Canada's federal review of contingency fees (brief) | Research Credit Integrity Alliance

Key points

Budget 2012 announced a study of contingency fees for SR&ED claims, and the Department of Finance and the CRA consulted on it from 2 August to 1 October 2012.12
The consultation paper set out concerns about compliance costs and aggressive claim positions, and possible benefits in awareness and access.1
A national accounting body defended contingency fees and suggested naming every paid preparer on the claim form, with penalties.3
Budget 2013 adopted disclosure: since 2014 each claim must report every paid claim preparer, the billing arrangement and the fee, with a 1,000 dollar penalty.45
The CRA said the information would be analyzed for links with non-compliance, but no findings from the review or the billing data were found in the official record.6

The review

In 2012 the SR&ED program provided more than 3.6 billion dollars in tax assistance, and the government described it as the largest federal program supporting business R&D.1 Budget 2012 announced a study "to better understand the practice of businesses hiring consultants on a contingency-fee basis to prepare their SR&ED claims, and to determine whether any action is required".7

The Minister of Finance and the Minister of National Revenue launched the consultation on 2 August 2012. It asked why firms hire preparers on a contingency fee basis, why preparers charge such fees, how prevalent the practice is, how much is charged, and what the practice does to the program's effectiveness.2 Comments were due by 1 October 2012.1

What the consultation paper said

The paper defined a contingency fee as one "only payable if there is a result favourable to the client", generally calculated as a percentage of the credits received.1 It reported that about two-thirds of businesses relied on third parties to prepare claims, and that 2009 tax data showed similar use by small and medium-sized firms (65 percent) and large firms (63 percent).1 It stated that there were no restrictions on the size of contingency fees and that it had "been reported" that they "may represent 30 per cent or more" of the benefit, without naming a source.1

It set out two concerns. High fees may raise compliance costs, so that less of the incentive reaches the firm doing the research. And because the fee "is related to the size and result of the claim", the practice "has been criticized" as giving preparers an incentive "to encourage their clients to take aggressive positions that push the bounds of the law", which, "if true", would raise administration costs and fiscal risk.1 It also recorded possible benefits: wider knowledge of the program, and claims by businesses that lack the expertise to prepare one.1

The paper compared other rules, including the ban on contingent payments to consultant lobbyists, the United States restriction on contingent fees for matters before the IRS, and preparer registration in Japan.1

What was submitted

The Department of Finance posted the submissions it had permission to publish; an archived list shows 42 entries.8 The Canadian Institute of Chartered Accountants argued that contingency fees had become "a vital component" of the system. It said they let companies claim "without any upfront cash outlay", matter most to first-time claimants, and work as a form of innovation financing, and that preparers "would take the same positions on filing the claim regardless of the fee arrangement".3 It reported its own poll and survey figures, which the government did not publish any test of.3 It opposed restrictions, but said that if action were needed the claim form could name "any third party who has provided any form of paid assistance", with penalties.3

The Certified General Accountants Association of Canada wrote that, because success is uncertain, contingency fees "make business sense".9

What the government decided

Budget 2013 gave the CRA new tools "to better respond to the minority" of preparers and claimants involved in claims where the risk of non-compliance is perceived to be high.4 Claim forms would require each paid third party's business number and "details about the billing arrangements including whether contingency fees were used and the amount of the fees payable", to "facilitate the identification of SR&ED program claims with a higher risk of non-compliance".4 A 1,000 dollar penalty would apply, with claimant and preparer jointly liable.4

The measure became law on 12 December 2013 and applies to claims filed from 1 January 2014.5 The Income Tax Act defines a claim preparer as anyone who "agrees to accept consideration to prepare, or assist in the preparation of" the form, other than an employee, and relieves only the preparer of the penalty where it exercised due diligence.10 The government did not cap or prohibit contingency fees, and did not require preparers to belong to a professional body.410

The rules in operation

Part 9 of Form T661 asks for each preparer's name, business number, billing arrangement code, rate and total fee, with code 1 for a fee "based on a percentage of the investment tax credit earned".11 In 2014 the CRA said that a claim would not be disallowed because Part 9 was incomplete, though the penalty might apply, and that data entry alone does not make someone a preparer.12 It also allowed billing details to be sent separately to the tax center for confidentiality.13

The CRA's privacy impact assessment states that it would analyze the information to "determine correlations with higher risk of non-compliance in SR&ED claims", and that program data are shared for analysis with Statistics Canada and the Department of Finance.6

What the record shows

Canada examined contingency fees for SR&ED claims as a question of program effectiveness, weighing compliance costs and claim positions against access and awareness.1 It responded with disclosure close to what a professional body had suggested, extended to the billing arrangement and fee, and with no restriction on the fee itself.34 The record contains no published answer to the questions the review asked and no statistics from the billing information the CRA has collected since 2014.

References

Department of Finance Canada, Consultation Regarding the Impact of Contingency Fees on the Effectiveness of the Scientific Research and Experimental Development Tax Incentive Program (2 August 2012), sections "Introduction", "Use of Third Parties to Prepare SR&ED Claims", "Considerations" and "Examples of Restrictions in Canada and Other Countries". Archived copy captured 7 May 2013. https://web.archive.org/web/20130507033404/http://www.fin.gc.ca/activty/consult/sred-rsde-eng.asp (accessed 11 October 2026). Back
Department of Finance Canada, News Release 2012-086, 2 August 2012. https://www.canada.ca/en/news/archive/2012/08/harper-government-launches-consultations-contingency-fees-sr-ed-tax-incentive-program.html (accessed 11 October 2026). Back
Canadian Institute of Chartered Accountants, Impact of Contingency-based Fees on the Effectiveness of the Scientific Research & Experimental Development Tax Incentive Program (September 2012), pages 3 to 8. Archived copy captured 24 December 2013. https://web.archive.org/web/20131224155822/http://www.fin.gc.ca/consultresp/pdf-srd-rsde/009-cica-icca.pdf (accessed 11 October 2026). Back
Department of Finance Canada, Budget 2013, Annex 2, section "Scientific Research and Experimental Development Program". Archived copy captured 20 December 2013. https://web.archive.org/web/20131220170359/http://www.budget.gc.ca/2013/doc/plan/anx2-eng.html (accessed 11 October 2026). Back
Canada Revenue Agency, Budget 2013, Scientific Research and Experimental Development (SR&ED) Tax Incentive Program (archived), notice of Royal Assent. https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2013/budget-2013-scientific-research-experimental-development-tax-incentive-program.html (accessed 11 October 2026). Back
Canada Revenue Agency, Privacy Impact Assessment summary: SR&ED Incentive Program (Enhanced Expenditures Claim Form T661). https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/protecting-your-privacy/privacy-impact-assessment/privacy-impact-assessment-summary-scientific-research-experimental-development-incentive-program-enhanced-expenditures-claim-form-t661-scientific.html (accessed 11 October 2026). Back
Canada Revenue Agency, Archived: Budget 2012, Scientific Research and Experimental Development (SR&ED) program, question 9. https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/archived-budget-2012/archived-budget-2012-scientific-research-experimental-development-program.html (accessed 11 October 2026). Back
Department of Finance Canada, Submissions for the Consultation Regarding the Impact of Contingency Fees on the Effectiveness of the SR&ED Tax Incentive Program. Archived copy captured 24 December 2013. https://web.archive.org/web/20131224155822/http://www.fin.gc.ca/consultresp/sred-rsde-eng.asp (accessed 11 October 2026). Back
Certified General Accountants Association of Canada, Submission to the Department of Finance and the Canada Revenue Agency (October 2012), section "Contingency fees". Archived copy captured 24 December 2013. https://web.archive.org/web/20131224155822/http://www.fin.gc.ca/consultresp/pdf-srd-rsde/010-cgaac-acgac.pdf (accessed 11 October 2026). Back
Government of Canada, Income Tax Act, RSC 1985, c 1 (5th Supp), subsections 162(5.1) to (5.3) (current to 21 September 2026). https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-162.html (accessed 11 October 2026). Back
Canada Revenue Agency, Form T661, T661 E (26), Part 9 and billing arrangement codes. https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t661/t661-26e.pdf (accessed 11 October 2026). Back
Canada Revenue Agency, Form T661 (13): Questions and Answers (31 March 2014), questions 3 to 5. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/form-t661-13-questions-answers.html (accessed 11 October 2026). Back
Canada Revenue Agency, SR&ED T661 Claim Form: Revised optional filing measure for Part 9 (30 May 2014). https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/whats-new-program/t661-claim-form-revised-optional-filing-measure-part-9.html (accessed 11 October 2026). Back