Canadian Department of Finance's consultation on the effect of contingency fees on scientific research & experimental development tax incentives.

October 12, 2012

On October 12,2012, Tax Executives Institute filed the following comments with the Canadian Department of Finance on a government consultation relating to the use of contingent fee arrangements in prosecuting claims for the Scientific Research & Experimental Development (SR&ED) tax incentives. The comments were prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is Bonnie Dawe of Finning International Inc. Contributing to the development of TEI's comments were Vincent Alicandri of Hydro One Networks, Inc., and Paul T. Magrath of AstraZeneca Canada, Inc. Jeffery P. Rasmussen, TEI's Senior Tax Counsel and staff liaison to the Canadian IncomeTax Committee, coordinated the preparation of the comments.

On August 2, 2012, the Department of Finance and Canada Revenue Agency launched a consultation on the effect of contingency fee arrangements on the Scientific Research & Experimental Development (SR&ED) tax incentives. The consultation follows up on the Government's commitment in Economic Action Plan 2012 to study the contingency fees charged by tax preparers for SR&ED claims. On behalf of Tax Executives Institute, I am pleased to provide the following comments on the use of contingent fee arrangements in the preparation of SR&ED claims.

Background on TEI

TEI is the preeminent association of in-house business tax executives worldwide. The Institute's 7,000 professionals manage the tax affairs of 3,000 of the leading companies in North America, Europe, and Asia. Canadians constitute 10 percent of TEI's membership, with our Canadian members belonging to chapters in Montreal, Toronto, Calgary, and Vancouver, which together make up one of our nine geographic regions. Many of our non-Canadian members, including those in Europe and Asia, work for companies with substantial activities in Canada. Thus, both Canadian resident and non-resident members must contend daily with the planning and compliance aspects of Canada's business tax laws, including the SR&ED provisions. The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

Consultation Background

The SR&ED tax incentive program encourages Canadian businesses of all sizes and in all sectors to conduct research and development (R&D) in Canada that will lead to new, improved, or technologically advanced products or processes. Out of concern that contingency fees may be diminishing the benefits of the program to Canadian businesses and the economy, the Government announced in Economic Action Plan 2012 that it would undertake a study of contingency fees charged by tax preparers. The consultations are aimed at understanding (1) why firms choose to hire third-party tax preparers on a contingency-fee basis, (2) why these tax preparers charge such fees, (3) the prevalence of the practice, (4) the size of the fees charged, and (5) the effect of the practice on the benefits derived by Canadian businesses and the economy from the SR&ED program.

Rationale for Contingency Fees

1. The Government would like to understand why certain SR&ED performers use the services of third-party tax preparers on a contingency fee basis to prepare their claim form.

   Taxpayers, especially the large case file taxpayers for whom TEI members work, employ contingency fee arrangements for many reasons depending on the nature of the business and the type of SR&ED performed. In all cases, contingency fee arrangements expand the resources taxpayers have available for identifying whether new or existing projects qualify and, as important, whether a taxpayer's business processes properly document the qualification of the projects. Because of business exigencies and continuing constraints on corporate headcount, few taxpayers have the resources necessary to identify and document all their qualifying activities and expenditures and to timely complete the required tax forms. While the SR&ED tax incentive remains a powerful incentive, taxpayers seeking to remain competitive with their business peers in Canada and globally may not be able to sufficiently staff the laboratory, manufacturing shop floor, business unit, or tax department in order to monitor and document their qualifying eligible activities. With a contingent fee arrangement, there is generally no immediate "hit" or expense to a business unit's or tax department's budget for the...