CRA achieving the opposite of desired results

Read Part 1: CRA pits bureaucrats against businesses

Read Intro: Applying Taxi common sense to tax credit program

In my last post, I described a systemic problem with the administration of the Scientific Research and Econonic Development (SR&ED). program. TEBA (Tax Earned by Audit) is an internal calculation that “rewards” the CRA and its managers for denying or reducing claims. This is at odds with the policy purpose of the program, which is to encourage Canadian business innovation through refundable tax credits.

Auditor General and Parliamentary reports confirm and highlight some of these issues, including that TEBA targets may push or encourage auditors to close files early or inaccurately. This is compounded by the fact that even if the audits or denials are later overturned, they do not affect the TEBA targets or the bonuses that come with them. Even if the CRA must eventually pay penalties! In other words, staff are rewarded for initial reductions or denials, even if it incurs greater costs later.

We end up incentivizing denials and reductions with no consequences if this is unfair or even wrong. It’s no wonder we’re seeing an increase in both the quantity and intensity of SR&ED Reviews. It’s also no surprise that some Reviews have become quite adversarial. I’ve even heard a Reviewer declare “there is no SR&ED here, I don’t care what you say.”

I have to believe that’s a systems problem, not a people problem. I don’t think that all the CRA or its staff are nefarious people, rubbing their hands with glee. But it’s difficult to separate a legitimate denial from a TEBA-motivated one. Why create that potential conflict for claimants or staff? Why let businesses doubt whether their work was evaluated fairly or because of something that has nothing to do with them? Companies need greater certainty in their project and financial planning and won’t use a program that might be a waste of time despite their own best efforts.

That’s likely why I and others like me, have witnessed such an increase in complaints from clients and colleagues alike. As one claimant recently put it:

“Even before these latest changes, the level of scrutiny was over the top. We had claims that were well-documented, supported by testing, and even acknowledged by the reviewing engineer as strong — yet we still faced rejection. It’s disheartening.”
 
With program “streamlining” coming later this Spring, now is the time to advocate for the kind of change that will have a big impact. This is why it’s so important to TSOFT – Take SR&ED Out From TEBA. We have a short window to make this urgent change. At a systemic level, it will reintroduce a fairness and transparency that we desperately need to restore trust in Canada’s business ecosystem and its regulators.

That seems like a pretty valuable change to me.