Canada's Scientific Research and Experimental Development (SR&ED) program gives a deduction against income and an investment tax credit for qualifying work carried out in Canada. It is administered by the Canada Revenue Agency. It is the oldest and, by claimant numbers, one of the largest R&D incentives among the seven countries, and its structure has two layers that the other schemes mostly lack: a pool of deductible expenditures that can be carried forward indefinitely, and a credit calculated on a narrower base of qualified expenditures. This page is the map; the other Canadian pages are the detail.
What it is
| Feature | Rule |
|---|---|
| Benefit type | Investment tax credit, and a deduction against income |
| Deduction | SR&ED expenditures go into a pool under subsection 37(1), deductible in the year or carried forward indefinitely |
| Credit rates | Enhanced rate of 35% on qualified expenditure up to the expenditure limit, for most CCPCs and, for tax years beginning after 15 December 2024, eligible Canadian public corporations. Basic rate of 15%. |
| Expenditure limit | C$6 million a year, for tax years beginning after 15 December 2024, shared among associated corporations and reduced by taxable capital |
| Refundable | For most CCPCs at the enhanced rate, current expenditure is 100% refundable and capital expenditure 40% refundable, up to the limit |
| Unused credits | Carried back 3 years or forward 20 years |
| Registration | None. Optional pre-claim approval has been available since 1 April 2026 |
| Claim | Form T661 and Schedule 31 with the return, no later than 12 months after its filing due date |
| Statute | Income Tax Act section 37 (deduction), section 127 (credit), section 127.1 (refund), subsection 248(1) (definition) |
Who it applies to
Corporations, individuals, trusts and partnerships that carry on SR&ED in Canada. The rate and the refund depend on the claimant:
- CCPCs receive the enhanced 35% rate up to the expenditure limit and, where they meet the conditions, a full refund of the credit on current expenditures. Above the limit they receive 15%, refundable at 40% for CCPCs that qualify.
- Eligible Canadian public corporations receive the enhanced rate for tax years beginning after 15 December 2024 under the Budget 2025 measures.
- Other corporations, including foreign-controlled companies, receive the basic 15% non-refundable credit.
- Individuals and trusts receive 15%, partly refundable for individuals.
- Partnerships compute the credit and allocate it to partners.
Control decides CCPC status: a private corporation resident in Canada that is not controlled, directly or indirectly, by non-residents, public corporations or a combination. Start-ups raising foreign capital watch this line closely, because losing CCPC status moves the whole claim from 35% refundable to 15% non-refundable.
How it works
- Identify SR&ED projects that answer the Why and How questions.
- Calculate SR&ED expenditures by category on Form T661, choosing the proxy or traditional method for overheads. These enter the section 37 pool.
- Calculate qualified expenditures: the SR&ED expenditures adjusted for the 80% contract rule, the prescribed proxy amount, and reductions for government assistance, non-government assistance and contract payments received.
- Apply the credit rates on Schedule 31: 35% on qualified expenditures up to the expenditure limit for eligible claimants, 15% on the rest.
- Determine the refund under section 127.1 and apply the remainder against Part I tax, carrying back or forward what is unused.
- Deduct the pool under section 37, in whole or part, reduced by the credit claimed in the previous year.
The interaction of the two layers is what makes Canadian claims look complicated. The credit is not taxable income, but it reduces the pool the following year, so a profitable company gives back tax on it over time; a loss-making CCPC receives the refund now and carries the pool forward until it has income to deduct it from.
Worked example
Illustrative example. Avalon Devices Inc., a hypothetical CCPC with taxable capital well below the threshold and no revenue, has the following for its tax year.
| Step | Amount |
|---|---|
| Directly engaged salaries | C$800,000 |
| Prescribed proxy amount at 55% | C$440,000 |
| Materials consumed | C$60,000 |
| Arm's length contract payments C$200,000, at 80% | C$160,000 |
| Less provincial credit received | (C$90,000) |
| Qualified expenditures | C$1,370,000 |
| Credit at 35% (within the C$6 million limit) | C$479,500 |
| Refund (100% on current expenditures) | C$479,500 |
| Section 37 pool carried forward (salaries, materials, contracts at 100%) | C$1,060,000, less the credit next year |
Avalon receives C$479,500 in cash on assessment. Had it been foreign controlled, the credit would have been C$205,500 at 15%, non-refundable, carried forward until it had tax to pay.
Common questions
Is the credit taxable? Not directly. It reduces the SR&ED pool in the following year, which has a similar effect for a profitable company.
Can we claim both the deduction and the credit? Yes. They are the two layers of the program.
What changed in Budget 2025? The expenditure limit rose to C$6 million, the enhanced rate was extended to eligible Canadian public corporations, the taxable capital thresholds were raised and capital expenditures became eligible again, for tax years beginning after 15 December 2024 and property acquired on or after 16 December 2024.
Where do provincial credits fit? Most provinces add their own credit, which reduces the federal qualified expenditures. See provincial credits.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.