CRA pits bureaucrats against businesses

Program to support innovation is killing it instead

There’s widespread agreement that Canada’s Scientific Reseach and Economic Development program (SR&ED) has become too adversarial and difficult to manage without a consultant. The new Budget even acknowledges that the program is straying from its intended purpose of supporting innovation in Canadian companies. One primary cause for this is Tax Earned by Audit (TEBA).

Imagine for a moment, that you’re opening a new savings account at your bank. A few months later, you check your statement and discover that no interest was paid on your deposit. When you ask what’s going on, you’re told that you don’t qualify for the interest payments so they gave them to their bank manager as a bonus instead.

It’s outrageous, no? Yet this is similar to what’s happening in the SR&ED program. SR&ED is being used as part of TEBA calculations. And if you don’t know what that is or never heard of it, that’s no surprise.

TEBA (“Tax Earned By Audit”) is an internal metric the CRA uses to make their financials look better. Basically, anything they deny or reassess for a client is considered “income” for themselves. For example, let’s say you have a $1,000 tax refund owing to you. If the CRA reassesses your refund to $100, the $900 difference counts as “income” for the CRA. And some executive and managerial bonuses are tied to how much their team can “earn” from TEBA.

I’m not alone in thinking that’s problematic. Even the Auditor General has pointed out the conflict here. Even if there’s an argument to be made to use TEBA for personal and corporate tax assessments, there certainly isn’t for the SR&ED program. SRED is an INCENTIVE program. Its policy purpose is to provide refundable tax credits to support Canadian innovation and experimentation.

To deny these incentive credits so that the CRA’s finances can look better and its staff can earn more bonuses, is at best, a conflict of interest. And it’s a primary source of a lot of the problems and challenges the program is facing right now. These problems have been accelerating over the past few years and if not addressed in the upcoming “streamlining” are going to get worse, not better.

Yes, a good consultant can help you capture the essential SR&ED work your team is doing. They can also help you understand what’s required in a Review and push back when the CRA is crossing the line. But removing the incentive to deny claims for internal metrics would dramatically improve the program at a systemic level.

It seems like a pretty easy fix to me.

In my next post, I’ll continue to explore some of the issues around using TEBA for SR&ED claims and some advice on dealing with difficult SR&ED Reviews. For now, remember TSOFT:

Take SRED Out From TEBA.

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David Reti publishes regularly on LinkedIn. You can follow him and read his insights here.