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Pinchevsky & Co Management Consultants Inc Submission in Response to Joint Finance Canada – Canada Revenue Agency Consultation Improving the Scientific Research and Experimental Development Tax Incentives:
Tax Incentives for Scientific Research And Experimental Development
Pinchevsky & Co Management
Pinchevsky & Co is a management consulting firm with a principal specialty and expertise in the preparation and management of Scientific Research & Experimental Development (SR & ED) files for its clients.
The firm with its founder, Marcel Pinchevsky has been consulting on SR&ED for over 15 years, Today Pinchevsky & Co is a national practise with offices in Montreal, Toronto and Vancouver. The focus of the practise is on technology. Each professional has at least one degree in an Engineering or Scientific area plus a second post-graduate degree in a complementary discipline. Each person has had at least 5 years of real world business experience with a technology driven company. Today the company employs over 25 full time technology professionals making it one of the largest consulting firms in the field of SR&ED.
Pinchevsky has a diverse practise with over 200 clients in seven provinces, from start-ups to SMEs to multi-national public companies. In the past ten years, the firm has prepared over 1,200 SR&ED files and has participated in numerous audits across Canada. A significant proportion of its clients are long term, having recognized the value of outside expertise in the management of its SR&ED program.
Building on such a broad professional expertise and the wide-ranging industrial experimental development of its clients, Pinchevsky presents a focussed presentation based on our direct observations across Canada. The subject of SR&ED is quite broad and deep. Although there are areas that also require attention, this document will address certain elements which were not directly addressed in the background document provided by the Finance and CRA. These have an important impact on the program and its delivery:
- Improve the measure of program satisfaction
- SR&ED is an incentive program and should be delivered as such
- Consistency, not only across Canada but also within a TSO
- Timely delivery
- Excessive compliance burden
For the most part, our firm has respect for the CRA staff charged with the definitions and the administration of this program. They are generally perceived as professional and dedicated individuals.
The comments and feedback in this document focus on those exceptions which serve to discredit the program or whose actions are in conflict with its intentions.
Rather than simply focus on what does not work, this submission endeavours to highlight possible solutions to those elements which require improving.
2 General Comments and Context
Both the Department of Finance and CRA refer to SR&ED as an incentive program designed to assist business to invest in its technology and by implication, in its future well being and success. On the whole, the program appears to have met this objective. Within its client-base, Pinchevsky & Co has seen many companies succeed or simply survive while competitors have fallen to the wayside. The innovation in developing new and better products has been key to opening new markets and opportunities. New and improved processes drive our client's ability to be competitive against some very aggressive global companies.
Therefore unlike other areas managed by CRA, SR&ED is an incentive program, and must be administered as such.
3 Elements for Consideration
3.1 Improve the measure of the program satisfaction
Surveys on SR&ED have consistently shown a high degree of satisfaction with the program. On the other hand, CRA only directly deals with claimants in 20% to 30% of cases when the Agency staff conducts an audit. The balance of the claims are either dealt with in the course of a positive risk analysis (low risk) or a desk review with little contact.
It is proposed that the only appropriate measure of the quality of CRA services should be based on the claimants who have direct dealings with agency staff, both technical and financial. The inclusion of other claimants merely serves to skew the results and distort reality.
3.2 SR&ED is an incentive program
The SR&ED program is presented as an encouragement for Canadian taxpayers to advance their technology. It is unfortunate that, in the course of a CRA audit, on too many occasions, the government representation appear to look for reasons to disallow a project or expense, rather than give the company, particularly a first-time claimant, the benefit of doubt.
Too many CRA staff appear to have forgotten the incentive nature of the program. They attempt to enforce a strict compliance far beyond that which is reasonable and necessary to assure conformity with the ITA.
3.3 Consistency, not only across Canada but also within a TSO
As a national SR&ED practise, Pinchevsky & Co has the opportunity to view the program delivery from a number of perspectives:
- Risk evaluation
- ITA interpretation
- CRA interpretation bulletin application
It has been observed on too many occasions, the criteria used to apply one or all of the above items seems arbitrary. Moreover, when a new CRA RTA or FR is assigned to a file, a completely new set of criteria are applied to evaluating the company's projects. This may be explained away by the attitude that "each year must be dealt with separately". This is true. However, the frame of reference should not be brought into question every time.
Some concrete examples of this are presented as follow:
- CRA RTA who either refuses to provide a clear set of review concerns and an agenda or submits such a generic review agenda as to be useless to the claimant in preparing the company staff and information for the meeting;
- CRA RTA who do not feel bound by the published guidelines on conducting a review.
- TSO staff make program decisions in deciding unilaterally that any salaries paid to specified employees but disbursed within 180 days after year-end to be bonuses and not eligible for tax credits. This decision is taken in contradiction of the facts or the ITA.
- A CRA RTA who declares to the claimant, in the course of an audit, that certain projects are acceptable but reverses this position without explanation in the technical report. This unfortunately is not unusual.
- A CRA RTA who deems a specific expenses as admissible for one claimant but inadmissible for another.
In summary, there are too many interpretations provided by CRA staff which are contradictory and lead to wide-spread confusion among claimants as to which one to believe.
3.4 Transparency & Predictability
An element which is important to the understanding and self-compliance of the SR&ED claimant is a transparent process whereby the expectations of CRA are clearly communicated. Furthermore, these expectations should be applied in a manner that the company should have a clear idea of what to expect.
This is not happening. On too many occasions, claimants find themselves blind-sided by CRA staff with expectations that are totally unreasonable. Some examples of this behaviour are presented as follows:
- Reviewers withholding their opinions of a review until writing a final report. On too many occasions, the report demonstrates a misinterpretation of the facts. Proper transparency would include working with the claimant to obtain an accurate understanding of the projects as well as, putting forward concerns to be addressed during the review process, rather than in a long and burdensome series of written representations.
- A dogmatic expectation by the CRA of a specific format of time sheets, R&D contracts, or other documentation rather trying to understand and accept naturally generated company information.
- A CRA expectation that the claimant can readily provide evidence to support every single activity included in a project without any consideration for the business context of the company Or feasibility of the request
- Following a CRA audit, the reasonable claimant expectation is that the RTA specific guidelines for presenting the file (e.g. grouping of projects) is acceptable. In a subsequent audit, sometimes within 12 months, this presentation is quickly dismissed by the next CRA RTA as either insufficient or completely wrong.
- Expectations of documentation levels beyond the means of small claimants.
- Types of expenses are deemed admissible in a year and then inadmissible in the next at times by the same CRA RTA.
- Compliments received by CRA FR in one year on the quality of the financial record keeping are deemed totally unsatisfactory a few months later from the perspective of a new CRA FR.
3.5 Timely Delivery
Statistics maintained by Pinchevsky & Co regarding the program delivery to its clients, show a a dramatic deterioration in timeliness and quality of service when CRA actually goes out to the claimant.
Some examples of this includes the following:
- On too many occasions, files under review are delayed for months for no apparent reason, with no communication or other feedback to the taxpayer. Subsequent responses from the CRA staff demonstrate minimal, if any, accountability. Such delays have led to a serious financial burden and risk to the claimant.
- Delays without cause of over one year are not unusual
- On too many occasions, first time claimants have had an accumulation of 3 and 4 years of claims before final resolution of the file.
3.6 Excessive burden
On too many occasions, claimants have had artificial burdens placed on them by CRA staff without regard to the materiality or reasonableness of the request. This places a serious human and financial burden. Some examples of this of this are presented as follows:
- A CRA FR demanding three visits to review the documentation regarding $20,000 of consumed materials on a claim of over $1,000,000 of expenses.
- Too often claimants frustrated by the CRA review process, have seriously considered stopping their participation in the SR&ED program or simply stopped claiming.
- Too often, claimants are subjected to a yearly audit following successful recourses to opposition or a second administrative reviews.
4 Summary & Conclusion
The above elements cover limited areas of the delivery of the SR&ED program.
Pinchevsky & Co has seen improvements with the delivery of the program over the past few years. However, the consistency and timely delivery of the program still vary greatly from region to region, and TSO to TSO. These factors, which are very visible whenever CRA staff deal directly with claimants, only serve to give a black eye to a very worthwhile initiative.
Pinchevsky & Co looks forward to working with CRA and participating actively in any government initiatives which address the above and seek to rectify the situations.
We hereby grant permission to the Department of Finance to post this document on their web site.
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