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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 ...

"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 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. We don't have a final version yet."

The risk of getting caught for making bogus claims remains low.

The CRA's Mr. Brideau said the agency is reviewing an unspecified number of cases dating back to 2007, but it hasn't imposed any penalties yet.

The odds of criminal prosecution are also low. Just four people have been convicted since April, 2006, in connection with false SR&ED claims - two in 2010 and one each in 2008 and 2007, according to Mr. Brideau.

The CRA is trying to cope with the sheer volume of claims by arbitrarily rejecting many of them and imposing onerous new documentation requirements on everyone, according to numerous consultants and claimants.

The result is that the approval process has become increasingly inconsistent and unpredictable. Faced with near-identical R&D projects, the agency may approve one, while arbitrarily rejecting others.

"The program has lost its focus," lamented Dean El-Sedfy, president of SR&ED Engineering Inc. in Burlington, Ont.

Tax authorities should be focused on whether companies are doing legitimate R&D in Canada, he said. Instead, they're wasting their time making sure forms are filled out correctly and contain the right buzz words, Mr. El-Sedfy scoffed.

"The abuses are a real problem," Mr. El-Sedfy added.

The result is that CRA is rubber stamping large volumes of smaller claims that look legitimate because more thorough reviews are too costly and time-consuming. Meanwhile, many larger claims are being arbitrarily scaled back or rejected.

Toronto-based iSkin Inc., which developed antimicrobial covers and wireless accessories for iPads and iPhones, recently ran into the CRA's get-tough policy. 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.

Ms. Filliter, the Revenue Minister's spokeswoman, said the government is anxiously awaiting the results of a government-appointed panel of experts, headed by Open Text Corp. chairman Tom Jenkins, which is reviewing Ottawa's various R&D efforts, including SR&ED.

Based on submissions Mr. Jenkins has received so far, leading business groups and accounting firms are pushing for an expansion of SR&ED, rather than a sweeping overhaul. Many want refundable credits for all companies - regardless of whether they're public or private, small or large.

Mr. Hearn of Scitax suggested that a better alternative to refundable credits for all companies would be a flow-through share scheme, similar to those currently offered in the mining and resource sector.

"What we need to do it fix the malfunctions, not destroy the system," he said.

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