Over the past several years, the Department of Finance ("Finance") and the Canada Revenue Agency (the "CRA") have conducted a detailed review of the structure and administration of the federal Scientific Research and Experimental Development ("SR&ED") program (the "SR&ED Program"). The SR&ED Program is designed to provide meaningful tax incentives for Canadian businesses to undertake meaningful scientific research and development activities in Canada.

In Budget 2012, the Government proposed substantial legislative amendments to reduce certain of the tax advantages historically associated with the SR&ED Program, including the rate of certain investment tax credits offered under the SR&ED Program.

The Government also proposed to undertake a study of the contingency fees charged by third party consultants to prepare SR&ED claims on behalf of taxpayers. The Government expressed concern with the relatively high fees charged by certain SR&ED consultants and the possibility that such practices were "diminishing the benefits of the SR&ED tax incentive program to Canadian businesses and the economy."

In August 2012, Finance and the CRA launched a formal consultation process in which they invited submissions and feedback from interested stakeholders on the impact of contingency fees on the SR&ED Program. In the briefing note that accompanied the request for submissions, Finance and the CRA made certain observations regarding the impact of contingency fee arrangements, including the following:

As the fee received by tax preparers charging on a contingency basis is related to the size and result of the claim, this billing 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. If true, this practice would increase the costs for the Canada Revenue Agency to administer the SR&ED tax incentive program, in addition to increasing the overall fiscal risks associated with the SR&ED tax incentive program.

In Budget 2013, the Government announced new compliance measures that will permit the CRA to (i) more closely monitor the activities and advice provided by tax preparers that assist with the preparation of SR&ED claims, and (ii) better identify aggressive or high risk claims. The first measure proposed by the Government will require more detailed information regarding the tax consultants that have been retained to prepare an SR&ED claim to be provided on the relevant claim forms. Where one or more third parties have assisted with the preparation of an SR&ED claim, the Business Number of each third party will be required to be provided, along with details regarding the relevant billing arrangements, including whether contingency fees were applicable and the aggregate amount of the fees payable. Where no third party was engaged to assist with the preparation of an SR&ED claim, the taxpayer will be required "to certify that no third party assisted in any aspect of the preparation of the SR&ED program claim."

To encourage full compliance, Budget 2013 further proposes that a new penalty of $1,000 be levied in respect of each SR&ED claim in which information regarding third parties that assisted with the preparation of the claim, including their billing arrangements, is missing, incomplete or inaccurate. Where a third party has been engaged to assist with an SR&ED claim, the relevant taxpayer and the third party may be held jointly and severally, or solidarily, liable for the penalty.

The newly proposed SR&ED compliance measures may have significant implications for both taxpayers that engage SR&ED consultants, as well as the SR&ED consultants themselves. It should be expected that the CRA may target the claims of taxpayers that have been prepared with the assistance of SR&ED consultants that the CRA has identified as advocating aggressive filing positions. As a consequence, taxpayers will need to exercise greater diligence in assessing the practices and reputation of a particular SR&ED consultant prior to engaging the consultant to assist with the preparation of an SR&ED claim. In addition, because both the taxpayer and the relevant SR&ED consultant may be held liable for the newly proposed compliance penalty for not fully reporting the relevant aspects of an SR&ED consultant's retainer, both the taxpayer and the SR&ED consultant will need to be diligent in ensuring that all required information is provided to the CRA on a timely basis.

These new SR&ED compliance measures are proposed to apply to SR&ED claims filed on or after the later of (i) January 1, 2014, and (ii) the day on which the relevant enacting legislation receives Royal Assent.