Questionable claims diminish SR&ED tax credit program

Great article in the Globe & Mail today by Barrie McKenna titled Dubious claims diminish R&D tax credit.

McKenna writes about what many have been feeling for awhile. While the Scientific Research and Experimental Development (SR&ED) program is Canada’s marquee innovation program, it's ultimately broken.

The Scientific Research and Experimental Development tax credit cost Ottawa roughly $4.5-billion last year – the largest source of federal research and development funding.

Thousands of Canadian companies tap the scheme every year, leveraging the credits to spend billions more developing the kinds of products that, in theory, should drive the economy of the future.

But there is growing evidence that SRED is becoming dysfunctional. Far too much of the money is going to consultants in fees, rather than R&D. And a flood of dubious claims, some crafted by former Canada Revenue Agency employees-turned-consultants, is bogging down an already complex and unpredictable application process.

McKenna tells the story of a recent town hall meeting with tax consultants in Burlington where CRA officials from across the country painted a disturbing picture of a program gone badly astray. Among the problems noted:

• Tax offices across Canada are experiencing a surge of bogus and unsubstantiated claims.
• An exploding cottage industry of consultants is pushing large volumes of dubious claims.
• Consultants are sometimes blanketing entire geographic areas, coaching companies that do little or no R&D how to apply for credits.
• Many applicants are abruptly withdrawing applications at the first hint of a review by tax authorities.

While the majority of of SR&ED claims are legitimate, CRA officials warned consultants they will crack down on abuse by slapping penalties on applicants involved in “negligent or misleading claims.”

Remember that every dollar squandered on bogus claims takes money away from legitimate R&D at a time when Canada faces unprecedented global competitive threats.

Have you heard any stories of successful SR&ED claims that left you shaking your head? Add them as a comment to this blog post and feel free to leave out company names.