I’m going to look at the benefits of using a SR&ED consultant through a lender’s lens rather than a consulting perspective. Take it from someone who has seen thousands of SR&ED claims and has no affiliation with consultants, we know what is best to maximize your return and minimize your pain.
Lenders like Venbridge have criteria that are important to us when underwriting a SR&ED loan. Aside from the company’s financials, we take a close look at the underlying asset; the SR&ED claim. Some lenders do their own calculations to evaluate the reasonability of the claim amount. For instance, if the total salary and benefits are $500k and the SR&ED claim is $320k, it would raise some eyebrows if 100% of the salaries are being claimed as SR&ED. Some lenders read the technical portion of the SR&ED claim to better understand the business and determine if the claim might be eligible. Some lenders will go to the extent of obtaining the costing sheet and looking at the supporting documentation to ensure that if the claim were to be selected for review, it would withstand the scrutiny of the CRA. A lender wants to know that there is a high probability of the SR&ED claim refund being close to 100% of what was submitted.
I look at three different classes of SR&ED consultants.
There are large multinational accounting firms with SR&ED practices, independent SR&ED consulting firms, and independent consultants. In general, my experience has shown that there are key differences. The large accounting firms are generally less aggressive. They know the details of the tax code and, as a result, do a great job of claiming the maximum amount. Firms with larger practices often have experts in the specific domain and therefore prepare great claims.
The independent consultants tend to be more of a mixed bag. There are some that have a reputation of being extremely aggressive and have very high CRA review rates while others are the complete opposite. Overall, the independent consultants prepare solid SR&ED claims like a well-oiled machine and do more of the heavy lifting for their clients than do large accounting firms. The independent consultants are often less expensive than multinational firms and can offer fantastic services. By looking into the work experience of the consultant, you can often tell if they are a good fit to prepare your SR&ED claim.
Generally speaking, any SR&ED consultant is well worth the investment. I recall a few years back the Director General of the SR&ED program saying that over 70% of taxpayers use a SR&ED consultant to file their claim. I would suggest everyone should use a well qualified and reputable consultant. The consultants are up to speed on the latest changes in the tax code and SR&ED program. They will often find activities that qualify for SR&ED that you were not even aware of were part of the program. Consultants know the intricacies of calculating labour, material, and contractors expenses involved with SR&ED – and yes, this can get very tricky!
Probably the most important aspect of a consulting service is their ability to help you effectively organize to claim SR&ED every year and support you when the CRA chooses to review your claim. The claim review process can be difficult to navigate and a consultant can be incredibly useful in preparing to provide the CRA the information they are looking for.
From a lender’s perspective, engaging a SR&ED consultant is not mandatory but generally reduces our risk.
At Venbridge we have a rating system for consultants – some of which are very low risk because they have a lower than average adjustment rate (amount of SR&ED credits denied after review). Others are such high risk that we won’t fund a borrower who uses this particular consultant. A vast majority of consultants prepare claims which maximize the incentive and effectively manage the risk.
Some companies do not use consultants at all. Not all lenders will finance these companies. At Venbridge we will consider financing with a bit more investigation. We want to see that the borrower has a track record of success with the CRA, and more importantly, has shown that their claim can be defended when subjected to a review.
The person preparing the claim needs to have expertise in this area and have filed for multiple years. What we find is that companies feel that it is more economical to file their claim internally. However, when you calculate the opportunity cost of the people preparing the claim, plus the added risk of not filing as professionally as a consultant, often the economics of filing internally doesn’t make sense. I often see companies file their claim internally until they are subject to a CRA review. The review does not go as well as expected and the next call is to a consultant to help them prepare the next year’s claim. The issue with this strategy is that once there is a significant reduction in your claim size, it makes it difficult in future years to claim similar projects without inviting more CRA reviews.
Overall, if you are looking at financing your SR&ED claim or if you simply want a fantastic claim which maximizes your entitlement then I strongly suggest you use a consultant. And if you’re looking to finance your SR&ED claim, contact us at Venbridge and we’ll be happy to help you.