SR&ED Lease Expenditures Policy

Date: June 8, 2026

On this page

• 1.0 Overview
  • 1.1 Purpose
  • 1.2 Introduction to lease expenditures
• 2.0 Legislation
  • 2.1 Lease expenditures incurred before December 16, 2024 cannot be claimed
  • 2.2 Lease expenditures incurred after December 15, 2024 can be claimed
    • 2.2.1 Lease expenditures when you choose the traditional method
    • 2.2.2 Lease expenditures when you choose the proxy method
    • 2.2.3 Lease expenditures for buildings: Not allowed
• 3.0 Terms
  • 3.1 All or substantially all
  • 3.2 Primarily
  • 3.3 Operating time
  • 3.4 General purpose office equipment or furniture
  • 3.5 Meaning of “building”
• 4.0 Issues concerning SR&ED lease expenditures
  • 4.1 Lease or sale
  • 4.2 Software and software licences
  • 4.3 Specific lease expenditures allowed
    • 4.3.1 Bandwidth allowed as lease of equipment under proxy method
    • 4.3.2 Lease of land allowed when you choose the traditional method
• 5.0 Documentation and other evidence
  • 5.1 Examples of documentation and other evidence
• Appendix A: References
  • A.1 Legislative references
  • A.2 Jurisprudence
• Appendix B: Revisions
  • B.1 Explanation of changes

1.0 Overview

The legislation resulting from the 2024 Fall Economic Statement and the 2025 Federal Budget provides that lease expenditures incurred after December 15, 2024, may qualify for SR&ED tax incentives. The rules contained in this policy document allowing lease expenditures for SR&ED are applicable to lease expenditures incurred after December 15, 2024.

1.1 Purpose

This policy document deals with lease expenditures incurred by a claimant after December 15, 2024 that are for the prosecution of SR&ED carried on in Canada. The purpose of this document is to clarify the position of the Canada Revenue Agency (CRA) regarding leases when administering the SR&ED legislation under the federal Income Tax Act (ITA) and the Income Tax Regulations.

The purpose of this document is to:

• Explain which expenditures incurred after December 15, 2024, may be claimed for the leasing of equipment used in SR&ED
• Explain the differences in claiming lease expenditures under the traditional and proxy methods
• Identify issues surrounding the lease of SR&ED equipment

1.2 Introduction to lease expenditures

How lease expenditures are calculated and claimed will depend on whether the claimant uses the traditional or proxy method and the extent the equipment was used in the prosecution of SR&ED (SR&ED usage) carried on in Canada. The SR&ED usage of the equipment is determined as a percentage of the total operating time (see section 3.3).

Under the traditional method, lease expenditures that are either all or substantially all (ASA) (see section 3.1) attributable or directly attributable to the prosecution of SR&ED carried on in Canada may be included in the pool of deductible SR&ED expenditures. Lease expenditures allowable under the traditional method are discussed in section 2.2.1. For more information on the traditional method, refer to the Traditional and Proxy Methods Policy. For more information on the concepts of ASA attributable or directly attributable, refer to the SR&ED Overhead and Other Expenditures Policy. For more information on the pool of deductible SR&ED expenditures, refer to the Pool of Deductible SR&ED Expenditures Policy.

Under the proxy method, an expenditure for the lease of premises, facilities, or equipment may be included in the pool of deductible SR&ED expenditures if it is:

• ASA attributable to the prosecution of SR&ED carried on in Canada, or
• Primarily attributable to the prosecution of SR&ED in Canada ( more than 50% of its usage). In this case, 50% of the lease expenditure can be claimed

The rules concerning lease expenditures under the proxy method are discussed in section 2.2.2. Note that despite allowing the lease of premises and facilities, the lease of a building (rent) (see section 3.5) is specifically excluded and cannot be claimed as an SR&ED expenditure. For further explanation refer to section 2.2.3.

2.0 Legislation

2.1 Lease expenditures incurred before December 16, 2024, cannot be claimed

After December 31, 2013, and before December 16, 2024, an SR&ED expenditure of a current nature cannot include an expenditure for the use of, or the right to use, property that would be capital property of the claimant if it were owned by the claimant. A lease cost for a capital property is any expense incurred to use capital property or to have the right to use capital property. Thus, an expenditure incurred for leasing a capital property after December 31, 2013, and before December 16, 2024, does not qualify for SR&ED tax incentives.

2.2 Lease expenditures incurred after December 15, 2024, can be claimed

2.2.1 Lease expenditures when you choose the traditional method

When leased equipment is used 90% or more of the time for SR&ED, a claimant can claim 100% of the expenditure as a lease cost. Generally, only expenditures incurred after December 15, 2024, for the leasing of equipment are allowable. Generally, expenditures for the lease of buildings (see Section 2.2.3) cannot be claimed.

Lease expenditures incurred for equipment used less than 90% of the time in SR&ED after December 15, 2024, may be included in the pool of deductible SR&ED expenditures. They would be claimed as overhead and other expenditures on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. The amount claimed is proportional to the percentage the leased equipment is used for SR&ED. The lease expenditures must be directly attributable to the prosecution of SR&ED carried on in Canada. An expenditure is directly attributable where it is directly related and incremental to the prosecution of SR&ED carried on in Canada. For more information on directly attributable (directly related and incremental), refer to the SR&ED Overhead and Other Expenditures Policy.

For more information on the traditional method, refer to the Traditional and Proxy Methods Policy.

2.2.2 Lease expenditures when you choose the proxy method

After December 15, 2024, for claimants using the proxy method, if leased equipment was used 90% or more of its operating time (see section 3.3) for SR&ED in Canada, the total cost incurred for leasing the equipment (other than GPOEF) may be claimed. If leased equipment was used more than 50% but less than 90% of its operating time for SR&ED in Canada, 50% of the cost to lease the equipment (other than GPOEF) may be claimed.

Lease expenditures for the lease of premises, facilities or equipment not used primarily for the prosecution of SR&ED in Canada (used 50% or less of its operating time for SR&ED in Canada) cannot be claimed under the proxy method.

Since expenditures for the lease of buildings (see section 2.2.3) are excluded from being claimed for SR&ED, generally only the costs of leasing equipment are allowable.

2.2.3 Lease expenditures for buildings: Not allowed

A lease cost for a building is any expense incurred to use a building or to have the right to use a building. Outlays and expenses made or incurred for the use of, or the right to use, a building (see section 3.5) cannot be included as an expenditure on or in respect of SR&ED. Thus, an expenditure incurred for leasing a building does not qualify for SR&ED.

The only exception is for lease costs incurred after December 15, 2024, for a special-purpose building prescribed by the Regulations. Prescribed special-purpose buildings are buildings the Department of Finance Canada approves on a building-by-building basis. For more information on special-purpose buildings, refer to Appendix A of the SR&ED Capital Expenditures Policy.

When under the terms of a lease agreement it is clear that the lessee has the right to use a building and equipment, the claimant should make a reasonable allocation of the lease costs between the building (expenditure not allowable for SR&ED purposes) and the equipment (may be an allowable expenditure).

In certain cases, a lease expenditure incurred after December 15, 2024, attributable to the lease of something other than a building may be allowable provided the requirements discussed in sections 2.2.1 and 2.2.2 are otherwise met. For example, a lease expenditure for a structure (a bridge or a dam) may be allowable under the traditional method if the structure meets the requirements discussed in section 2.2.1. A lease expenditure for a structure may be allowable under the proxy method if the expenditure meets the requirements discussed in section 2.2.2. Refer to Archived Interpretation Bulletin IT-79R3, Capital cost allowance – Buildings or other structures for further discussion on structures.

3.0 Terms

3.1 All or substantially all

All or substantially all (ASA) is generally accepted to mean 90% or more.

Generally, for SR&ED purposes where an expenditure is ASA, the total amount of the expenditure is deductible. Where a lease expenditure incurred before 2014 or after December 15, 2024, is ASA attributable to the prosecution of SR&ED carried on in Canada, the total amount of the lease expenditure may be included in the pool of deductible SR&ED expenditures.

The ASA test for lease expenditures is based on actual use (operating time). For more information on operating time, refer to section 3.3.

3.2 Primarily

Primarily generally means more than 50%.

Under the proxy method, leased equipment is used primarily for the prosecution of SR&ED if the equipment is used more than 50%, but less than 90%, of its operating time (see section 3.3) for the prosecution of SR&ED in Canada. Under the proxy method, an expenditure for equipment that is used 90% or more (ASA) for SR&ED is precluded from also being claimed as an expenditure for equipment used primarily for SR&ED.

3.3 Operating time

Total operating time is generally determined on a tax year basis. A claimant should not use a particular portion of the tax year as the basis to determine the operating time of the equipment for SR&ED. Thus, a claimant that uses the proxy method and leases equipment that normally operates during an entire 12 month tax year would not be able to include the portion of the cost of leased equipment, for example, for a two or three month period within the 12-month tax year that the leased equipment was used primarily (or ASA) for SR&ED in Canada. The rationale is that the operating time for the entire tax year must be used as the basis to determine SR&ED use of equipment.

However, for any tax year that includes December 16, 2024, calculate the SR&ED use of equipment as a percentage of the total operating time of the equipment after December 15, 2024. For more information on operating time, refer to section 4.2 of the SR&ED Capital Expenditures Policy.

3.4 General purpose office equipment or furniture

General purpose office equipment or furniture (GPOEF) includes all furniture, such as desks, chairs, lamps, filing cabinets, and bookshelves. It also includes photocopiers, fax machines, telephones, cell phones and calculators.

Computers, including hardware, software, and ancillary equipment are not considered to be GPOEF.

Any expenditure related to GPOEF is intended to be covered by the prescribed proxy amount. Thus, when a claimant uses the proxy method, GPOEF is specifically excluded when determining lease costs.

However, when a claimant chooses the traditional method, any lease costs incurred after December 15, 2024, related to GPOEF, may be claimed as a lease cost of equipment if it is used ASA in the prosecution of SR&ED in Canada. If the leased GPOEF is not used ASA in the prosecution of SR&ED, then the lease costs incurred after December 15, 2024, may be claimed as an overhead and other expenditure. The lease cost must be directly attributable (directly related and incremental) to the prosecution of SR&ED in Canada to claim as an overhead and other expenditure. For more information on the traditional and proxy methods, refer to the Traditional and Proxy Methods Policy. For more information on directly attributable (directly related and incremental), refer to the SR&ED Overhead and Other Expenditures Policy.

3.5 Building

Building is a broad term covering any structure with walls and a roof affording protection and shelter that is affixed to the land. For example, a mobile home would be considered a building if the wheels, the trailer hitch, brakes, and emergency lights are removed and the unit is affixed to cement pads on the ground, and services, such as hydro and water, are installed.

The term structure includes anything of substantial size that is built up from component parts and intended to remain permanently on a permanent foundation. This definition of structure was considered by the Supreme Court of Canada in British Columbia Forest Products Ltd. v. Minister of National Revenue, 71 DTC 5178, which also concluded that the term structure—when used in the context of building or other structure—does not mean only a structure in the nature of a building. Bridges or hydro-electric transmission towers, for example, while clearly not buildings, are structures.

Portable shelters such as housing, office, and other service units are regarded as buildings if they are installed and intended to remain in a particular location. Such things as tents, canvas marquees, and air-supported fabric domes that are not part of a rigid structure are not considered to be buildings or structures.

Property that is attached to a building, however firmly, is included in capital cost allowance (CCA) Class 8 if it is acquired exclusively for those purposes stated in CCA Class 8. For example, concrete footings, foundations and structural steel exclusively for the support of machinery are regarded as CCA Class 8 property. Stairs and platforms, the sole purpose of which is to provide access to machinery, also fall within CCA Class 8, whether they are attached to the building or the machinery.

The comments in the archived Interpretation Bulletin IT-79R3, Capital cost allowance – Buildings or other structures, may be of assistance in distinguishing between buildings and other structures.

4.0 Issues concerning SR&ED lease expenditures

4.1 Lease or sale

It is the CRA's view that the determination of whether a contract is a lease or sale is based on the legal relationship created by the terms of the agreement, rather than on any attempt to ascertain the underlying economic reality. The Supreme Court of Canada has held, in Shell Canada Limited v. The Queen, 99 DTC 5669, and in other decisions, that the economic realities of a situation cannot be used to re-characterize a taxpayer's bona fide legal relationships. The Court held that absent a specific provision of the Income Tax Act to the contrary, or a finding that the taxpayer's relationships are a sham, the taxpayer's legal relationships must be respected in tax cases. Thus, generally and subject to the general anti-avoidance rule, re-characterization is permissible only if the label attached by the taxpayer (claimant) to the particular transaction does not properly reflect its actual legal effect. Therefore, in the absence of a sham, it is the CRA's view that a lease, is a lease and a sale is a sale.

4.2 Software and software licences

An expenditure for software or software licences may be considered an SR&ED capital expenditure or a current lease expenditure depending on the facts of the case. For more information on this subject, refer to the SR&ED Capital Expenditures Policy.

4.3 Specific lease expenditures allowed

The following information applies to SR&ED lease expenditures incurred after December 15, 2024 (see Section 2.2).

4.3.1 Bandwidth allowed as lease of equipment under proxy method

It may be difficult to determine whether the lease of bandwidth is an overhead expenditure covered by the proxy amount or the lease of equipment. The Tax Court of Canada dealt with a similar issue in the case Data Kinetics Ltd v. The Queen, 98 DTC 1877. In this case the claimant used the proxy method to calculate its SR&ED expenditures and included the cost to lease a dedicated telephone line and a mainframe located outside of Canada. The Judge concluded that the amount represented the lease of equipment.

The Judge stated:

"When used with reference to tangible personal property, [the] word "lease" means a contract by which one owning such property grants to another the right to possess, use and enjoy it for a specified period of time in exchange for periodic payment of a stipulated price, referred to as rent."

The Judge concluded that Data Kinetics Ltd. was in fact leasing equipment from the party providing the telephone line and that the lease was not for general purpose office equipment or furniture (GPOEF).

The claimant was paying for time associated with the use of bandwidth. However, the bandwidth could only be made available through the use of highly sophisticated optoelectronic equipment. Applying the principles asserted in Data Kinetics Ltd , the cost associated with bandwidth incurred after December 15, 2024, would be allowed as a lease of equipment under the proxy method because it was dedicated for SR&ED and it was not a lease for GPOEF.

4.3.2 Lease of land allowed when you choose the traditional method

The cost incurred after December 15, 2024, for leased land, may be considered an SR&ED expenditure where a claimant uses the traditional method in determining SR&ED expenditures. The cost associated with the lease of land is allowable as overhead and other expenditures, provided it is a current expenditure that is all or substantially all (ASA) attributable or directly attributable, as determined by regulation to the prosecution of SR&ED carried on in Canada.

The limitation on SR&ED expenditures for the right to use a building (see section 2.2.3) does not apply to the cost associated with the lease of land.

Where a claimant has elected to use the proxy method in determining SR&ED expenditures, the cost associated with the lease of land (land is not a premise, facility, or equipment) is not an allowable SR&ED expenditure. In this situation, the cost to lease land is replaced by the prescribed proxy amount.

5.0 Documentation and other evidence

The CRA recommends that claimants keep a list of leased equipment and other items they used in the year for the prosecution of SR&ED carried on in Canada, to support their SR&ED claim. Claimants should be able to provide explanations and supporting evidence of how the leased equipment was used in the prosecution of SR&ED carried on in Canada. Claimants should be able to provide enough information to establish actual use of the equipment. This information should be retained and ready to be provided to CRA upon request. For more information concerning documentation and other supporting evidence, refer to Information Circular IC78-10R5, Books and Records Retention / Destruction and Keeping records.

5.1 Examples of documentation and other evidence

Examples of documentation and other evidence that support SR&ED lease expenditures are:

• Lease agreements, lease contracts
• Logbooks or other documentation that support the SR&ED use of equipment for the period
• Invoices, cancelled cheques, and so forth

For more information on documentation, refer to Appendix 2 of the T4088, Guide to Form T661 – Scientific Research and Experimental Development Expenditures (SR&ED) Claim.

Appendix A: References

A.1 Legislative references

A.2 Jurisprudence

Appendix B: Revisions

B.1 Explanation of changes

The following are the explanations of changes to the SR&ED Lease Expenditures Policy as part of the June 8, 2026, revision:

Section 1.0 has been revised to include additional wording to explain that the rules contained in this policy document are applicable to lease expenditures incurred before 2014 and after December 15, 2024.

Throughout the document, we updated the legislative references, and we added wording to indicate that lease costs the claimant incurred after December 15, 2024, may qualify for SR&ED tax incentives. Lease costs the claimant incurred before December 16, 2024, do not qualify for SR&ED tax incentives.

We updated Appendix A to reflect the effective date of the amended legislation.

We revised Appendix A.1 to update the legislative references.

Other minor formatting and editing corrections were made throughout the document.