What the SR&ED Tax Credit Can Fund in Canada: Eligible Expenses and Claiming Rules

The Scientific Research and Experimental Development (SR&ED) tax incentive is Canada’s flagship R&D tax credit. It provides two core benefits: a deduction against income and an investment tax credit (ITC) that can reduce taxes payable and, for some entities, be refundable. This article explains what SR&ED can fund, which costs are excluded, how rates generally work, what documentation you need, and how funds are ultimately claimed. As of December 1, 2025, always verify details with the Canada Revenue Agency (CRA) before filing. (canada.ca)

Program Funding Overview

SR&ED supports Canadian research and development by recognizing eligible work and linking it to eligible expenditures. Claimants file their SR&ED claim with their income tax return for the year, combining the technical description of eligible work with the financial calculation of eligible costs and the related ITC. The program is administered by the CRA. (canada.ca)

At a high level, SR&ED funding coverage flows through two mechanisms:

• Deduction: You may deduct allowable SR&ED expenditures from income for the year or carry them forward to reduce income in a future year.

• Investment tax credit: You may earn an ITC on qualified SR&ED expenditures. The basic federal ITC rate is 15%; certain corporations may qualify for an enhanced 35% rate on a portion of expenditures, with refundability varying by entity type. Check the CRA’s SR&ED Investment Tax Credit Policy for current rules. (canada.ca)

Because SR&ED is a tax credit, reimbursement typically occurs through your corporate or personal tax return rather than an upfront grant. Provincial and territorial R&D credits may also be available and can be combined with federal SR&ED, subject to “stacking” adjustments noted below. (canada.ca)

Funding Amounts & Rates

• Federal ITC:

• Basic ITC rate: Generally 15% of qualified SR&ED expenditures for most claimants.

• Enhanced ITC rate: Some Canadian‑controlled private corporations (CCPCs) may earn a 35% refundable ITC on a portion of annual expenditures, with amounts above that threshold earning the basic rate. Refundability depends on the claimant type and specific policy rules. Always confirm the current‑year expenditure limit and refundability criteria on the CRA site. (canada.ca)

• Carryback/carryforward:

• Unused ITCs may generally be carried back to reduce tax in prior years or carried forward to future years, subject to the Act’s limits. (canada.ca)

• Provincial/territorial credits:

• Many provinces offer additional R&D credits that interact with the federal SR&ED calculation. These incentives can be refundable or non‑refundable and typically follow federal definitions of eligible work and expenditures. Verify your province’s current program and forms. (canada.ca)

• Note on recent proposals:

• Federal proposals discussed by tax advisors in 2025 would expand access to the enhanced 35% ITC and adjust expenditure limits. Treat these as context and verify enacted rules on CRA pages before relying on them. (pwc.com)

Eligible Expenses

SR&ED recognizes costs that are directly attributable to eligible R&D work performed in Canada. You must be able to connect each expense to specific SR&ED activities documented in your technical narrative and time/expense records. The main categories include:

1) Salaries and Wages

• Reasonable salaries and wages for employees directly engaged in eligible SR&ED work (hands‑on R&D, experimentation, testing) or directly supporting it (e.g., certain technical support).

• Include employer portions of benefits/payroll taxes proportionally allocated to SR&ED time.

• Maintain contemporaneous time tracking that distinguishes SR&ED from routine production or administration.

2) Materials Consumed or Transformed

• Materials that are consumed (used up) in carrying out experimental work (e.g., reagents, prototype components that are scrapped during testing).

• Materials that are transformed and become part of a prototype used to achieve or test the scientific or technological advancement.

• Keep purchase invoices, lot tracking where relevant, and evidence tying material usage to SR&ED phases.

3) Subcontractor and Contracted SR&ED

• Payments to arm’s‑length contractors who perform SR&ED on your behalf may be eligible, subject to federal rules and any caps or adjustments in the policy. Contracts must clearly define SR&ED scope, deliverables, and IP ownership/control aligned to CRA requirements.

• For non‑arm’s‑length relationships, special rules apply; consult the CRA’s assistance and contract payments guidance. (canada.ca)

4) Overhead and the Prescribed Proxy Amount (PPA) or Traditional Method

• You may claim overhead using one of two methods:

• Prescribed Proxy Amount (PPA): A simplified proxy that estimates eligible overhead as a percentage of direct SR&ED labour, added to the SR&ED expenditure pool.

• Traditional method: A detailed allocation of actual overhead items directly attributable to SR&ED (e.g., utilities, certain supplies, small tools), supported by a robust methodology and evidence.

• Choose the method that best reflects your facts; you cannot mix methods for the same tax year’s calculation of the proxy. Reference CRA policy for the PPA definition and constraints. (canada.ca)

5) Third‑Party Payments and Collaborative R&D

• Certain payments to approved associations, universities, or other qualified entities may be eligible in specific circumstances, provided they fund SR&ED conducted in Canada and meet policy conditions. Confirm treatment and documentation before claiming. (canada.ca)

6) Provincial/Territorial R&D Credits Interaction

• Provincial credits generally follow federal SR&ED eligibility for work and expenditures, with province‑specific rates, refundability, and forms. These credits are typically calculated on federal qualified expenditures incurred in the province/territory and then integrated through the federal return. (canada.ca)

Ineligible Expenses

Some costs are routinely excluded from SR&ED, even if they occur during an R&D project:

• Capital equipment purchases and most capital expenditures (for many years not eligible for federal SR&ED purposes; always verify any current exceptions or new rules before filing).

• Routine quality control/assurance testing, debugging without technological uncertainty, and standard data collection.

• Market research, sales/business development, customer support, and training.

• Commercial production runs (beyond limited experimental production required to achieve/verify advancement).

• Patent filing fees, legal and financing costs unrelated to SR&ED work.

• General administrative expenses not directly attributable to SR&ED under the chosen method.

• Work performed outside Canada (foreign work) beyond strict limits; only costs of SR&ED carried out in Canada are generally eligible for the federal credit.

Check the CRA’s “What are SR&ED tax incentives” and related policies for the latest definitions and exclusions. (canada.ca)

Expense Documentation Requirements

Strong documentation is essential to substantiate that costs are linked to eligible work:

• Time tracking for technical staff showing SR&ED vs non‑SR&ED tasks, signed off by supervisors.

• Technical records: hypotheses, test plans, experiment logs, code repositories and commit messages, lab notebooks, test results, failures and iterations, design revisions.

• Financial records: invoices, payroll registers, T4/T4A slips, contractor agreements, purchase orders, receipts, and proof of payment.

• Methodology: written explanation of how you allocate labour and overhead (PPA vs traditional), including assumptions and rate calculations.

• Assistance tracking: records of all government and non‑government assistance (e.g., IRAP, provincial credits), with dates and amounts, to ensure proper netting and disclosure. (canada.ca)

Examples of Funded Projects

The following realistic scenarios illustrate how SR&ED eligible expenses might be organized. Your facts must show technological uncertainty and systematic investigation.

• Software/SaaS (Ontario):

• Activities: Designing a novel scaling algorithm for real‑time event processing where known methods fail at required latency.

• Eligible costs: Developer and data engineer time on experimental prototypes, materials/services for testing environments, cloud instances used specifically for experiments, and overhead via the PPA.

• Ineligible costs: Customer onboarding, routine bug fixes without technological uncertainty, production hosting not tied to experiments.

• Stacking note: Ontario Innovation Tax Credit (OITC) may apply in addition to federal SR&ED; ensure you report assistance properly. (canada.ca)

• Advanced Manufacturing (Quebec):

• Activities: Developing a new heat‑treat process that enables a novel alloy performance beyond the current state of the art.

• Eligible costs: Metallurgist and process engineer labour, consumable materials destroyed in testing, prototype billets transformed during experiments, overhead via traditional method with documented allocation.

• Ineligible costs: Operator training for the commercial line, marketing samples, and standard QA for production lots.

• Stacking note: Quebec administers its own R‑D incentives; coordinate SR&ED with Revenu Québec programs and ensure federal netting is handled correctly. (canada.ca)

• Agtech (Alberta):

• Activities: Controlled field trials to resolve scientific uncertainty in sensor‑driven irrigation algorithms under variable soil conditions.

• Eligible costs: Research scientist and field technologist labour, consumable test components, targeted contractor analytics under SR&ED contracts.

• Stacking note: Alberta’s Innovation Employment Grant is separate from federal SR&ED; plan for interactions in your budget. (canada.ca)

Funding Disbursement & Claiming Process

SR&ED is claimed with your tax return using Form T661 plus the appropriate ITC schedule (T2 Schedule 31 for corporations, or T2038‑IND for individuals). Refundability depends on your entity type and, for corporations, status such as CCPC. Partnerships cannot claim the ITC directly; it is generally allocated to partners. (canada.ca)

Key points:

• File with your original return or as an amendment by the SR&ED reporting deadline tied to your taxpayer type; late claims are not accepted. (canada.ca)

• If eligible for a refundable ITC, funds are typically received after assessment; non‑refundable ITCs reduce Part I tax payable, with possible carryback/carryforward. (canada.ca)

• Keep all technical and financial documentation; the CRA may review your claim and request additional information. (canada.ca)

Stacking Rules

Government and non‑government assistance reduces the expenditures on which you can earn the federal SR&ED ITC. This includes provincial/territorial R&D credits and programs like NRC IRAP. You must report all assistance in your SR&ED claim. The CRA’s Assistance and Contract Payments Policy explains how assistance affects eligible expenditures and the SR&ED pool. (canada.ca)

Provincial and territorial R&D credits can still be valuable despite the netting effect because they often add refundable cash or reduce provincial tax. Confirm the current list of provincial programs and filing forms on the CRA’s provincial/territorial credits page. (canada.ca)

Real‑World Budgeting Tips

• Start with labour: Direct SR&ED wages usually drive the claim. Align job descriptions and time tracking with experimental tasks and hypotheses.

• Choose PPA vs traditional method early: Model both approaches for your project mix and pick one that best reflects your overhead reality.

• Separate SR&ED from production: Physically and financially segregate experimental runs from commercial production, with lot IDs and test logs.

• Write it as you work: Maintain short, dated notes at each experiment iteration; do not reconstruct your story after year‑end.

• Coordinate other funding: Model IRAP grants and provincial credits to avoid surprises from assistance netting. (canada.ca)

• Verify rates and limits before filing: The basic federal ITC rate is stable, but enhanced/refundable rules and expenditure limits evolve. Check CRA pages during tax prep; note that 2025 commentary discusses enhancements not yet fully reflected across all CRA pages at time of writing. (canada.ca)

Conclusion

SR&ED can fund a wide range of R&D costs in Canada—principally direct labour, materials consumed or transformed, eligible contracted SR&ED, and allowable overhead via the PPA or traditional method. Costs must be tied to eligible work and thoroughly documented. Because assistance affects your net claim and refundability differs by entity, validate current rules on CRA pages before filing. With disciplined documentation and early planning, organizations can maximize their SR&ED claim and complement it with provincial credits while remaining compliant. (canada.ca)