Why I Hate “SR&ED Consultants”

… even though I am one.

This morning I received an invitation via LinkedIn that inspired me to write this post. It’s a topic that’s been irking me for awhile now. You may be thinking to yourself, “don’t you run a firm that specializes in SR&ED”? Yes, I do.

What is a SR&ED consultant?

First, let me explain my understanding of the term “SR&ED Consultant”. It is composed of two parts: SR&ED and consultant. The SR&ED portion is straightforward – it refers to the Scientific Research and Experimental Development tax credit program, which is quite generous if you are a business that qualifies. (Read about it at SR&ED Education and Resources).

The challenge is defining the term consultant. A generally accepted definition is that a consultant is…

an expert or a professional in a specific field and has a wide knowledge of the subject matter [1. Pieter P. Tordoir (1995). The professional knowledge economy: the management and integration services in business organizations. p.140]

Following this logic, someone who is an “expert” in SR&ED will have a “wide knowledge of the subject matter”. I personally ascribe to the theory that 10,000 hours makes an expert, as per Gladwell’s theory in his book Outliers (although others such as Seth Godin argue that 5,000 hours is sufficient). Further, it’s not enough to have put in the time – one needs to demonstrate competenceMy definition of competence is when you have submitted over 100 SR&ED claims and had them “Accepted As Filed” (ie. no changes / challenges / reductions).

Naturally, while becoming an expert, one will develop the “wide knowledge of the subject matter”. Some of the relevant areas that a consultant will become intimately familiar with are as follows:

  1. Relevant sections of the Income Tax Act (248(1) amongst many, many others)
  2. All Information Circulars (particularly IC86-4R3), plus related schedules in relevant fields (ex. 97-1 in Software Development)
  3. The processes and procedures in their local tax office and all the local Research and Technology Advisors (RTAs)
  4. How to compile research related to the technology baseline, review supporting documentation, and ask questions that elicit the correct information.
  5. Unwritten, undocumented “red flag” words / terms the CRA uses to screen for “risky” applications.
  6. Tax Court of Canada rulings since the inception of the program (in particular, Northwest Hydraulics) and other cases that highlighted key concepts, such as SR&ED and business context or the importance of answering the providing sufficient information.

One can learn all of the above points without hands-on experience (ie. understand the theories); however, writing / preparing / submitting SR&ED claims provides an additional level of insight into the program (ie. experiential learning).

As you can discern, a background in technology, accounting, or law is helpful at the outset as you will have a head start towards becoming an expert. That being said, the results speak for themselves. Not all accountants think creatively. Not all lawyers can think within the box when required. It’s how hard you work towards becoming an expert in your field, assuming professional accreditation isn’t required.

The question is, how can the average business owner identify and avoid consultants that do not meet the criteria of “consulting expert”?

Sample “SR&ED Consultants” – Key Features

First, acknowledge that they exist. I’ve had a feeling there were sketchy consultants out there long before the Globe and Mail stirred up a controversy and tarred all preparers with the same brush.  At networking events I’d often refrain from describing my profession. I’ve spent years building my business, why not promote it? It’s simple –  people who were pleasant only moments ago would physically recoil when I would mention my specialization. Perhaps you’re familiar with this defensive posture?

SR&ED? No thanks!

It’s pretty difficult to continue a conversation when this happens. It’s literally “talk to the hand”. Ouch.

The inevitable conclusion from many of the knee-jerk reactions (“we’re ok” / “I don’t need SR&ED” / “oh….”  *awkward silence, looking around*) is that there are people out there who don’t necessarily engage in ethical or even best business practices. Until today, I’ve managed to avoid most of them.

Here are some examples to help you pick out firms you probably shouldn’t work with…

SR&ED Sales Fail

First, why would you send this to another SR&ED consultant? Did you not read my profile? Yes, I have a technology company as well. Guess what? I’m probably going to do this in-house.

Second, why are you asking me for a recommendation? I’ve never worked with you. I don’t know you. What I’ve seen so far is that you haven’t proofread your email. That really, really bothers me. Especially since this is clearly a template.

Third, your signature tells me you’re a one man show working from home. No disrespect intended towards those work from home, particularly software startups. On days when I can do it, I love it. As the first unofficial day back (Jan 2nd), I’m in comfy clothes and I have a dog curled up at my feet while I catch up on  emails. Ultimately, it depends on your field and whether you require a public-facing workspace. In this field, I believe it’s important. Have you seen the Emergex Subvention office in Montreal? It’s incredible – and it unites their team.

 

SR&ED office space or creative loft? It's the former.

SR&ED office space or creative loft? It’s the former.

Services Fail

If you’re a good SR&ED consultant, you’ll know why I included this posting. For everyone else, here’s why: a very, very basic rule is that non-arms length contractors are not eligible. If you own part of the company you should be salaried. Why? Because *nothing* is eligible if you’re non-arms length and skipping out on source deductions. Nada. Zip. Zero. That’s over $62K gone forever. 

This is a simple point that he should have known. There are ways that – in special circumstances – this amount could be restructured. They’re extremely high risk and can be costly. Avoid the hassle by avoiding this type of consultant and seeking advice early in the development process.

This also illustrates the power of LinkedIn. Skim through the SR&ED groups and you’ll quickly identify the influential individuals. Then go to their profiles to review, compare and contrast. This individual’s profile showed a jack-of-all-trades-master-of-none. Avoid at all costs (lest you wish to lose another 62K).

Bait & Switch

 

This is an example of a job posting I’ve seen on several different occasions for one of the SR&ED boutique firms. I’ve pointed out in red a few key points (and spelling mistakes), but the takeaway is this:

If you knew that students were being paid $100 per 1400[2. 350+350+700=1400, not 1500.] words SR&ED technical narrative, would you pay 20-30% of your entire refund to the SR&ED firm?

The technical narrative is the most important part of the SR&ED claim. It’s the first thing the CRA reviews. Sure it’s supervised, but if you do the math… what are you paying for, exactly?

Attention to Detail

Tiny mistakes may seem insignificant, but they can cost you both money and time. Leaving a box unchecked can lead to serious delays or miscalculations of your refund. One error, recently made by a Chartered Accountant (more likely, their assistant) has meant a delay to the taxpayer by almost two months. Their file was “Accepted as Filed” but the money is sitting in limbo awaiting disbursement. In the land of startups, two months is an eternity.

Summary

These are only a few examples. I have no doubt there are more, based on the negative conceptions many people have of this group of professionals. Truthfully, I can’t blame them. It seems as though any technology company is considered fair game and is aggressively pursued by SR&ED sales teams. Unfortunately, the pushiest are not always the best. Below are a few ways to identify & protect your company from “cottage-country”[3. McKenna, Barry. Flawed R&D Scheme Costs Taxpayers Billions. In The Globe and Mail. Retrieved January 4, 2012, from http://m.theglobeandmail.com/report-on-business/flawed-rd-scheme-costs-taxpayers-billions/article1939418/?service=mobile]  SR&ED consultants.

How to Protect Yourself

  1. Ask about experience. Remember those six points above? Start with those. Move on to asking about the latest ruling in the Tax Court of Canada. If they know SR&ED, they can discuss this in relation to existing practices at the CRA. Read this blog before you meet – so you already know the answers.
  2. Question the “success” statistics they quote you. Is it based on the number of files “Accepted As Filed” (quick refund) or total amount refunded? How long does it usually take them?
  3. Attention to detail is everything. Are there spelling mistakes? How do they present themselves? Sure, we’re all human and make mistakes. How do they correct errors? This is the business equivalent of a job interview. Mistakes due to inattention can cost you thousands in SR&ED tax credits. Save yourself the hassle and be ruthless in your selection process.
  4. Beware of bait and switch. Find out who will actually be working on your file. In a larger organization it will likely be a junior individual that is overseen by a manager. There’s nothing wrong with this approach; however, ensure that you (a) want this and (b) know the level of involvement of the senior individual.
  5. Review recommendations. Can they provide reference clients? What are people saying about them publicly? Some people are modest geniuses – most are not. Call and ask around about a particular individual or group. If you have concerns, discuss them. We’ve all fired clients or service providers, find out both sides. Trust your instincts.
  6. Are they accredited with the Better Business Bureau? How do they handle disputes or disagreements?
  7. Follow your gut. Recent research has indicated that we have a “second brain”.[4. Our Second Brain: The Stomach. In Psychology Today. Retrieved January 4, 2012, from http://www.psychologytoday.com/articles/199905/our-second-brain-the-stomach] Trust yourself. If it doesn’t feel right, move on.

Ultimately, it comes down to this: take your time and do your due diligence.  Ask around, question everything, and see if it’s a good fit. Sometimes it’s worth it to pay more, but a big price tag isn’t necessarily an indication of quality. Most importantly, if you’re gut says this isn’t right – listen! There are more than a few great, ethical SR&ED experts in Canada. You’ll find the right one for you soon enough.

Update: It’s been brought to my attention that I’m not the first to write on this topic. Here is another great article on identifying ethical vs. unethical SR&ED preparers.

Do you really know SR&ED? Sign up for our new Comprehensive Guide to SR&ED for everything there is to learn about the program.

 

 

Article by Elizabeth

Award-winning policy consultant by day (SR&ED, OIDMTC, Arts Funding), music advocate, board member, and fundraiser by night.

  1. Brennan says:

    It’s been a while since I’ve read something so impassioned, but I love it! ^_^ I’m sorry to hear there are a lot of scammers in your industry….I think it’s true of a lot of service-based businesses….

    • Hi Brennan,

      I suppose this is nothing compared to the Ocean Marketing “PR” debacle! You’re right, service-based industries are easy to start and thus more prone to sketchy business practices.

      Thanks for your note, it’s appreciated! :)

      Liz

  2. Hi Elizabeth. Your articles are always interesting, but also very well articulated and written, even funny at times. Keep up the good work of demonstrating the professional side of our SR&ED industry through your actions and communications.

    I remember 10 years ago when I had to convince entrepreneurs to try the SR&ED program, as they did not believe money was handed out for salaries they paid anyway. That was what I call the “evangelization” era.

    Today, I consider that our industry is now saturated, with many more firms and consultants running after the same limited pool of prospective clients. I too have seen a negative perception about SR&ED consultants during our networking and marketing efforts.

    It is our collective responsability to prove our value and integrity to the rest of the world through our actions, including your great articles.

    And thank you for the good words about our offices, that you seem to appreciate!

    • Elizabeth says:

      Hi Pierre,

      Thank you for your note! It’s interesting to hear about your experiences having been in this area for so many years. And yes, I loved seeing your office – it’s the level of professionalism that all groups should aspire to.

      I hope to read more of your writing on this topic – the historical aspects I find particularly interesting. After all, they may help us see what is coming!

      Warm Regards,
      Elizabeth

  3. J. N. says:

    Having dealt with a number of SR&ED consultant firms, I have to say that our company did fall prey to some of the less ethical consultants out there. I know we are mostly to blame for not making an informed decision. I mostly blame on how attractive initially the a contingency payment plan is.

    The contingency model of payment does seem attractive to newbies mostly because they feel that it presents no financial risk to them. This feeling of course is because they do not truly feel that the SR&Ed returns is actually their money being handed back to them. In addition it does present a “deal with it later” financial cost.

    My quarrel however, lies with some of the consultant firms that claim to be experts when they are not even remotely so. The firm we dealt with consisted of two members, an IT manager of sorts and a retired programmer. Now if all the claims they were undertaking were software related then by all means they could perhaps be labeled as experts, however they were processing industrial and manufacturing claims! Being an engineer, what bothered me most is they claimed to be engineers when that was not the case…

    They charge 20% but if you are to follow the path of your actual process in their hands you will find it ending up in the hands of some student subcontracted for the write up for a mere few hundred dollars. SR&ED what was once a program to encourage innovation and scientific research is now filled with used car salesmen!

    PS: In my opinion it will do you good to avoid consultant firms such as [NAME REMOVED AT REQUEST OF SRED FIRM 16/04/13], perhaps they have improved but in the end you should do your homework.

    • Elizabeth says:

      Hi J,

      Thanks for taking the time to write such a thoughtful comment. I am sure others will benefit from your experience.

      Regarding your points:

      1) Yes, contingency fees are very appealing to people new to the program. What most don’t realize is that there is a very real risk they are ignoring – being red-flagged by the CRA. Once you have a file denied in part or in full the CRA will question further submission. Deferring payment also means costs are also higher (20%).

      2) Abuse of the term “expert” is true of any field, but it’s particularly painful in this space as the financial stakes can be quite high. One SR&ED veteran in my network (19 years as a CRA SR&ED Research & Technology Advisor, 8 years private-sector consulting) refuses to use the term. Also true of using the term “engineer” in this case…

      3) You’re one of the few people that point out there are sub-specializations within the SR&ED space – most believe it is “one size fits all”. It’s not. There are groups that focus on medical research, others in software, and others still in manufacturing! The list goes on. While the policies are the same, the application at the administrative level remains very different.

      4) The fact narratives are often subcontracted is not widely discussed. With many of the larger organizations, they will subcontact to professionals in their space. In the smaller ones, they will aim to cut costs and hire students. It’s not fair to the client to have a bait-and-switch approach, nor to the subcontractor who is often paid a fraction of what is charged to the client. In some cases, it’s a markup of over 500%! (Ex. $100 per technical narrative for a 50K refund… most are larger refunds. Try searching “$100 SR&ED Technical Narrative” – I wish I was joking…)

      5) Homework is always key. There are some great groups out there – there are many professionals in my network I would highly recommend on any given day. Use LinkedIn, search for references, and ask tough questions. After all, if you knew you were going to pay $20K or upwards of $140,000 to a company that could potentially ruin your reputation with the CRA – wouldn’t you want references? I would!

      Thanks again!

      Elizabeth

  4. James Normandi says:

    Hey Liz,
    Thanks for elaborating on my comment :)

    I think it would be cool if there was some sort of accreditation handed out by the government that set the standards for SR&ED consulting. Although there are seminars available organized by the government, I have to say they are not sufficient for a business owner to walk out of there with enough confidence to tackle a SR&ED write up on his/her own for the first time.

    Upon reading one of your initial posts, you labeled one of the consulting firms as a “Boutique Firm” and that term really stuck with me because I think you nailed that head on. A number of firms out there are resorting to image to portray success and lure in the clients. I even distinctly remember at one point chit chatting with one of the SR&ED consultants a while back and having him say “In the end we are all salesmen!”….

    James N.

    • Elizabeth says:

      Hi James,

      I love that you took the time to reply to both the post and my comment. Thank you!

      I would agree that accreditation would be nice, but think it should be handled by an existing accreditation body. Accountants (CA, CGA, and CMA) all have their own governing bodies and ethics groups, as do professional engineers. We’re all (theoretically) mature enough to do this ourselves. That said, there have been attempts to start this process but collaboration in this space is difficult.

      Yes, the seminars by the government are nice, but they’re more of a pat on the back – they rarely contain enough information for someone to confidently tackle a submission on their own. So much goes back to “it depends”!

      In life, we all have to sell ourselves – be it in a job interview, performance review, or marketing report – but whether we do so honestly and ethically is the real question. My angle has always been “teach a man to fish” (pun intended!) – it’s always better if the company has a sound understanding of the program. It’s your company and this could be the single largest cheque sent to you in any given year. I would want to understand the process! Perhaps I’m odd in that sense!

      Elizabeth

  5. Heather says:

    “Why I hate so-called “SR&ED Experts” | Identifying weak SR&ED Consultants” definitely causes me personally ponder a little bit extra.
    I actually adored each and every single element of this blog post.
    Regards -Winfred

  6. Tim says:

    This was an excellent piece.

    I must admit, it’s been a while since I’ve thought to come read through either Sreducation or your blog, but it certainly gave me some things to consider. I’ve worked in the industry for just over 2 years and wouldn’t consider myself an “expert” at all. Frankly, I despise the word as, to me, it implies a level of arrogance in yourself. A personal observation, but nonetheless one that I have had confirmed on more than a few occasions.

    At the very least, it served as a reminder that continually reading and reviewing is key. For me, I think that is why I will never consider myself an “expert.” I always feel like I am learning and in that regard, one can’t truly be an “expert” (in my view) if you’re still learning. Highly knowledgable and experienced; certainly, but not an expert in my view of the term.

    You mentioned the “second brain” and I noted that you quoted Gladwell early on in your post. I assume you’ve read Blink then? The entire concept of the “second brain” makes me think of Gladwell’s theory in Blink.

  7. Alex says:

    Would you recommend any SR&ED consultant company? I’d like to apply this year for the first time.

    • Elizabeth says:

      Hi Alex,

      There are many different groups available to you, so it depends on what you’re looking for. Each has a particular strength and weakness. There are consulting companies that subspecialize (for example, I focus on CBRNe and Defence Software subcontractors that also apply for OIDMTC) while others are generalists. The Big 4 have national teams as do some boutiques, but it’s harder to get their attention if you’re a startup. Individual shops have better pricing but you’ll need to know what you want.

      Why not take a look at SRED Education and Resources for some ideas? You can reach me via the “Contact Us” form for more details. Before proceeding, take a moment to think about what would be important to you (the same way you would when finding an accountant – experience in your space, proximity, etc).

      Hope this helps!

      Best,

      Elizabeth

  • [...] There are several arguments put forwards by the CRA as to why contingency models should be eradicated. The most frequently cited reason is that this model diverts benefits from taxpayers to consultants, thereby “reducing the impact of SR&ED”.  Admittedly, the ease with which new claimants can be sold on the contingency model has led to some abuse of the program, particularly by unqualified individuals, as mentioned in a 2011 Globe and Mail article about R&D in Canada. There have even been articles by SR&ED consultants on why they hate other SR&ED consultants. [...]

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