Did your SR&ED claim invite CRA to the door?

So your SR&ED claim attracted a site visit by CRA, did it?

Site visits were not as common a few years ago as they now are. But CRA found out that the honor system of filing was being used by dishonorable people. There was one nationally active SR&ED claims preparation firm that routinely filed bogus claims. I worked on an SR&ED claim of one of their clients a year after that firm had filed for the client. I examined that prior claim and discovered that the eligible costs were overstated by about 400%.  It was an uphill battle trying to convince CRA that the client was honest and simply had signed the claim because he was busy and signed where he was told to sign, trusting the “professional”.

Why would an SR&ED claims consulting firm inflate a claim?

If the firm was charging a fee based on the size of the claim, then the motive may seem obvious.  And if the firm was charging a fixed fee or an hourly based fee which got rather high, then it’s plausible that cheating on the claim was a way to make the high fee look not so high.

Do contingency fees tend to result in fallacious SR&ED claims?

Some CRA employees seem to think that a fee based on the size of the claim is incentive to cheat. I disagree. I am involved in managing a SR&ED preparation firm (getsred.ca) which usually charges a percentage of the benefits the client receives from the claim, and this is incentive to be careful. Since fees are only receivable on successful claims, this means that the firm is active in defending claims before CRA: communications, attending meetings, appeals, etc.  Those activities burn up resources faster than preparing a claim does, and what might have been a profitable filing effort can rapidly turn into a loss. Guess what…. Claims that are realistic tend to encounter less pushback from CRA than claims that are from someone’s imagination. So the incentive is there to file honest, realistically evaluated claims.  There is a further advantage, and that is that honest filing preserves the reputation of the firm at CRA. And that can’t hurt clients.

SR&ED Reviews

A few years ago, CRA decided to hire a lot of new staff and review a higher portion of claims than they had been reviewing. So if you have filed a claim, there is a good chance it will be reviewed. Sometimes the review is simply part of their FTCAS (First Time Claimant Advisory Service) program. If you are having only an FTCAS visit, it usually means your claim has been accepted as filed and will be paid out after the FTCAS visit has occurred. More often though, the site visit is occurring because there are issues with the technical write-up or because CRA wants to verify the expenses claimed or both. Verification of expenses is usually a painless process provided that the claim was filed in accordance with the SR&ED legislation.

The SR&ED Technical Review

Technical reviews can be a problem. I’ve been involved in many. One of the problem features of these reviews is that often the RTA (that’s what CRA calls its technical reviewers) is an expert in some field to which the claimed project is peripheral, so they have enough knowledge to ask some sensible questions, but sometimes they just don’t seem to see the technological challenges of the project. Some RTA’s are able to grasp what is going on, but an easy tactic is for them to say “I just don’t see it.” This is particularly true if they break the project work into small steps and examine each step and declare that there is no SRED in each of those steps. Of course, the courts have determined that SRED can be in the project as a whole rather than in each of the steps.

One of the requirements of SRED is that there be new knowledge created. To some RTAs this means discovering Why. If the claimant can’t explain why something occurred, there is no new knowledge. The trouble is that whatever is put forth as the answer can meet with another Why.  Pretty soon engineering devolves into physics and then cosmology and then philosophy if an RTA doesn’t exercise the care to not sound like a three year old: “Why? ….. Why? ..... Why?”  I don’t want to create the impression that all RTAs are obstreperous or downright thick. Some of helpful and most are quite intelligent.  And the majority are affable.  The meetings are usually friendly and enjoyable. But an RTA’s friendliness is not proportional to his acceptance of your claim. When you are milking the cow, it doesn’t hurt to stroke her, does it?

Have a professional with you in your CRA site visit.  And be prepared to focus on proving Yes answers to the five questions RTAs like to ask.

Election bombs and closing the casino

Is more coming? What other news bombs will go off between now and November 8? The FBI announcement towards the end of last week (see https://gordonfeil.blogspot.ca/2016/10/donald-trump-is-right-game-is-rigged.html#comment-form) may be just the first in a series.  Who knows? Maybe the best will be saved for last. I recall living in Edmonton in the mid-seventies and The Edmonton Journal publishing, on the day before the mayoralty election, a front-page article with a headline in the type that I might have thought would be reserved to announce the end of the world. The article was a revelation of a scandal alleged to have involved the popular candidate and former mayor, William Hawrelak. The next day, the target of that piece won the election by a landslide as I recall.  The power of the press. So not all adverse news is destructive to a candidate’s reputation. Nonetheless, I would not be surprised if sometime in the next few days we are treated with new revelations and accusations that will pale the ones already made.

These rumors may have a big effect on already tottering markets. Tottering?  Yes, tottering. You want to know how badly? Well, when a former U.S. Treasury Secretary, in this case Larry Summers, suggests that the Fed should buy common stocks to support the stock market, you have to know that the roulette table is wobbly.

Pretty much every month lately the Fed puts forth the rumor that interest rates will be increased. Savvy people have not bought into it. A rise in interest rates before the November 8 election would go against the Democrats, and Trump has said he’s firing Fed boss Yellen, so do you think she’s going to do anything to get him elected? No, any rate increase will have to wait until after the election.

The USA is long overdue for interest rate hikes. The way things work there is that after a recession, rates are gradually raised so that when the next downturn comes, there is room to lower them incrementally by three or four hundred points (3 to 4 percentage points). After the 2008 washout, rates have not been raised like that.  To have done so would have tanked the economy even more.  The U.S. economy just has not recovered enough to support those rate increases. But now, this creates a problem.

The ratio of national debt to GDP has been increasing throughout the developed world to the point where insolvency is in sight. When your debt is too many multiples of your production, you can’t make your payments because they are just too high. Debt increases as governments keep buying votes with their handouts, and production has declined both because of aging work forces moving into retirement and because of per capita production dropping also. An economic downturn is inevitable, but the usual treatment of lowering interest rates is not available. How can they drop 4% from what is almost zero percent?

Ah!  “Negative interest rates” say Ivy League economists. Shades of Social Credit. The argument is that if people are dinged a fee for saving money (negative interest), they will not save and will spend. This will get the economy moving.  Only a PhD could have thought of that.  The Austrian school of economics (guys like Von Hayek, von Mises, Rothbard, and their intellectual descendants) knows better. People generally save for a reason: education for their kids, retirement, whatever. If their savings are being eroded, they will want to save even more to compensate. No, negative interest rates will not work, so the weapon establishment economists use to fight downturns is gone. Their arsenal is empty.  I think that the Fed will not be bailing out the big banks next time. The Fed may require a bailout of its own.

More libertarian than libertarian

I decided to take a look at the platform of the Libertarian Party of Canada, finding it at www.libertarian.ca/platform. The first plank listed is to “Reduce federal income taxes to a maximum rate of 15% and increase the personal income tax exemption amount to $17,300 from $11,500”, and I am thinking “Whoa! That’s not really libertarian, is it?” Why stop at 15%? Just repeal The Income Tax Act. Get rid of it…..and all the expense associated with enforcing it. No more CRA wages or building costs. And while we are at it, get rid of GST and any other federal sales tax. No more excise tax. Customs duties? Gone. On anything and everything.

So, how would the federal government pay for necessary expenditures? Glad you asked. They can just “print” money. It’s not really printing, but rather electronic data in computers. Wouldn’t that cause hyperinflation? No. First, there would be a legislated limit to the expansion of the money supply. Second, production of goods and services would probably increase rapidly in an environment of no tax, so that even though there was more money chasing goods and services, these would be increasing along with money. And even if your dollar was worth less, this depreciation would be mitigated by you having the extra money that previously would have been applied to taxes. And THAT is a LOT of money.  A prime influence upon price inflation is the velocity of money, and with the extra money in private hands by reason of no more federal taxes, it seems likely that the velocity would abate somewhat.

Congruent with this, I propose that non-renewable natural resources not be exportable except in processed form. These resources are property of all of us, and our property rights should be respected.  Oil would not be exported except as refined products. Gold would be jewellery, coins or industrial forms.

In addition, the federal government would provide free post-secondary education by paying tuition in full. Living costs would be the responsibility of students, but they could obtain student loans to cover them in full, and these loans would be forgivable at the rate of 1/15 per annum of the amount borrowed, provided that the student was working in a Canadian position for 30 hours a week, or was prevented from doing so solely by disability.

Furthermore, let the market determine interest rates. They would now be a function solely of the supply of and demand for money. Government would no longer be competing with businesses and consumers for funds, so this would help ease the demand. The extra money in the hands of people because of no federal taxes would help increase the supply of money also, so rates would tend to not be onerous.

What would the consequences of all this be? Business would want to move TO Canada instead of away as a result of abundant well educated labor, easy to obtain materials (raw non-renewables are not being exported, and materials from outside the country can be imported with no duty), money being obtainable for funding capital formation, and no confiscatory taxes.  A very competitive business environment that would tend towards creation of jobs for almost everyone that wanted to work.

By and large, the Libertarian platform seems thoughtful, and maybe one day someone of influence in that party might decide to make the Gordon Feil suggestions part of their campaign. Sigh.  Wouldn’t that be cool?