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SR&ED Contingency Fees - Government Kicks off Consultations 

Canadian Tax Adviser

 

August 07, 2012

 

As promised in the 2012 federal budget, Finance and the CRA have launched a joint consultation process on the impact of contingency fees charged by tax preparers on the effectiveness of the scientific research and experimental development (SR&ED) tax incentive program. The announcement and a seven-page background document to guide the consultation process were released on August 2, 2012. The deadline for making comments is October 1, 2012.

Rationale for Contingency Fees
While this study is focused on contingency fees, the government is generally concerned about all types of billing arrangements that result in high compliance costs for taxpayers. Finance states that it is undertaking the consultation to:

 

  • Better understand why some taxpayers hire third-party tax preparers on a contingency-fee basis to prepare their SR&ED claims
  • Learn why some taxpayers prefer to pay for these services on a contingency-fee basis rather than a more traditional billing method
  • Determine the size of the fees being charged
  • Determine whether taxpayers are more likely to hire tax preparers on a contingency-fee basis for their first-time claim or on a recurring basis
  • Understand the motivations of tax preparers who use contingent billing, and the relative importance of this type of revenue for tax preparers.

 

Effects of Contingency Fees
As a tax preparer's contingent fee is related to the size and result of the SR&ED claim, this billing practice has been criticized for potentially providing an incentive for tax preparers to encourage clients to take aggressive positions that push the bounds of the law and its interpretation. Finance notes that such a practice would increase the costs for the CRA to administer the SR&ED tax incentive program, in addition to increasing the overall fiscal risks associated with this program.

 

Finance also notes that, on the other hand, the "widespread use of contingency fees" may also positively affect the efficiency of the SR&ED tax incentive program by:

 

  • Resulting in a more widespread knowledge of the SR&ED program
  • Allowing businesses that do not have the internal expertise or resources to prepare SR&ED claims to receive funding from such a claim.

 

Therefore, the government is also interested in understanding the potentially positive impacts associated with contingency fees, including those noted above.

 

It is interesting to note that the government states that Australia requires any third party that provides service or advice regarding taxation law (e.g., preparing a return, representing a taxpayer in dealings with tax authorities) to have certain qualifications and experience, and be considered a "fit and proper" person.

 

For more information, or if you would like to make a submission, contact your KPMG adviser.

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