The SR&ED program, which provides $3 to $4 billion in government funding for R&D in Canada, is a critical support tool for companies engaged in research and development. However, filing a strong SR&ED claim is a complex process that requires both experience and expertise. Over the years, the CRA (Canada Revenue Agency) has made numerous changes to the SR&ED program and has made efforts to educate businesses about the filing process. Nevertheless, there has been no shortage of SR&ED consulting companies in the last two decades offering consulting services. The question is: Do technology companies find it valuable to hire consultants for preparing their SR&ED claims? The answer appears to be a resounding “Yes!”
The Role of SR&ED Consultants
SR&ED consultants have built a strong reputation due to their expertise in understanding tax laws and helping companies identify SR&ED-eligible opportunities. Determining which activities and expenses qualify for SR&ED credits can be challenging, and most companies, particularly those focused on developing new technologies, prefer to allocate their time and resources elsewhere. Given the high costs of developers, scientists and engineers, many businesses rely on SR&ED experts to manage and file their claims efficiently.
Trends in SR&ED Consultant Usage
The charts below, sourced from data from the CRA, show the number of claimants and the percentage that are using SR&ED consultants. The consultants range from independent contractors to multinational accounting firms. The red bars depict SR&ED claimants who do not use a consultant and the blue bars depict companies that do engage a consultant.
Another interesting point is that historically, the number of SR&ED claimants has remained relatively stable at around twenty thousand. Over the same period from 2014 to 2022, the population of Canada grew by almost 10%. The number of businesses in Canada grew by a similar amount. One would expect to see the number of SR&ED claimants increasing but we do not see that trend. This lack of focus on R&D and innovation is concerning and has been discussed in many forums.
SR&ED Consulting Cost for Small and Large Firms
The number of firms using consultants is surprisingly high. Over 40% of claimants file an SR&ED claim that is under $100,000. For many companies that file small claims (<$50k) it is difficult to retain a consultant as most charge a minimum fee of $10,000. If you have a $25k claim, paying 40% to an SR&ED consultant is quite steep. However, it is clear from the data that even smaller companies find value in retaining SR&ED consultants as less than 19% of claimants don’t use an SR&ED consultant.
One may also think that very large technology companies that have internal SR&ED resources may not use an SR&ED consultant. Contrary to expectations, even the largest companies use an SR&ED consultant to verify and review the work done internally. The consultants are typically retained on a fixed price or hourly basis. This review by the consultants provides large companies with a second set of eyes on the SR&ED claim and typically strengthens the technical submission.
When looking at the percentage of companies that use an SR&ED consultant in the chart below, we can see that the blue bars that represent the companies that use an SR&ED consultant have been steadily increasing over the past decade. By increasing from 75.9% in 2014 to 81.1% in 2022, it is clear that SR&ED claim consultants for any size of business are a valuable resource. Note that some of the 2023 SR&ED claims are still being processed which explains why 2022 is the most recent data.
The increase in the use of SR&ED consulting services may explain why the CRA rarely does First Time Claimant Advisory Services (FTCAS) in 2024. A FTCAS was intended to educate companies that are filing SR&ED for the first time. The CRA technical and financial advisors spent a couple of hours with the company sharing the qualification criteria, expected documentation and claim support and discussing the SR&ED program. The intention was to increase the quality of the claims and, I believe, to encourage companies to file SR&ED claims without the need for an SR&ED consultant. While the FTCAS presentation and education were useful, it would seem that the quality of SR&ED claims is most often determined by the quality of the SR&ED consultant. The company, once they understand the SR&ED process, generally feel that retaining a consultant is good value.
Why Companies Choose SR&ED Consulting Services
For those who are wondering what are the benefits of SR&ED consultants, there are many. Here’s a list of some of the most common reasons.
- Up-to-date knowledge: The CRA SR&ED policy and application of the policy change very frequently. SR&ED consultants keep abreast of all the changes to ensure you’re claiming what qualifies and maximize the size of the claim.
- Good value: With the number of consultants available, the free economy creates pricing that is fair to companies. The cost to a company of diverting their developers, senior technical people and senior financial people away from developing customer solutions is significant. Most companies want their team focused on what they are great at – and preparing an SR&ED claim is rarely a key success factor.
- Expertise: Knowing the accounting and technical side of filing an SR&ED claim is a skill and an art. To be able to maximize the provincial and federal portions of SR&ED is done by people with experience and expertise in the field of science being claimed.
- Project definition: Creating well-structured SR&ED projects is critical to success. Too many projects and the CRA may deny one or more based on the lack of complexity. Too few projects and there may be insufficient detail. In addition, with too many projects, the time to prepare the SR&ED claim can be significant. SR&ED consultants understand what the CRA’s sweet spot is and create the appropriate number of projects.
- Audit defence: Preparing for a CRA SR&ED review can be a daunting task. A good consultant will assist their customer in presenting the material in a way that allows the CRA to easily digest and evaluate the SR&ED claim.
Challenges of SR&ED Filing Without Consultants
Small businesses or very large corporations may elect to file their SR&ED claim without engaging an SR&ED consultant. Some are successful but it is important to appreciate the risks involved:
- Sub-optimal use of resources: Probably the biggest challenge is that the people involved with preparing and filing the SR&ED claim are already 100% utilized in delivering on customer commitments. The goal of the team members tasked with preparing the SR&ED is to get this done as quickly as possible so they can focus on clients. Rarely is diverting skilled engineers away from their daily activities a good return on investment.
- Timing challenges: Often times companies leave the preparation of the SR&ED claim to the last minute. This often reduces the quality and puts strain on the staff involved with the process.
- Overlooking eligible activities: While overall the SR&ED program is well understood, to get every last dollar owing to a company from the program requires specific expertise. I’ve seen companies file for activities that do not qualify for the program and others that do not claim for expenses that should have been included in the SR&ED claim.
SR&ED Consultants: In summary
The increase in utilization of SR&ED consultants makes perfect economic sense. Companies focus on what they do best while expert consultants focus on quickly, professionally and cost-effectively filing the greatest value SR&ED claim. If you’re not using an SR&ED consultant and would like more information please visit GrowWise or contact us at contact@growwise.ai.
