An SR&ED claim runs through two definitions. SR&ED expenditures are the amounts deductible under section 37 of the Income Tax Act, which go into a pool the company can deduct in the year or carry forward. Qualified expenditures are the subset on which the investment tax credit is calculated, after the adjustments in subsection 127(9). Form T661 collects both. This page covers the categories, the two methods for overheads, and the amounts the law takes out.
Cost categories that qualify
| Category | What is included | Qualified expenditure |
|---|---|---|
| Salaries and wages | Employees directly engaged in SR&ED, for the portion of time so engaged; taxable benefits included, bonuses and remuneration based on profits for specified employees excluded | 100% |
| Materials | Materials consumed or transformed in the SR&ED | 100% |
| Contract payments | Payments to a Canadian performer for SR&ED carried on in Canada on the claimant's behalf | 80% where the performer is at arm's length; non-arm's length payments limited to the performer's own qualified costs |
| Third-party payments | Payments to universities, colleges, research institutes and approved organisations for SR&ED related to the business | 80% |
| Overhead and other expenditures | Traditional method: expenditures directly related and incremental to the SR&ED. Proxy method: the prescribed proxy amount instead | 100% (traditional) or the PPA (proxy) |
| Capital expenditures | Depreciable property acquired on or after 16 December 2024 for use all or substantially all in SR&ED, and shared-use equipment | 100%, refundable at 40% |
Staff and time
Salaries and wages are the heart of most claims. An employee is directly engaged when doing the hands-on SR&ED work: experimenting, analysing, programming for the investigation, collecting data for it, and directly supervising it. Time spent on administration, sales, routine production or general management is not directly engaged, even for a scientist. The portion is measured by time records; the CRA accepts other reasonable allocation methods supported by evidence, but timesheets by project are the standard.
Two special rules. Specified employees, broadly those who own 10% or more of any class of shares or are related to such a person, have their salary limited to five times the year's maximum pensionable earnings, and their bonuses are excluded. And under the proxy method, the salary base for the prescribed proxy amount counts only directly engaged salary, with specified employees' salary capped at 75% of their total and 2.5 times the maximum pensionable earnings.
Contractors and subcontracted work
A payment to a contractor for SR&ED performed in Canada on your behalf is a contract payment: an SR&ED expenditure in full, but only 80% of it counts as qualified expenditure for the credit when the contractor is at arm's length. The contractor cannot claim the same work, and the amount it receives reduces its own qualified expenditures as a contract payment received. Where the contractor is not at arm's length, the payer's qualified expenditure is limited to the contractor's own qualified SR&ED costs for the work, and the two must coordinate their claims. Payments to non-residents, or for work done outside Canada, are not contract payments and earn no credit, though they may remain deductible in the ordinary way.
Third-party payments to universities and approved research institutes follow the same 80% rule and require that the claimant be entitled to exploit the results.
Materials, software and overheads
Materials consumed in SR&ED, such as reagents destroyed in testing, and materials transformed, such as components built into a prototype, are both eligible. Where a prototype or experimental production output is later sold or converted to commercial use, the recapture rules claw back credit on the materials.
Software licences and cloud services used in the SR&ED are overhead-type expenditures: directly related and incremental under the traditional method, or covered by the proxy amount.
Overheads are where the two methods diverge. Under the traditional method the company itemises expenditures that are directly related to the SR&ED and incremental, meaning they would not have been incurred without it: utilities for a lab, supplies, travel for the investigation, and the salaries of support staff not directly engaged. Under the proxy method it claims none of these and instead adds a prescribed proxy amount of 55% of the salary base of directly engaged employees. The proxy versus traditional page compares them.
Costs that are excluded
| Excluded or reduced | Treatment |
|---|---|
| Government and non-government assistance | Grants, provincial credits and other assistance for the expenditure reduce qualified expenditures |
| Contract payments received | Reduce the performer's qualified expenditures |
| Work outside Canada | Excluded, except the 10% salary allowance |
| Capital property acquired before 16 December 2024 | Excluded |
| Expenditures for the acquisition of rights to SR&ED, and interest | Not SR&ED expenditures |
| Unpaid amounts | Salary or wages unpaid 180 days after the end of the tax year are treated as not incurred in that year |
Illustrative example
Illustrative example. Fundy Marine Systems Inc., a hypothetical CCPC using the proxy method, has the following for its year:
| Item | Amount | Qualified expenditure |
|---|---|---|
| Salaries of three engineers, 70% directly engaged, total C$450,000 | C$315,000 | C$315,000 |
| Prescribed proxy amount: 55% of C$315,000 | C$173,250 | C$173,250 |
| Materials consumed in tank tests | C$40,000 | C$40,000 |
| Arm's length Canadian test facility contract | C$100,000 | C$80,000 |
| Provincial R&D credit received on the same salaries | C$30,000 | Reduces by C$30,000 |
| Total qualified expenditure | C$578,250 |
At the enhanced 35% rate, Fundy's investment tax credit is C$202,388, fully refundable as current expenditure.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.