Canada SR&ED and contingency fees (brief) | Research Credit Integrity Alliance

Key points

Form T661 defines a contingency fee arrangement as one where the fee is based on a percentage of the investment tax credit earned.1
In 2012 the federal government consulted on contingency fees for SR&ED claims, citing compliance costs and the criticism that such fees give an incentive to take aggressive positions, and also recording possible benefits.2
Budget 2013 responded with disclosure: since 2014 every claim must report each paid claim preparer, the billing arrangement and the fee.34
Missing or inaccurate preparer information carries a 1,000 dollar penalty for which the claimant and the preparer are jointly liable; the tax consequences of a reduced claim fall on the claimant.56
No published findings from the 2012 study and no CRA statistics on billing arrangements were identified.

How the fees work

Canada's SR&ED program gives an investment tax credit (ITC) at a basic rate of 15 percent and, for some corporations, an enhanced rate of 35 percent.7 The claim is made on Form T661. Part 9 of the form lists five billing arrangement codes, and code 1 is a "Contingency fee arrangement" where the fee is a percentage of the ITC earned.1

The CRA's guide shows that such fees can vary with the size of the credit. Its worked example describes a fee of 15.5 percent on the first 10,000 dollars of ITC and 6 percent on the next 5,000 dollars.8 Because the fee may not be settled when the claim is filed, the form asks for the fee "paid, payable or expected to pay".1 As an illustration only, a fee of 20 percent on an ITC of 100,000 dollars would be 20,000 dollars.

The 2012 study

Budget 2012 announced a study of contingency fees for SR&ED claims, and the Department of Finance and the CRA consulted until 1 October 2012.9 The consultation paper said about two-thirds of businesses relied on third parties to prepare claims, and that it had been reported that contingency fees "may represent 30 per cent or more of the total SR&ED benefit". It presented that figure as reported, not measured.2

The paper set out two concerns. High fees may raise compliance costs, so that a smaller share of the incentive reaches the business doing the research. And the practice "has been criticized on the basis that it provides an incentive for tax preparers to encourage their clients to take aggressive positions that push the bounds of the law and its interpretation".2 It also recorded possible benefits: wider knowledge of the program, and claims for businesses that lack the expertise to prepare one themselves.2 It stated that there were then no restrictions in Canada on contingency fees for SR&ED claims, and compared the Lobbying Act, which prohibits contingent payments to consultant lobbyists.210

No published report of the study's findings was identified.

The 2013 response

Budget 2013 required claim forms to give each third-party preparer's business number and "details about the billing arrangements including whether contingency fees were used and the amount of the fees payable". It said this information "will facilitate the identification of SR&ED program claims with a higher risk of non-compliance".3 The CRA states the rule applies to claims filed on or after 1 January 2014.4

The Income Tax Act now requires every SR&ED form to contain claim preparer information, defined to include the arrangement under which a preparer accepts payment.115 A claim preparer is anyone who agrees to accept consideration to prepare or help prepare the form, other than an employee.5 The rule requires disclosure. It does not cap fees, ban any type of fee, or require a fee to be refunded if a claim is reduced.

Who bears the consequences

The CRA states that a claimant "is still legally responsible" for its claim even when represented, and that a lack of supporting information can lead to partial or full disallowance.12 A selected claim cannot be withdrawn.12 A false statement made knowingly or with gross negligence carries a penalty of the greater of 100 dollars and 50 percent of the amounts listed in the Act, which include an overstated refundable ITC.6

Preparers face the 1,000 dollar claim preparer information penalty, jointly with the claimant, unless they show due diligence.5 The third-party penalty in section 163.2 can apply to a person who makes a false statement for another, and is measured partly by "gross compensation", which includes amounts to which the person is entitled "contingently".13 Members of CPA bodies are also bound by a rule barring contingent fees for preparing an income tax return, although the code does not say whether SR&ED claim work is covered.14

The case for contingency fees

The 2012 paper itself recorded arguments for contingency fees: they may spread awareness of the program and let businesses without the resources to prepare a claim make one.2 A business that is unsure whether its work qualifies pays only if a credit results, and the preparer bears the cost of work that finds nothing. Supporters can also point out that since 2014 the CRA has known, for each claim, whether a contingency fee was used. Nothing in this brief suggests that preparers who charge contingency fees act improperly.

What the record shows

The federal government has treated contingency fees in SR&ED claims as a policy question, consulted on them, and chose disclosure. Every claim reports how its preparers were paid, and the stated purpose is risk identification.3 Responsibility for the content of a claim, and the tax cost of an overstated claim, rest with the claimant.612 What the record does not show is how many claims use contingency fees, at what rates, or how those claims fare on review. No published official source identified for this brief measures it.

References

Canada Revenue Agency, Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, T661 E (26), Part 9, Claim preparer information, lines 935 to 975 and billing arrangement codes. https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t661/t661-26e.pdf (accessed 11 October 2026). Back
Department of Finance Canada, Consultation Regarding the Impact of Contingency Fees on the Effectiveness of the Scientific Research and Experimental Development Tax Incentive Program (2012), sections "Use of Third Parties to Prepare SR&ED Claims" 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, Economic Action Plan 2013 (Budget 2013), Annex 2, Tax Measures: Supplementary Information, 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, section on claim preparer information and penalty. 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
Government of Canada, Income Tax Act, RSC 1985, c 1 (5th Supp), subsections 162(5.1), (5.2) and (5.3). https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-162.html (accessed 11 October 2026). Back
Government of Canada, Income Tax Act, RSC 1985, c 1 (5th Supp), subsection 163(2), including paragraph (d). https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-163.html (accessed 11 October 2026). Back
Canada Revenue Agency, What are SR&ED tax incentives. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/what-are-sred-tax-incentives.html (accessed 11 October 2026). Back
Canada Revenue Agency, T4088, Guide to Form T661 (T4088(E) Rev. 20), Part 9, lines 940 to 965 and example. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4088/guide-form-t661-scientific-research-experimental-development-expenditures-claim-guide-form-t661.html (accessed 11 October 2026). Back
Department of Finance Canada, Harper Government Launches Consultations on Contingency Fees for the SR&ED Tax Incentive Program, 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
Government of Canada, Lobbying Act, RSC 1985, c 44 (4th Supp), section 10.1. https://laws-lois.justice.gc.ca/eng/acts/L-12.4/page-2.html (accessed 11 October 2026). Back
Government of Canada, Income Tax Act, RSC 1985, c 1 (5th Supp), subsection 37(11). https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-37.html (accessed 11 October 2026). Back
Canada Revenue Agency, The SR&ED Review Process: A Guide for Claimants, section on withdrawing a claim and Appendix A. https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/technical-review-a-guide-claimants.html (accessed 11 October 2026). Back
Government of Canada, Income Tax Act, RSC 1985, c 1 (5th Supp), section 163.2, subsections (1), (4) and (5). https://laws-lois.justice.gc.ca/eng/acts/I-3.3/section-163.2.html (accessed 11 October 2026). Back
Chartered Professional Accountants of Ontario, CPA Code of Professional Conduct, Rule 215, Contingent fees. https://assets.cpaontario.ca/members/regulations-guidance/pdfs/CPA-Ontario-Code-of-professional-conduct.pdf (accessed 11 October 2026). Back