United States vs Canada: R&D credits compared

Groups with engineering teams on both sides of the border, companies that have moved development from one country to the other, and advisors with clients in both compare these two schemes before any others. They reward the same kind of work, and the evidence that supports a claim in one country supports a claim in the other. Almost everything else differs: the benefit, the eligibility test, the costs that count, the calculation, the deadline and the review.

At a glance

Point	United States	Canada
Scheme and administering body	Credit for increasing research activities under section 41 of the Internal Revenue Code. Internal Revenue Service (IRS)	Scientific Research and Experimental Development (SR&ED) program. Canada Revenue Agency (CRA)
Form of benefit	Income tax credit, claimed on Form 6765 with the tax return	Investment tax credit, and a deduction against income
Headline rates	Regular credit of 20% of qualified research expenses above a base amount, or alternative simplified credit of 14% of qualified research expenses above 50% of the average for the previous three years. 15.8% or 11.06% if the reduced credit is elected under section 280C(c)	Enhanced rate of 35% on qualified expenditure up to the C$6 million expenditure limit, for most Canadian-controlled private corporations (CCPCs) and, for tax years beginning after 15 December 2024, eligible Canadian public corporations. Basic rate of 15%
Refundability	Not refundable. Qualified small businesses can elect to apply up to US$500,000 a year against payroll tax, using Form 8974	For most CCPCs at the enhanced rate, current expenditure is 100% refundable and capital expenditure 40% refundable, up to the limit
Who can claim	Corporations, partnerships, S corporations, individuals, estates and trusts that pay or incur qualified research expenses	Corporations, individuals, trusts and partnerships that carry on SR&ED in Canada
Definition of qualifying work	All four parts of the test in section 41(d): costs eligible to be treated as research or experimental expenditure under section 174; work undertaken to discover information that is technological in nature; information intended to be useful in developing a new or improved business component; substantially all of the activities elements of a process of experimentation	Systematic investigation or search carried out in a field of science or technology by means of experiment or analysis: basic research, applied research and experimental development, and support work that directly supports them
Registration or approval step	None	No registration. Optional pre-claim approval has been available since 1 April 2026
Claim deadline	With the income tax return for the year, on Form 6765. The payroll tax election and the reduced credit election must be made on a timely filed original return, including extensions	Form T661, with Schedule 31 for corporations, filed with the income tax return and no later than 12 months after its filing due date
Written description required	For tax years beginning after 2025, Section G of Form 6765 asks for information about each business component, with some exceptions	Form T661 asks you to describe the work and calculate your expenditure; Part 2 asks three narrative questions per project, limited to 350, 700 and 350 words
Review body and time limit	IRS examination. The IRS generally has three years from the filing of a return to assess additional tax	CRA financial review, technical review or coordinated review before the claim is assessed. The normal reassessment period is three years after the original notice of assessment for a CCPC and four years for other corporations

Where the schemes differ in practice

What the benefit is and whether it is paid out

The US credit is not refundable. A qualified small business can elect to apply up to US$500,000 a year against payroll tax (payroll tax offset). For most CCPCs at the enhanced 35% rate, current expenditure is 100% refundable (CCPC enhanced refund). A loss-making company can receive cash in Canada and a carried forward credit in the United States for the same work.

How eligibility is tested

The four-part test in section 41(d) is applied to each business component, not the company as a whole, and failing any single part means the activity does not qualify (four-part test). The CRA's guidelines ask why the work was done, which requires a scientific or technological uncertainty, and how it was done, which requires a systematic investigation by experiment or analysis (SR&ED eligibility). The US excludes research conducted outside the United States and funded research; SR&ED must be carried on in Canada.

Which costs count and how overheads are handled

Qualified research expenses are wages, supplies and 65% of contract research costs, linked to the qualifying work; utility costs are generally overhead and excluded (qualified research expenses). SR&ED includes salary or wages of employees directly engaged, materials, and 80% of arm's length contract payments, then offers a choice for overheads: the traditional method or the proxy method, which adds a prescribed proxy amount of 55% of the salary base. The proxy election is made on Form T661 and is irrevocable for that tax year (proxy versus traditional method).

How the amount is calculated

A US claimant chooses between the regular credit, measured above a base amount, and the alternative simplified credit, measured above 50% of the average for the previous three years, and decides whether to elect the reduced credit under section 280C(c); without that election, section 280C(c) reduces the research expense deduction by the amount of the credit (ASC versus regular method). SR&ED applies a flat rate to qualified expenditure with no base amount, and the SR&ED expenditure pool is reduced by the investment tax credit claimed in the preceding year, so the credit is effectively taxable through a smaller deduction (SR&ED program).

When and how the claim is filed

Neither country requires registration. Form 6765 is filed with the income tax return; a missed credit can be claimed by amended return within the refund period, but the payroll tax election and the reduced credit election cannot be added by amendment (US deadlines, Form 6765). Form T661 and Schedule 31 are due no later than 12 months after the return's filing due date, 18 months after year end for a corporation, and the Minister has no discretion to extend it (Canadian deadlines, Form T661).

How the claim is reviewed

Research credit claims can be selected for examination through the IRS's normal return selection processes. Examiners test contemporaneous documentation, wage allocations and the consistency of narratives with financial records, and a taxpayer may go to the IRS Independent Office of Appeals (US examinations). The CRA risk-assesses each SR&ED claim on receipt and either accepts it as filed or selects it for a financial review, a technical review or a coordinated review. Preliminary findings are communicated before assessment, and a notice of objection must be served within 90 days of the notice of assessment (CRA reviews).

Illustrative example

Illustrative example. Harrow Instruments, a hypothetical company, spends three amounts on one qualifying project in a year: 500,000 in salaries of the engineers who perform the work, all of their time; 50,000 in materials consumed in prototypes; and 100,000 paid to an unrelated contractor that performs part of the work in the same country. The same figures are used in US dollars and in Canadian dollars so that only the rules differ.

Step	United States	Canada
Assumptions	Alternative simplified credit; qualified research expenses in each of the previous three years, averaging US$400,000; the reduced credit is not elected	A CCPC throughout the year, within the C$6 million expenditure limit; the proxy method is elected; no specified employees; no assistance or provincial credit received
Eligible costs	Wages US$500,000, supplies US$50,000, contract research 65% of US$100,000 = US$65,000. Qualified research expenses US$615,000	Salary or wages C$500,000, materials C$50,000, contract payment 80% of C$100,000 = C$80,000, prescribed proxy amount 55% of C$500,000 = C$275,000. Qualified expenditure C$905,000
Rate and arithmetic	50% of the three-year average is US$200,000. 14% of (US$615,000 less US$200,000) = 14% of US$415,000 = US$58,100	35% of C$905,000 = C$316,750
Cash position	Not refundable: used against income tax, carried back one year or forward twenty years. A qualified small business could instead elect to apply the credit against payroll tax, up to US$500,000 a year	Current expenditure is fully refundable at the enhanced rate, so C$316,750 is refundable whether or not tax is payable

Had Harrow elected the reduced credit, the alternative simplified rate would be 11.06% and the credit 11.06% of US$415,000 = US$45,899, with no reduction of the research expense deduction.

Which to study first

Start with the scheme under which the larger share of the cost falls, then read the other against it. A team new to both should study SR&ED first, because the CRA's two questions describe the evidence any reviewer wants and Form T661 shows how it is written up, then the four-part test, which adds a business component unit of analysis, statutory exclusions and a base amount computation. Finance teams should read the two deadline pages together: the US claim travels with the return; the Canadian reporting deadline is fixed at 18 months after year end and cannot be extended.

Educational material, not advice. Eligibility and treatment depend on the scheme and the facts.

United States vs Canada