Globe & Mail: Flawed R&D Scheme Costs Taxpayers Billions

Since its original run on March 11th, there has been much discussion of this article within the SR&ED industry. While some are quick to react by blaming the CRA and the SR&ED program itself, it is best to look at the root of the problem first: negligent and unprincipled SR&ED practitioners. To wit, let's examine the abuses cited by Barrie McKenna:

"Many people think that the access to Canadian government-funded R&D incentives is limited to manufacturers and research labs," Mark Sorkin, part owner and director of business development for Toronto-based Tripol Management Services, wrote recently in an online newsletter….

"There is no punishment for anything that you (we) write in the claim," according to the document.

The document, for example, urges its consultants to

- embellish claims by lifting technical jargon from the Internet for "scientific flavour,"
- changing employee titles to make them sound more technical and
- playing with percentages to make them "look more convincing to reviewers."
- Tripol refers to these tactics as "decorating the reality."

Reached by phone, Mr. Sorkin acknowledged the document belongs to Tripol, but insisted it's only a draft. "It's a confidential file," he said. "We drafted it for business comment…."

SR&ED practitioners of this nature are actually destroying the program for those claimants with legitimate SR&ED claims. We strongly support the CRA is any proposed enforcement measures to ensure that unscrupulous participants are completely removed from the program.

We believe that in most of these cases, claimants are supplying false information. These are grossly misrepresentative in that they are, in some cases, claiming to have performed research which was not actually undertaken (i.e. claiming to have done another's research by downloading their reports form the internet).

David Sabina has written an article about this specific fact and believes that this will actually work in favor of the taxpayers that are performing SR&ED (see Newsletter 2011-1 page 9).

The sad effect is that many legitimate claimants are feeling pressure as a result of these "bad apples."

McKenna supports the idea that corrupt claims are depriving said deserving claimants from funds by quoting Toronto-based company iSkins Inc, recipients of a rejection from the CRA. Though unintentional, this example actually illustrates the importance of accurate documentation rather than a flawed CRA system:

" The company applied for $1.8-million in tax credits, but was rejected after an audit on the grounds that its work amounted to routine engineering.

"The act is vague to begin with, and interpretive," complained Ron Juliani, iSkin's director of business affairs. "One company can get approved for something minor, while another like us, is summarily dismissed … We should be the poster child for R&D, yet we're punished for it."

There seems to be a "mandate from the top" to reduce the number of claims, whether they're legitimate or not, Mr. Juliani said."

Failure to extend beyond a company's initial knowledge base is not a flaw in the CRA system. "Routine Engineering" can represent any activity that is not correlated with one or more technological uncertainties. A lack of documentation of any attempts to resolve technological uncertainties through analysis or experiment will result in rejection. It is absolutely imperative to document and rank the technological significance of each attempt in a clear and concise manner, otherwise any "advancement" will be seen as being within the knowledge base of standard practice and the claim will be rejected.

David Sabina has cited "Routine Engineering" as one of the most common documentation problems across all fields of research, and includes it as one of the key points in his SR&ED courses.

Though the article hands down a harsh pronouncement, it is our belief that legitimate claimants who adhere to the documentation standards of the CRA have nothing to fear from exploitative practitioners.