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Ottawa's grant scheme to encourage research and development is beeing abused by some companies. (Reuters/Reuters)
Ottawa's grant scheme to encourage research and development is beeing abused by some companies. (Reuters/Reuters)

Flawed R&D scheme costs taxpayers billions Add to ...

But another CRA source said as many as two-thirds of SR&ED claims - often worth millions of dollars apiece - are merely accepted "as filed," with minimal vetting.

Mr. Brideau would not confirm what percentage of claims are approved without thorough review. He said the agency's "risk assessment criteria, coverage rates and review strategies" are confidential.

Nor would he discuss specific claims or consultants, citing confidentiality rules. But he said the agency is vigilant about pursuing tax evaders and is consistently improving its administration of the program and "promoting greater compliance."

Erin Filliter, a spokeswoman for Revenue Minister Keith Ashfield, insisted the government is aggressively pursuing cases of potential fraud and laying charges when there's evidence of abuse.

"This is a very serious issue and we take it as such," Ms. Filliter said. "We are taking appropriate action."

Ottawa and the CRA owe it to Canadians to do a much better job of ensuring taxpayers' money is going to legitimate R&D, Mr. Hearn argued.

"SR&ED is something that CRA and the government can and should fix. They just need the will to do it," he remarked. "We mustn't allow them off the hook on this. It's like any policing. It's a tough job, but it has to be done. It's their job and they should do it."

The federal government has known about gaping holes in the program for more than a decade. Numerous studies, including a 2000 Auditor-General's report, warned of rampant problems with SR&ED, including poor controls, inconsistent decisions and exaggerated benefits.

The Auditor-General urged both the CRA and the Department of Finance to bolster internal controls and tighten the rules. Instead, Ottawa has made the program progressively more generous. The result was predictable. The cost of the federal SR&ED program has climbed to an estimated $3.5-billion a year from $2.7-billion in 2005.

At the same time, Canadian companies are doing less R&D than they were before the recession - $14.8-billion in 2010 versus $16.6-billion in 2007, according to Statistics Canada. And numerous studies suggests Canadian businesses are doing a relatively poor job of converting that R&D into successful new products and higher exports.

What's worse, there's no evidence generous tax incentives are leveraging any more R&D than would occur anyway. The Department of Finance concluded in 1997 that the SR&ED program barely pays for itself, generating just $20-million to $55-million a year worth of net "real income" for the country.

Unlike most other developed countries, Canada chooses to pump cash into business R&D indirectly, through tax breaks, rather than directly through grants, investments or government purchases.

Nor is the fraud problem a new phenomenon. The SR&ED program replaced the defunct Scientific Research Tax Credit (SRTC) program, which was abruptly cancelled in the 1980s after costing the government more than $1-billion in tax revenues and spawning a litany of fraud convictions.

Like the SRTC, the great lure of the current system is that the credits are payable as cash refunds. Smaller Canadian private companies get an instant refund on up to 35 per cent of their first $3-million in eligible R&D costs, including salaries, equipment and outside contracts. Most provinces tack on additional credits of 10 to 20 per cent.

SR&ED is also producing lucrative fees for a thriving cottage industry of consultants, who promise big payouts for navigating the program's arcane rules. Google "SR&ED" and you'll get listings for hundreds of consultants offering advice on how to get hefty refunds.

Exploiting grey areas in the law has become big business for consultants. Some even brag about pitching SR&ED to businesses who don't do conventional R&D, such as restaurants and bakeries.

"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. "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 highlights the perceived low risk in the industry of pushing the envelope.

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