Every SR&ED claimant chooses, each year, how to bring overheads into the claim. The traditional method itemises them: the expenditures that are directly related to the SR&ED and would not have been incurred without it. The proxy method ignores them and instead adds a prescribed proxy amount, a percentage of the salaries of employees directly engaged in the work, to the qualified expenditures for the credit. Most claimants use the proxy method because it is simpler and often worth more; the traditional method wins for companies with high overheads and low SR&ED salaries. The election is made on Form T661 and is binding for the year.
What it is
| Feature | Proxy method | Traditional method |
|---|---|---|
| Overheads claimed | None | Itemised expenditures that are directly related to the SR&ED and incremental |
| Instead | Prescribed proxy amount: 55% of the salary base, added to qualified expenditures for the credit only | Not applicable |
| Salary base | Salaries of employees directly engaged, for the portion so engaged, with specified employees limited to 75% of their salary and 2.5 times the maximum pensionable earnings | Not applicable |
| Cap | The PPA cannot exceed the total of the claimant's business expenditures for the year, less certain amounts | None beyond the eligibility of each item |
| Salary treatment | Only directly engaged time counts; support staff time is in the proxy | Directly engaged time plus salaries of staff who directly undertake, supervise or support the SR&ED |
| Deduction pool | The PPA is not deductible under section 37 | Overheads enter the section 37 pool |
| Election | Line 160 of Form T661, each year; once made, irrevocable for that tax year | Default if no election |
Who it applies to
Every claimant chooses. The proxy method suits companies whose SR&ED is mainly staff time and whose overheads are modest or hard to isolate: software, engineering and most early-stage companies. The traditional method suits companies with substantial costs that are directly related and incremental to the SR&ED but are not salaries, materials or contracts: a dedicated laboratory with its own utilities, significant travel for field trials, specialised support staff, or heavy use of leased facilities. It also suits companies with large support teams whose time is claimable under the wider traditional salary test but would be lost under directly engaged.
Specified employees shift the balance. Because their salary counts in the proxy salary base only up to 75% and 2.5 times the maximum pensionable earnings, an owner-managed company whose SR&ED is done by its shareholders gets a smaller PPA than its payroll suggests.
How it works
- Estimate both methods before year end, since the records needed differ: the traditional method needs overhead items coded to SR&ED and an incremental test for each; the proxy method needs only the salary base.
- Proxy: compute directly engaged salaries, apply the specified employee limits, multiply by 55%, check the cap, and add the result in Part 4 of the T661.
- Traditional: list each overhead item, document that it is directly related to the SR&ED and incremental, apportion where shared, and enter the total in Part 3.
- Compare the credit, not just the expenditure: the PPA earns credit but no deduction; traditional overheads earn both.
- Elect on the T661 for the year. The choice can differ from year to year, but once made it is irrevocable for that tax year.
Worked example
Illustrative example. Two hypothetical CCPCs, each with C$600,000 of directly engaged salaries, none paid to specified employees.
| Rideau Software (lean offices, shared services) | Athabasca Labs (dedicated laboratory) | |
|---|---|---|
| Directly engaged salaries | C$600,000 | C$600,000 |
| Proxy: PPA at 55% | C$330,000 | C$330,000 |
| Traditional: directly related and incremental overheads | C$90,000 (cloud test environments, travel) | C$420,000 (lab utilities and consumables, lab technicians' salaries, maintenance, field travel) |
| Better method | Proxy: C$240,000 more qualified expenditure | Traditional: C$90,000 more qualified expenditure, plus the overheads in the deduction pool |
| Credit difference at 35% | C$84,000 in favour of proxy | C$31,500 in favour of traditional |
Rideau elects the proxy method and keeps no overhead records for the claim. Athabasca uses the traditional method and codes its laboratory costs to SR&ED through the year so that each item can pass the incremental test in review. Athabasca also claims its two lab technicians' salaries in full under the wider traditional test, which Rideau could not do for its office administrator under directly engaged.
Common questions
Can we switch methods each year? Yes. The election is annual.
Is the proxy amount deductible? No. It increases qualified expenditures for the credit only.
Do contractors count in the salary base? No. Only salaries and wages of employees.
Does the traditional method invite more review? It gives the Financial Reviewer more to test, because each overhead item must be shown to be directly related and incremental, so the records burden is heavier even where the method is worth more.
What if we forget to elect? The traditional method applies for the year.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.