Noticing An Increase in Fraudulent SR&ED Claims
On April 6, 2022 the Canada Revenue Agency (CRA), sent a press release which noted that there has been a recent increase in SR&ED claims containing false and/or fraudulent information. In the SR&ED community, such CRA releases are actually rare and do not happen frequently. Because the CRA is a very conservative government agency, this sort of “reminder” is actually a sign that there might be serious issues with fraudulent claims of SR&ED and the CRA is seeing a systematic pattern of fraudulent SR&ED claims.
The tax system in Canada is designed to be a ‘self-assessment’ system. It operates on a trust-based, honor system ethos. As the agency delegated by the Minister of Finance, the CRA has been given authority to administer this program. In other words, the CRA as the tax administrator conducts audits to review (in other words “audit”) those self-assessed claims. There are over 200+ auditors (called Research and Technology Advisors and Financial Reviewers) in the SR&ED program and specialize in both the science and financial aspects of the claim.
As a SR&ED practitioner of many years, I have seen many “fly by night” SR&ED consultants ply their trade on unsuspecting companies with sales pitches of no-risk, high-return “free” money from the government. For many small-business owners this is a captivating pitch. I have heard of many SR&ED claims being filed by….
- Bakeries doing SR&ED for new recipes and products
- Auto-body shops doing SR&ED for repair and reconstruction of automobiles
- Paint shops doing SR&ED for quality issues in bad print jobs
The list goes on and on….
I could easily go down the list of these highly suspect SR&ED claims and tell you easily and immediately why, more than likely, there is no eligible SR&ED being performed.
There are a few unscrupulous SR&ED firms that employ boiler room sales tactics coupled with unethical and illegal claims to get short term financial rewards. They target small businesses by the dozens and play on the fear of missing out by small business owners. They play the numbers game and hope that only a few of their filed claims will ever get audited and found. These fraudulent claims are the result of overstating eligible expenditures, clearly ineligible SR&ED work being claimed and/or no discernable or reasonable documentation present to validate the work.
I recently heard of an auto-body shop here in Vancouver being assessed over $150,000 in fines and penalties for a fraudulent SR&ED claim. While I sympathize with the small-business owners it serves as a good reminder that anything that is signed and is submitted to CRA you must be responsible for as the business owner. I also suspect this is not just a one-off fine but intended to send a message; a strong message, to BOTH the SR&ED consultant and the taxpayer that there appears to be a systematic effort to file fraudulent claims and more than likely, there is more than one other auto-body shop that has filed claims. This fine was likely result of a demonstrable pattern of fraud rather than a one off, “honest” mistake.
Now if the actual business owner, mistakenly filed a SR&ED claim under good-faith and under a possible misunderstanding of the SR&ED program eligibility criteria and rules, CRA would just re-assess the claim a $0 eligible and move on with some future guidance on how to properly self-asses and file a SR&ED claim in a compliant manner. However, fines are generally given to those taxpayers who show willful disregard for the SR&ED rules and also to their complicit and enabling SR&ED consultants.
As the CRA mentions in their press release:
“Submitting false information may have serious consequences
If you apply for the SR&ED Tax Incentive Program using false and/or fraudulent information, you will have to repay the amount to which you were not entitled and you may face serious consequences, including interest and penalties. Third parties who knowingly file false or overstated SR&ED claims on your behalf can have civil penalties imposed on them.”
Remember: It’s your responsibility as the Taxpayer to verify the information being submitted on your behalf and to keep documentation to support any claim you make.
As a long-standing SR&ED consultant, we pride ourselves in ensuring our clients submit provable, qualified SR&ED claims. I cannot say honestly that we have been 100% successful. There are some claims where there is a difference in opinion and we cannot see eye to eye with CRA. In those few instances, we agree to disagree but never in our long history have we never had a fine assessed to us or our clients because we take great care to ensure we are ethical, rational, reasonable and well documented in all our filings.
As professional, longstanding SR&ED experts we understand occasionally that means telling clients things they don’t want to hear. We owe it to the SR&ED program and our business and our reputation that we are 100% forthright in our dealings and advice we give to our clients.
Have you received a penalty or fine from CRA for a SR&ED claim? If so, please email us at email@example.com to learn more about how we can help with your issue.