Is the SR&ED Claims Process Too Complex?

Is Canada’s SR&ED subsidy program overly complicated? Every so often I see remarks in various periodicals to the effect that the SR&ED program needs to be simplified. The usual evidence for that is something like “The program is so complicated that an industry as sprung up to write claims, and too much money that should go to R&D goes to pay these claims consultants.”

Leaving aside the fact that the best way to simplify the program is to get rid of it, just like should happen to all forms of government interference in the economy, we are left with the truism that if it’s going to be done, it should be done in a way that is most effective at inducing economically useful innovation. I think that to simplify the program to the point where no claims professionals are needed would only be done by making the program so sloppy that more would be paid out for non SR&ED work than is currently paid for claims preparation.

This morning I was reading an article that suggested that the claims process would be simpler if eligible costs were restricted to labor.  Oh, really?  Well, WHICH labor? How would that writer define eligible labor? First off, he’d have to define SR&ED. Of course, the law already does that, by saying that it includes this but doesn’t include that. The trouble is that life isn’t so black and white that a simple definition will work. Every rule contains loopholes, so new rules get added, either by regulation or by administrative policy, to give belts and suspenders to the existing rules.

The Federal government has seen that if the program is too simple, a lot of money will be paid out for work that should not be subsidized. So they have built a complex fence around eligible costs….complex because it requires various mechanisms for keeping ineligible costs outside of the claims corral. For example, if a worker’s wage is eligible because of the nature of the work he is doing, how about his supervisor’s work? And then what about the cost of the supervisor’s boss? How necessary to the achievement of the claimed work is that person’s efforts? So rules are made. If the claim is made on the proxy basis, the first level of supervision, to the extent that it relates to an eligible project, is eligible, but if the traditional basis of filing is used, more levels of management can be claimed as SR&ED costs provided the work associated with those costs is in support of an eligible project. This isn’t what the law says; it is a CRA policy that makes the effort to support what they think the legislators were trying to achieve. There are numerous other examples that arise because people are like water: they get through every crack, and the law has many cracks.

In order to restrict cash outflow to those types of projects that were envisioned by the framers of the legislation, complexity is necessary. The result is that professionals are needed to help claimants through the claims process. My estimate is that the cost of those services is substantially less than the cost of subsidizing work that should not be subsidized, but which would be in the absence of the claims complexity that has created the need for those claims services.