This track is for finance managers, tax leads and accountants preparing a Canadian Scientific Research and Experimental Development (SR&ED) claim in-house. SR&ED gives a deduction against income and an investment tax credit for qualifying work carried out in Canada, administered by the Canada Revenue Agency (CRA). Three things change the program's shape: two definitions, SR&ED expenditures that go into a deductible pool and qualified expenditures on which the credit is calculated; a once-a-year election between the proxy and traditional methods for overheads; and a reporting deadline, 12 months after the filing due date of the return, after which a missing expenditure is lost.
How the Canada rules change the program
| Module | What is different in Canada | Country page |
|---|---|---|
| Scheme mechanics | An investment tax credit and a deduction against income. Enhanced rate of 35% on qualified expenditure up to the expenditure limit of C$6 million a year, for most CCPCs and eligible Canadian public corporations. Basic rate of 15%. | SR&ED program |
| Cost capture | Salaries of employees directly engaged, materials consumed or transformed, contract payments, third-party payments, overheads or the prescribed proxy amount, and capital expenditures for property acquired on or after 16 December 2024. | Eligible expenditure |
| Staff time apportionment | Directly engaged means hands-on involvement in the SR&ED, including performing experiments and analysis, directly supervising the work, and technical documentation of the work, but not general management, administrative or clerical functions. | Eligible expenditure |
| Contractors and overseas costs | Only 80 percent of arm's length contract payments and third-party payments are included in qualified expenditures. Salary for SR&ED outside Canada is limited to 10 percent of the total salary or wages for SR&ED carried on in Canada in the year. | Eligible expenditure |
| Grants and subsidised expenditure | Qualified expenditures are reduced by government assistance, non-government assistance and contract payments received, receivable or reasonably expected. Provincial R&D tax credits are government assistance for this purpose. | Provincial credits |
| Calculations | Proxy or traditional method, elected on Form T661 and irrevocable for the year. The prescribed proxy amount is 55 percent of the salary base. | Proxy vs traditional method |
| Working with technical teams | Two questions per project: Why was the work done, which requires a scientific or technological uncertainty that could not be resolved by standard practice, and How was the work done, a systematic investigation by means of experiment or analysis. | Form T661 |
| Filing and deadlines | No registration; optional pre-claim approval has been available since 1 April 2026. Form T661 and Schedule 31 are filed with the income tax return and no later than 12 months after its filing due date. | Deadlines |
| Reviews and audits | The CRA risk-assesses each claim on receipt and either accepts it as filed or selects it for a financial review, a technical review or a coordinated review. | CRA reviews |
Forms and deadlines
| Form or step | Timing | Country page |
|---|---|---|
| Form T661 and Schedule 31 | With the income tax return and no later than 12 months after its filing due date. Where missing prescribed information is not provided by the reporting deadline, the claim is not accepted. | Form T661 |
| T2 return and balance of tax | The return is due six months after the end of the tax year, so the reporting deadline falls 18 months after year end. The balance of tax is due two months after year end, or three months for CCPCs meeting the small business deduction conditions. | Deadlines |
| Reassessment period and records | Three years after the original notice of assessment for a CCPC and four years for other corporations, extended for misrepresentation. Books and records are kept for six years from the end of the last tax year to which they relate. | CRA reviews |
Key rules to know
Two definitions, one form. The SR&ED pool under subsection 37(1) may be deducted in whole or in part in the year, with the balance carried forward indefinitely, and is reduced by the investment tax credit claimed in the preceding year. The prescribed proxy amount is included in qualified expenditures but is not an SR&ED expenditure deductible under section 37.
The proxy election replaces every overhead. Under the traditional method, overhead and other expenditures are allowable where they are directly related to the prosecution of SR&ED and would not have been incurred had the SR&ED not been carried out. Under the proxy method none of that is claimed and 55 percent of the salary base stands in for it. Model both before the T661 is filed.
Unpaid salary and preparers. Salary or wages unpaid 180 days after the end of the tax year are treated as not incurred in that year. Where claim preparer information required on Form T661 is missing or incomplete, a penalty of C$1,000 applies, for which the claimant and the claim preparer are jointly and severally liable.
Worked example
Illustrative example. Georgian Bay Automation Inc., a hypothetical CCPC throughout its 31 December 2025 tax year, with taxable capital well below C$15 million and no associated corporations, elects the proxy method on Form T661 and files it with the T2 return by 30 June 2026.
| Item | Amount | Treatment | Qualified expenditure |
|---|---|---|---|
| Salaries of engineers, 75% directly engaged per time records, total C$600,000 | C$450,000 | Salary or wages, directly engaged portion | C$450,000 |
| Prescribed proxy amount, 55 percent of the salary base | C$247,500 | For the credit, not deductible under section 37 | C$247,500 |
| Materials consumed in bench testing | C$50,000 | Materials consumed or transformed | C$50,000 |
| Arm's length Canadian test laboratory | C$150,000 | Contract payment, 80 percent | C$120,000 |
| Test rig acquired in March 2025 for use all or substantially all in SR&ED | C$100,000 | Capital expenditure, acquired on or after 16 December 2024 | C$100,000 |
| Provincial R&D tax credit and federal grant on the same costs | (C$67,500) | Government assistance | (C$67,500) |
| Total qualified expenditures | C$900,000 |
The C$900,000 is within the C$6 million expenditure limit, so all of it earns the enhanced 35% credit: C$315,000. Of that, C$800,000 is current expenditure, earning C$280,000 that is 100% refundable, and C$100,000 is capital expenditure, earning C$35,000 of which 40 percent, C$14,000, is refundable. Georgian Bay has no Part I tax to pay this year, so it receives C$294,000 with the notice of assessment and carries the remaining C$21,000 back 3 years or forward 20 years. Rent, utilities and laptops are not claimed at all, because the proxy amount stands in for them.
Under the traditional method the team would instead itemise the overheads directly related and incremental to the SR&ED and claim no proxy amount; whichever total is larger is the one to elect. The last day to add anything missed is 30 June 2027.
Related country guide pages
Self-check questions
Answer each question, then open it to compare.
A CCPC has a 31 December 2025 tax year. When is its T2 return due, and what is the last day on which an SR&ED expenditure can be added to the claim?
Directly engaged salaries are C$450,000 and the company elects the proxy method. What is the prescribed proxy amount and what does the election cost it?
An arm's length Canadian laboratory is paid C$150,000 for SR&ED performed on the company's behalf. How much is a qualified expenditure, and what happens on the laboratory's side?
The company received a provincial R&D tax credit and a federal grant in respect of the same salaries. How do they affect the federal claim?
What does Part 2 of Form T661 ask for each project, and within what word limits?
What happens when the CRA receives an SR&ED claim, and what can a claimant do if it disagrees with the technical findings?
Official sources
- Scientific Research and Experimental Development (SR&ED) tax incentivesCanada Revenue Agency
- T4088 Guide to Form T661Canada Revenue Agency
- SR&ED Filing Requirements PolicyCanada Revenue Agency
- How to apply for pre-claim approvalCanada Revenue Agency
- Income Tax Act, section 127 (investment tax credit)Justice Laws Website
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Educational content only, not tax advice. See the disclaimer.