eligible businesses – like wholesalers and distributors – now sometimes create new products or improve processes in ways that could qualify.
Maximize your claim – The biggest “missed opportunities” for companies? Failing to get all the refunds or credits they might be entitled to. For instance, not identifying SR&ED projects at the right levels for funding, failing to include eligible activities and costs, and just-plain not recognizing which projects qualify for the program. All are ripe areas that experienced, trained consultants familiar with the program can help investigate, Cookson says.
The stakes can be high, but don’t get greedy – Eighty per cent of the clients Cookson helps with their SR&ED claims each year receive more than $50,000 in benefits and savings; many get more than $200,000. He recommends, however, that you don’t get greedy. If you develop new products and processes each year, it makes sense that you file a SR&ED claim each year. A CRA site review is inevitable, so create a good impression and demonstrate that you understand the rules. Don’t claim 80 per cent of the president’s salary as eligible for SR&ED if you can’t back it up, especially when it’s clear that most of his or her time is spent on the commercial side of the business.
Make money even when you lose money – By way of illustration, Cookson says that a privately owned Canadian company in Ontario, with the right profit levels, doing the right things in the right industry, could potentially get back more than 40 per cent of what they spend on research and development from the program. A large company could get as much as 20 per cent. Even a privately owned Canadian company that reports a net loss in profitability won’t necessarily find their benefits are impacted. Under the right circumstances, the SR&ED credits can offset taxes you owe or generate a refund in the amount of the credits, even if your business loses money!
Documentation is key – By far, Cookson says, the biggest challenge most companies face in making SR&ED claims to the CRA is keeping proper paperwork and sufficient documentation to substantiate them. Much of what is needed is reconstructed ad hoc with little contemporaneous documentation, he says – omissions, the government hates.
Don’t be a slave to the calendar – The SR&ED program is nothing if not flexible. Credits claimed in a single year can be carried back as much as three years to recover past taxes paid. They can also be carried forward to offset future taxes for as long as 20 years.
Preapproval not required – There is no need to get approval to make an SR&ED claim before beginning that new initiative, although you can do so in certain cases. Your eligibility will be determined as your claim is filed and processed.
Don’t forget to file the claim – There is an 18-month deadline for making an SR&ED claim. You can miss some tax deadlines and either there is no effect, or you can get the same tax result with a minor penalty. However, SR&ED claims are different – if you miss the deadline, you get nothing.
Expect a visit from the CRA – To keep this very expensive program honest, the CRA administers it carefully. Cookson says a team of technical auditors, engineers, and other highly trained professionals visit claimants to assess progress and the validity of their claims. Roughly one-third of all claims are audited each year, and you can expect to be the subject of one of these in-depth evaluations at least every five or six years. So keep a tight rein on your records and data.
Brought to you by The Institute of Chartered Accountants of Ontario
Filtering Out The Good From The Bad When Filing SR&ED
Having worked in the R&D tax credit industry for several years, for a firm that has been established for over two decades, it’s safe to say that I have some knowledge of the competitive SR&ED consulting landscape. Many smaller SR&ED consulting firms have entered the market in the last few years, offering a service that is sought out by thousands of Canadian companies across the country annually. However, although the offering might sound the same, not all SR&ED consulting firms offer an equivalent level of service and knowledge. While it is frustrating to scroll through a respectable periodical and read an editorial, like the recent Globe & Mail article by Barrie McKenna, that fosters such a negative view of consultants assisting applicants within the business community, I have to agree that there are currently some unscrupulous consulting firms in our industry that are giving all of us a bad name.
Like in any competitive market, there will be certain types of firms who perpetuate a type of fear mongering among prospects in order to win business. The recent Globe and Mail article insists that “[… a] flood of questionable tax claims pushed by an exploding cottage industry of consultants is threatening Canada’s signature research and development incentive.”
Though no substantial evidence exists to support this claim, being an experienced practitioner within the industry has put RDP up against other vendors when bidding on new clients. As a result, we have come up against certain competitors using questionable tactics in order to set false expectations of large refunds to lure in business from other providers.
For example, recently one of RDP’s current clients was approached by a competitor claiming that RDP substantially under claims with its clients and that they had gone on to double the refund sizes with their customers who were previously claiming with RDP.
The response to our client on this seedy sales tactic was that this company is attempting to substantially over promise and likely over claim with these clients. We are constantly coming across claims put together by aggressive SR&ED service providers where they have falsely inflated claims by including costs that are both ineligible from a technical perspective (i.e. projects or activities that are ineligible and do not meet the three criteria) and from the standpoint that they are over-estimating time on eligible activities (i.e. using rough, unsupported estimates of time without establishing a linkage of the costs to eligible activities). It is extremely risky for a company to file a claim that has been put together this way; should CRA perform a detailed review and discover the ineligible or unsupported costs, not only will the current claim be reduced, by the company’s likelihood for time consuming detailed reviews in future years will skyrocket.
It is our job as a trusted service provider to claim within the parameters of the SR&ED legislation. Those attempting to over claim by throwing in everything but the kitchen sink are simply looking for short-term gains and may be potentially exposing their client a long arduous audit should these dubious tactics be employed. An ethical service provider is one that adds value to a clients work flow process, works with the client by meeting throughout the year to document eligible activity and will likely develop a long term partnership with their client as a result of excellent service.
Bottom line, Canada has been providing substantial funding to innovative companies for over twenty years via the SR&ED tax credit program. Many of those with knowledge of its existence understand its importance in fostering innovative business ideas, maintaining a Canadian competitive advantage and most importantly retaining skilled labor. Dubious practitioners do exist, which is why it is important for potential applicants who are in the midst of selecting a third party vendor to check references, ask for testimonials and work with a practitioner who has tenure in the industry.
For further information on our process and service approach, feel free to give me a call, Chris Bodnar at 416-313-2992 or email cbodnar@rdpassociates.com
RDP Joins the Ride for Heart
Help us feel the energy and raise funds for crucial heart and stroke research, while seizing the only chance to ride traffic-free along the DVP and Gardiner Expressway on Sunday June 5th, 2011.
We are riding in the Becel Heart&Stroke Ride for Heart to help save lives. We are hoping our fundraising efforts will also lead to earlier diagnosis, and breakthroughs in the treatment and recovery for family and friends who have been impacted by heart disease and stroke.
Every 7 minutes someone dies from heart disease and stroke in Canada. With our help the Heart and Stroke Foundation can continue making life better for Canadians touched by heart disease and stroke through research achievements and medical advancements. Together, through research, we are saving lives. To learn more about how the Foundation is making a difference visit www.rideforheart.ca Your Funds At Work.
Help support this important cause to end heart disease and stroke in Canada. Visit our team web page and help us in our efforts to support the Heart and Stroke Foundation of Ontario.
Sincerely,
RDP Associates
Please Follow This Link to visit our personal web page and help us in our efforts to support Heart and Stroke Foundation-Ontario
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Brian Cookson’s Response to Globe and Mail Article: “Flawed R&D scheme costs taxpayers billions”
Flawed R&D scheme costs taxpayers billions. Really?
Whenever I have had intimate knowledge of a particular subject, I am always amazed at how distorted and unsubstantiated a newspaper article can make of the situation, especially in the business community. I have been practicing in the area of R&D tax credits since 1982 and have some knowledge about the Canadian R&D tax credit system and other systems around the world.
I would like to take some time to dissect the article written by Barrie McKenna in the Globe and Mail on March 11, 2011.
“ A flood of questionable tax claims pushed by an exploding cottage industry of consultants is threatening Canada’s signature research and development incentive”
Ok, he is a journalist so he has to use words like flood and exploding. However, when we read into the article, Mr. Brideau of CRA is quoted as saying “It is important to note… that the vast majority of claims are compliant with filing requirements.” So what is the issue? If CRA thinks the vast majority of claims are acceptable then why is this being called into question? I will deal with abuse of the system below.
“But another CRA source said as many as two-thirds of SR&ED claims- often worth millions apiece-are merely accepted “ as filed”, with minimal vetting.” “ The program is prone to abuse because the risk of getting caught is low.” “
I think it is fair to say that CRA cannot audit every claim that is made. From a government viewpoint, auditing one third is very high. However, the most important fact to keep in mind is that your chance of being audited within any given 3-5 year period is greater than 90%. There are bad guys in every field of business and government, but knowing you are eventually going to get audited is very high deterrent.
“Erin Filliter… insisted the government is aggressively pursuing cases of potential fraud and laying charges…”
And so they should. Again no area of business or government is immune to fraud.
“The federal government has known about the gaping holes in the program for more than a decade. Numerous studies, including a 2000 Auditor-General’s report, warned of rampant problems with SR&ED…”. “ What’s worse, there’s no evidence generous tax incentives are leveraging any more R&D than would occur anyway. The Department of Finance concluded …. just $20M to $55M a year worth of net “real income for the country”
By auditor general standards, the SR&ED program came out with higher marks than most government agencies. If you go back and read the report, you will see that the recommendations are for CRA to reduce inconsistency, process claims faster and assess their risk management practices. There was no comment that funds were being wasted or abuse was occurring.
In addition, there have been econometric studies done on R&D tax credit program, and virtually all have concluded a positive net economic benefit.
The Finance document he refers to is from 1997 when the total amount of credits approved was much less than today. The statistic he failed to present from that report is that every federal credit generates $1.38 in incremental R&D spending per dollar of forgone revenue.
But why don’t we look at something more recent like the Sept 2007 Finance publication from Parsons and Phillips (an evaluation of the Federal Tax Credit for SR&ED)? Their conclusion was that the SR&ED tax credit generates positive net economic benefits under a reasonable range of assumptions.
Anecdotally our firm has noticed that companies taking part in and receiving tax credits under the SRED program will take on technically riskier projects than they otherwise would and the most common comment we receive from claimants upon receipt of their Investment Tax Credits is: “now we can hire more engineers”.
“Unlike most other developed countries, Canada chooses to pump cash into business R&D indirectly, through tax breaks, rather than directly through grants, investments or government purchases.”
Wow, to name just a few, the US, UK, Japan, France, Australia and China all have R&D tax credit programs. Tax credits are seen as fair, objective and having a low cost to administer. Grants put the decision as to which company gets funding into the hands of the government. This creates programs that are political in nature, rules that are shrouded in secrecy and provides very little certainty to businesses that they will receive funding. Just look at IRAP. Overwhelmingly, businesses want a tax credit is lieu of a grant.
“Like the SRTC, the great lure of the current system is that the credits are payable as cash refunds.”
The SR&ED program is nothing like the SRTC program, which lasted less than 2 years and was closed down in 1984 for abuse. The 2 main features of the current SR&D program which prevent abuse are: that a company must spend the money and carry out an eligible SR&ED project before receiving any kind of tax saving or credit; secondly, that CRA carries out a very high number of audits ensuring that every company is scrutinized at least once over a 3-5 year period. Many companies do not receive the tax credits until an audit takes place. Neither of these features were in place under the SRTC program.
“The result is that CRA is rubber stamping large volumes of smaller claims that look legitimate because more thorough reviews are too costly and time consuming. Meanwhile, many larger claims are being arbitrarily scaled back or rejected”
I have no idea where he gets this information. We have seen no evidence, based on the thousands of claims we have seen, that CRA is accepting a smaller claim over a larger claim. In fact we have seen the opposite; an increasing number of our clients are undergoing detailed reviews of claims made for less than $25K in total ITCs.
“ But a third or more of that cash being wasted and paid to consultants as a result of hazy rules on what’s legitimate R&D…”
This is really irresponsible. Let’s break it down. Let’s assume his figures are correct that the government hands out $4.7B of tax credits each year and over 20,000 companies apply for these credits. The statistics are that 8% of the companies that claim, or 1,600 companies receive 80% of the credits or $3.8B. So roughly $0.9B goes to the remaining 18,400 companies. Do you really think the large companies are paying consultants 30% of the $3.8B they receive? Again, as someone who has been working in this area for over 25 years, most large companies prepare the claim themselves and have the internal resources to do so. I would be surprised if 5% was going out to consultants on these large claims.
For the remaining group, there remains a high percentage of companies claiming the credits themselves without the aid of consultants. Further, with the competition in this “cottage” industry, the fees are down around 10-20% with fee caps on larger claims.
“ …decidedly low-tech and routine manufacturing, such as baking gluten free cake, making injection-moulded auto parts…”
Now he’s got the auto industry mad. Wow, Husky and all the other innovative companies in Canada that are striving to produce world class injection moulding systems and products should not get SR&ED credits? This is probably the worst thing he could say. It is this type of thinking and behaviour that is holding Canada back from being world class, not the SR&ED program. Thanks for that Barrie.
Anyone reading this would say I am biased as well as I am a consultant, and that is fair. But I have to confess I was morally troubled back in 1985 when I asked myself why any company should get a government hand out, grant, tax credit or subsidy. Governments should help the poor and disadvantaged and create an infrastructure of roads and community in which to live, but why in capitalist society should government fund business? Looking back over the past 25 years, I have grown to understand the particular difficulties of being a small business. This group has difficulty obtaining financing for accounts receivable let alone product development or process improvement. The large companies have much more access to capital markets for product and process R&D. This inequity can be bridged by government assistance to small business that objective, fair and open to all businesses that meet the rules and criteria. The SRED program fits this need.
RDP Presents to The Halton-Peel District Chartered Accountants’ Association
We welcome you to join RDP Associates on Wednesday February 23rd from 6-9pm, as we present to the Halton-Peel District Chartered Accountants’ Association (HPCA). A dinner buffet will be served from 6-7pm, followed by the presentation.
We will be discussing the following topics:
- Recent Changes to the SR&ED Program
- CRA’s Strict Approach to Claims
- Importance of Documentation
- Commonly Missed Opportunities
- Frequently Asked Questions
The seminar will take place at the Mississauga Golf & Country Club (1725 Mississauga Road, Mississauga).
To reserve your space, please visit http://www.hpca.ca/
We look forward to seeing you!
Common Questions Regarding the SR&ED Program
| 1) Will CRA (Canada Revenue Agency) carry out an audit of my SR&ED claim?
Generally speaking, the likelihood of having a CRA site review at least once every 5 years is quite high. In addition, CRA keeps a ranking of the claimant’s system with respect to how well the SR&ED activities are documented, as well as the reasonability of costs claimed. This ranking also dictates how often a claimant is reviewed. As a result of receiving more funding a few years ago, CRA now employs more technical auditors who are carrying out more detailed reviews of SR&ED claims. It is now imperative that claimants have sound SR&ED systems to identify, capture and document all eligible SR&ED projects, activities and costs. Helping clients implement a sound SR&ED system has been RDP’s focus. 2) Will an SR&ED review result in an audit by CRA of the rest of my business? With over 20 years’ experience in the program, we have not seen a situation where an SR&ED review carried out by CRA resulted in a full audit of the company’s business. The SR&ED section within CRA is actually a separate section from verification and enforcement. The SR&ED program is recognized as a separate incentive program within CRA. 3) How much time from my staff will be required in order to prepare the SR&ED claim? The SR&ED program in Canada is truly one of the most generous in the world. Most of our clients make SR&ED claims each year and realize significant cash returns to assist their innovation. Given the high return, it is important a sound process is put in place. Initially, this requires some time, but once in place it is the most efficient way to prepare SR&ED claims. If a sound system is in place, we generally meet with our clients periodically throughout the year as the SR&ED is taking place, to ensure the process is being properly maintained. This generally requires, on average, about one day each quarter for all staff time (i.e., technical and financial). Please do not hesitate to contact RDP to ask about the Innovation Connection Program and how it can help your SRED claims. To speak to a specialist, simply call Christopher Bodnar at 416-368-9341 ex 247 or email him at cbodnar@rdpassociates.com. www.rdpassociates.com [i] Canada’s economy on track for recovery in 2010: RBC Economics December 14, 2009 |
SR&ED’s Impact on Our Country’s Bottom Line
RDP is Looking for Your Help!
The Conservative government has formed an expert panel to review the programs that fund R&D and Innovation in Canada. The panel will review the government programs, which provide $7B to Canadian companies. The largest program is the SR&ED program, which provides $3B in funding, annually.
At issue is Canada’s ranking of 14th amongst 17 OECD countries in the area of Innovation; even though Canada ranks 2nd in funding Innovation among the group of OECD countries.
RDP has had the opportunity to work with many companies in Canada, the US and the UK. Intuitively, we have a hard time agreeing with this ranking, as well as some of the comments made by the Conference Board on this subject. In this regard, we are looking for comments and input from our clients that claim SR&ED tax credits.
To initiate discussion, we would like your opinion on a series of comments and statistics that we have set out below.
Statistics and Comments
- In order to make a SR&ED claim in Canada, a company needs to develop or improve a new product or process in order to make a claim as “experimental development”. This is by definition under the Income Tax Act.
- $3B of tax credits are delivered to approximately 18,000 companies each year.
- The Conference Board states “Canada has some strong initiatives, such as federal subsidies for biotechnology research and the national Scientific Research and Experimental Development tax incentive program. But, in the main, these programs create a supply of scientific discovery rather than go the extra step of fostering demand for innovation products.” How can this possibly be the case when you basically have to create an innovative product to earn the SR&ED tax credits?
- In Canada, approximately 85% of SR&ED funding goes to 8% of companies filing. If $3B of SR&ED funding is given out and 18,000 companies file SR&ED claims, approximately $2.5B goes to 1,500 large companies and $500M goes to 16,500 companies.
- The 16,500 companies, which tend to be small and medium sized companies, receiving $500M are spending approximately $1.6B on SR&ED. This amount does not appear to be captured in the statistics used to evaluate Canada’s performance.
- The statistics used by the Conference Board do not track the performance of small companies performing R&D. Small companies account for approximately 75% of the SR&ED claims submitted each year.
- When we compare our experience in visiting companies in Canada, the US and the UK to qualify whether they can make an R&D tax credit claim, we often find that US companies tend to source technology to acquire rather than develop it themselves, whereas Canadian companies will attempt to develop their own proprietary solution.
Our Concerns
- We have a difficult time reconciling Canada’s low ranking amongst the OECD group of companies given our experience and concerns listed above. Is Canada being penalized because the wrong data is being used to rank our success in this area?
- Upon receiving funding under the SR&ED program, we often hear clients say, “We can now re-invest these proceeds into hiring more engineers, and technical staff”. Isn’t this what the SR&ED program seeks to achieve, building a skilled labour force creating new products?
- Our experience is that the SR&ED program provides businesses with more certainty in terms of obtaining funding; is more objective and fair; is more timely than any grant program offered by any government in Canada. The program funding is distributed in an efficient and cost effective manner.
We would like to solicit your comments on the above and any other comments you have concerning the SR&ED program. We feel we need the Innovation Panel to understand what is actually happening in the “field” and how well businesses are innovating. We want to gather these comments in order to provide our own recommendations on how to improve the SR&ED system and become active in this process.
Thank you and we look forward to hearing from you!