In the recent 2012 federal budget, it was announced that there would be a study of contingency fees charged by tax preparers, specifically those in the SR&ED space. Small- and medium-sized businesses (SMEs) often compensate consultants who work on their SR&ED claims in the form of success-based fees. The government is concerned that the contingency fees charged by consultants are diminishing the benefits of the SR&ED tax incentive. Thus, the government will conduct a study in the coming year to better understand why firms choose to hire SR&ED consultants on a contingency-fee basis, and to determine whether further action is required.
The question is, is there really a problem? In an efficient marketplace with sufficient competition, contingency fees should eventually reach an equilbrium or “fair value” for SR&ED consultation. It is entirely possibly that the perceived high contingency fees no longer exist, because of market self-correction.
Many SMEs do not have adequate in-house expertise in the SR&ED program to prepare the claim themselves. Without this expertise, the services of a SR&ED practitioner are often utilized. From the perspective of a SME, a contingency structure aligns the interests of a SR&ED practioner with the company’s interests of maximizing shareholder value. The alternative to contingency fees (i.e. fixed fees), do not guarantee value for the services paid for.
However, from the Canada Revenue Agency’s perspective, contingency fees, combined with the lack of regulation of the SR&ED program, have the potential to lead to abuse. The CRA has limited resources and cannot audit every single bogus claim. An example of abuse can be found in the story broken by the Globe and Mail about the now-defunct Tripol Management Services.
Mark Sorkin, former director for the now-defunct Tripol Management Services, wrote in an online newsletter. “Small businesses in the food industry (like bakeries and restaurants) are also prime candidates who can and should take advantage of this amazing funding program.”
A Tripol sales training document obtained by The Globe and Mail stated: “There is no punishment for anything that you (we) write in the claim,” according to the document. “The best-case scenario – 90 per cent of cases that Tripol handles – is that the client simply receives the cheque from the government for the dollar amount of the claim.”
The optimal outcome from the perspective of the SR&ED practitioner, the SR&ED client, and the CRA is that the client receive the maximum value from the SR&ED program that they are legitimately and legally entitled to. Contingency fees from bogus SR&ED practitioners may be merely an artifact of the true underlying problem- that there need to be consistent guidelines from the CRA and formalized regulation of the SR&ED practitioners. Only then will a true win-win-win scenario be created.
