The innovation gap: Government subsidies come with a price in paperwork: Adam McDowell, National Post
November 5, 2010

Perle Systems, of Markham, Ont., has faced audits over its research and development tax credits before, but this year’s has the chief operating officer more worried than the previous ones.

“Historically, when we went through the science audit, the very first question the science people would ask was, ‘What do you do? What are you innovating? Let’s talk about the science.’ This is the first time we’ve had someone come in and say, ‘Let’s talk about paperwork,’ ” said John Feeney, COO of Perle Systems.

Like many Canadian-based firms trying to bring innovative products and services to market, Perle is discovering that what federal innovation policy gives with one hand, bureaucracy can take away with the other. Business leaders say auditors enforcing the rules of the Scientific Research and Experimental Development tax credit have taken a harder line against claimants of Canada’s flagship innovation policy, leading Perle Systems, a maker of networking hardware, to turn to a consulting firm to make sure the Canada Revenue Agency won’t claw back its credit over paperwork issues.

“We’ll probably lose 20%-25% of our claim to the consultants. So we’ll take that money and instead of putting it back into research and development, we’ll give it to some accounting firm,” said Mr. Feeney...

The Canadian Advanced Technology Alliance has lobbied Ottawa to back off from imposing “more rigid expectations and audit practices.” The association believes its members would be more vocal about the attitude change, but fear antagonizing tax auditors...

The Taxpayers’ Ombudsman, J. Paul Dubé, has listened to the calls. His office is currently undertaking a review to ensure CRA “is administering the SR&ED program fairly,” with respect to rule changes and the opportunity for companies to get a second opinion when their claims for tax credits are rejected...


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