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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 ...

A flood of questionable tax claims pushed by an exploding cottage industry of consultants is threatening Canada's signature research and development incentive.

Tax authorities are warning they'll start hitting companies claiming this wildly popular tax break with punitive penalties and even criminal charges to stop the abuses.

This year, Ottawa and the provinces will dispense $4.7-billion to more than 20,000 Canadian companies under one of the richest R&D tax regimes in the world. But a third or more of that cash is being wasted and paid to consultants as a result of hazy rules on what's legitimate R&D and limited government auditing resources, according to dozens of interviews with consultants, claimants and government officials.

The program is prone to abuse because the risk of getting caught is low. Tax authorities routinely accept a significant percentage of refund claims with little or no vetting in what one CRA source called the R&D industry's "dirty secret."

At a time when experts worry Canada is falling badly behind in the global innovation race, Ottawa often touts its Scientific Research and Experimental Development program as a key part of the answer - a powerful lure to get companies to invest here and generate wealth. In fact, the government's own studies have found the program generates almost no economic benefits. And the low risk of getting caught means too much of the money winds up in the hands of people who do little or no R&D, including small manufacturers, consultants and lenders.

The dilemma is that many claims may meet the agency's minimum filing guidelines, and yet constitute highly dubious R&D. The result, experts said, is that Canadian taxpayers are spending billions on a program that too often delivers little or no new R&D.

Senior Canada Revenue Agency (CRA) officials exposed the growing scourge of bogus claims at a series of recent meetings with industry consultants and accountants, The Globe and Mail has learned. At one of the gatherings, a CRA executive complained about unscrupulous consultants "carpet bombing" entire area codes and then flooding the agency with claims for many companies that do little or no R&D.

Money is often paid out to decidedly low-tech and routine manufacturing, such as baking gluten-free cake, making injection-moulded auto parts or growing potted roses. Carefully documented and presented as scientific investigation, this kind of work is worth millions in government cash.

The refund industry is so lucrative that it's even spawned a new breed of lenders, who give claimants cash up-front for a cut of any eventual refunds.

Thanks to a revolving door between the government and the industry many consultants know the ins and outs of the claims process better than government auditors.

Many of the same CRA officials who helped design SR&ED are now working as consultants for the country's major accounting firms. Ernst & Young, Price Waterhouse, and Deloitte Touche all have former agency executives in key positions in their lucrative R&D tax practices.

Top CRA officials acknowledged significant and growing problems with the program at a recent meeting with several hundred claimants and consultants in Burlington, Ont. Among the revelations: a proliferation of SR&ED consultants, a surge of dubious and poor-quality claims and far too many cases of companies making claims they can't back up with documentation, according to David Hearn, a veteran consultant and manager of Scitax Advisory Partners in Toronto, who was at the meeting.

CRA officials also told the meeting that some consultants are blanketing entire geographic areas and submitting unfounded claims for virtually every business on every street, Mr. Hearn said.

CRA officials contacted by The Globe and Mail confirmed the account and acknowledged they're facing "a growing trend" of bogus and fraudulent claims. CRA spokesman Philippe Brideau said the agency is also "aware" that some tax preparers are providing "incorrect information to potential claimants."

Recent meetings with the industry are part of an effort to "promote awareness and compliance," he said.

But Mr. Brideau insisted most companies are playing by the rules.

"It is important to note … that the vast majority of claims are compliant with filing requirements," he said.

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