What Expenses Can I Claim Under SR&ED?

If your company is tackling technological hurdles through systematic testing, you are likely sitting on a significant tax refund. However, Canada’s Scientific Research and Experimental Development (SR&ED) program doesn’t just let you claim a flat
percentage of your overall corporate budget.

To secure your investment tax credits (ITCs), you must tie your qualifying technical projects to four specific buckets of expenditures. Recent expansions have significantly widened what you can claim.

1. Salaries and Wages (The Gold Mine)

For the vast majority of claimants, internal employee salaries make up 70% to 80% of the entire claim. You can claim the portion of an employee’s salary that corresponds directly to the time they spent doing or supporting R&D.

• What is Eligible: * Direct Labor: The developers writing experimental code, the engineers modeling new machinery, or the scientists formulating chemical batches.
  • Direct Support: The technicians running test loops, data analysts compiling experimental results, or shop-floor workers fabricating a prototype.
  • Direct Supervision: The CTO or Product Manager, but only for the hours they spend directly supervising the technical experimentation (not for high-level sales or strategy meetings).
• What is Excluded: Bonuses, stock options, taxable benefits, and wages paid to employees who are non-residents of Canada.

2. Contractor and Subcontractor Fees

Many businesses outsource specialized technical tasks. If you pay an external Canadian contractor to perform R&D work on your behalf, those fees are eligible.

• The 80% Rule: To prevent companies from claiming administrative overhead on external workers, the Canada Revenue Agency (CRA) only allows you to pool 80% of the contract value into your eligible expenditures.
• The Geographic Constraint: The contractor must be a Canadian resident or corporate entity, and the actual R&D work must be performed within Canadian borders.
• The IP Trap: Ensure your contract explicitly states that you are paying for the prosecution of R&D and that your company retains or shares the intellectual property. Simply purchasing a pre-built proprietary software tool or hiring an expert to apply routine knowledge does not count.

3. Materials Consumed or Transformed

If your R&D involves physical prototyping, manufacturing trials, or biological testing, you can claim the costs of the raw materials used during experimentation.

• Materials Consumed (90%+ destroyed): Raw plastics, chemicals, or custom components that were completely destroyed, ruined, or rendered useless during testing loops.
• Materials Transformed: Materials that were structurally altered to create a prototype. If you built an experimental electric engine block, the steel used is eligible. (Note: If you eventually sell that prototype to a customer, you must trigger a “recapture” mechanism, which reduces your credit by the commercial value of the sale).

4. Capital Expenditures & Equipment (The Major Expansion)

Following landmark legislative updates, capital expenditures are officially back in the SR&ED program. This massive change reverses a decade-old restriction, allowing companies to reclaim significant costs spent on physical hardware and infrastructure.

• What Qualifies: Specialized laboratory machinery, custom automated assembly apparatuses, complex testing rigs, or advanced computing servers purchased primarily for R&D.
• The “All or Substantially All” (ASA) Rule: The asset must be intended to be used 90% or more of its operating time for eligible SR&ED work in Canada over its expected useful life, or have 90% of its physical value consumed during the R&D process.
• The Refundability Cap: While current expenditures (like wages) yield fully refundable cash returns for small businesses, the credits earned on these capital expenditures carry a 40% refundability cap, with the remaining balance functioning as a non-refundable tax offset.

Choosing Your Overhead Strategy: Traditional vs. Proxy Method

Running an R&D department incurs general overhead—utilities, office supplies, and administrative support. The CRA allows you to account for these costs in one of two ways:

The Traditional Method

You manually track and line-item every single utility bill, rent percentage, and office supply directly used for the R&D project. This requires an exhaustive, meticulous audit trail and is rarely used unless your utility costs are extraordinarily high.

The Proxy Method

Instead of tracking receipts, you select the Proxy Method. The CRA automatically calculates your overhead as a flat 55% bonus on top of your eligible internal R&D salaries.

How the Proxy Math Multiplies Your Claim:

If a developer spends $100,000 worth of their salary directly on eligible experimental code:

$$\text{Salary Base } (\$100,000) + \text{Proxy Overhead Bonus } (55\% = \$55,000) =
\mathbf{\$155,000 \text{ Qualified Pool}}$$
Your 35% refundable tax credit is then applied to the entire $155,000, netting your
company $54,250 back from the federal government on a single employee’s
salary—even before stacking additional provincial credits.