Prescribed Proxy Amount Policy

Date: April 28, 2022

Changes to the Prescribed Proxy Amount Policy

Reasons for revision

This revision accommodates the legislative changes that have been announced.

Revision overview

The percentage to calculate the prescribed proxy amount (PPA) is 55%. References to 60% for 2013 and 65% for 2012 and prior years has been removed. 

The text of this document has been revised to reflect these changes, see Appendix B.1 Explanation of changes.

Table of contents


1.0 Purpose

The purpose of this document is to clarify the position of the Canada Revenue Agency (CRA) regarding the prescribed proxy amount (PPA) when administering the scientific reasearch and experimental development (SR&ED) legislation under the federal Income Tax Act and the Income Tax Regulations. The PPA is only determined under the proxy method for calculating SR&ED expenditures.

2.0 Overview

Claimants have two ways to calculate their SR&ED expenditures. They can elect to use the proxy method or choose to use the traditional method. Claimants that elect to use the proxy method to determine their expenditures on, or in respect of, SR&ED cannot treat any portion of SR&ED overhead and other expenditures as qualified SR&ED expenditures because these expenses are not one of the three specific types of expenditures that may be included in the pool of deductible SR&ED expenditures. However, in lieu of these SR&ED overhead and other expenditures, these claimants can include as a qualified expenditure an amount referred to as the prescribed proxy amount (PPA). The PPA is a notional amount calculated under the Regulations. For more information on the traditional and proxy methods, refer to the Traditional and Proxy Methods Policy, and for more information on overhead and other expenditures, refer to the SR&ED Overhead and Other Expenditures Policy.

About the PPA

The calculation of the PPA is made in Part 5 of Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim.

Legislative references Income Tax Act
Subsection 9(1) Income from a business or property
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Subclauses 37(8)(a)(ii)(B)(I) to (VI) SR&ED expenditures in Canada under the proxy method
Subsection 127(9) Definition of “qualified expenditure” – includes the prescribed proxy amount

Legislative reference Income Tax Regulations
Subsection 2900(4) Calculation of the prescribed proxy amount

3.0 Calculation of prescribed proxy amount

The prescribed proxy amount (PPA) for a tax year is a percentage of the salary base (see sections 4.0 to 4.2 ), subject to the overall PPA cap (see section 5.0 ). Since 2014, the PPA is calculated as 55% of the salary base. 

Legislative reference Income Tax Regulations
Subsection 2900(4) Calculation of the prescribed proxy amount

4.0 Salary base

The salary base is an amount used to calculate the prescribed proxy amount (PPA).

The salary base is composed of salaries or wages of the claimant's employees for work performed in Canada and in certain cases outside Canada (see below) who are directly engaged in SR&ED. For more information on the salary or wages of employees directly engaged in SR&ED, refer to section 7.0 of the SR&ED Salary or Wages Policy.

Table 1 illustrates the differences between the expenditures for salary or wages that can be included in the pool of deductible SR&ED expenditures and those that can be included in the salary base.

Table 1 Inclusion of amounts in the pool of deductible scientific research and experimental development expenditures vs. the salary base

Pool of deductible SR&ED expenditures Salary base for PPA
For employees other than specified employees - directly engaged salary or wages incurred and paid in the tax year or paid within 180 days of the tax year-end, including bonuses, remuneration based on profits, taxable benefits, and prior years' unpaid salary or wages paid in the year. For employees other than specified employees - directly engaged salary or wages incurred and paid in the tax year or paid within 180 days of the tax year-end, excluding bonuses, remuneration based on profits, taxable benefits, and prior years’ unpaid salary or wages paid in the year.
For specified employees – directly engaged salary or wages incurred and paid in the tax year or paid within 180 days of the tax year-end, including taxable benefits and prior years' unpaid salary or wages paid in the year, excluding bonuses and remuneration based on profits, to a maximum of 5 x year’s maximum pensionable earnings (YMPE). For specified employees – total salary or wages incurred and paid in the tax year or paid within 180 days of the tax year-end, excluding bonuses, remuneration based on profits, and taxable benefits, multiplied by the percentage of time spent on SR&ED, to a maximum of 75%. This amount is limited to 2.5 x year's maximum pensionable earnings (YMPE).
Related benefits (employer's contributions) are not included in the pool of deductible SR&ED expenditures. Related benefits (employer's contributions) are not included in the salary base for PPA.

In certain cases, claimants can earn SR&ED investment tax credits (ITCs) on permissible salary or wages for SR&ED work performed outside Canada. For more information on permissible salary, refer to section 10.0 of the SR&ED Salary or Wages Policy. When the expenditures, or portion of the expenditures, for the salary or wages of employees performing SR&ED work outside Canada are deemed to be expenditures incurred in Canada, such salary or wages will be part of the salary base.

In summary, for any employee, whether a specified employee or not, the amount of an employee's salary or wages that the claimant can use in calculating the salary base cannot include any of the following amounts:

For more information on the above amounts, refer to the SR&ED Salary or Wages Policy.

The Regulations may further restrict the amount of salary or wages that the claimant can take into account for a specified employee. For more information on the restrictions for specified employees, refer to section 4.1.

Legislative references Income Tax Act
Section 6 Taxable benefits
Section 7 Stock options
Subsection 78 Unpaid remuneration and other amounts

Legislative references Income Tax Regulations
Subsection 2900(4) Calculation of the prescribed proxy amount
Subsection 2900(5) ASA salary or wages – proxy method
Subsection 2900(9) Exclusions to salary base

4.1 Restrictions for specified employees

The Regulations restricts the amount that a claimant can include in the salary base for a specified employee to the lesser of the following amounts:

* The YMPE is determined for purposes of the Canada Pension Plan. To obtain the YMPE for each year, use the Rates for Money Purchase limits, RRSP limits, YMPE, DPSP limits and Defined Benefits limits.

The formula to determine the maximum amount that a claimant can include in the salary base for a specified employee for the year, in other words for the second limit mentioned above, is:

2.5 × A × (B ÷ 365)

In this formula:

A is the YMPE for the calendar year in which the tax year ends.

B is the number of days in the tax year that the claimant employed the individual.

Other rules apply if a specified employee of a corporation is also an employee of an associated corporation (see section 4.2).

For information on the rules that apply to the salaries or wages of specified employees, refer to section 6.0 of the SR&ED Salary or Wages Policy.

Legislative references Income Tax Regulations
Subsection 2900(7) Restrictions for specified employees
Subsection 2900(9) Exclusions to salary base

4.2 Specified employees of associated corporations

In addition to the restrictions discussed in section 4.1, the amount of salaries or wages that a corporate claimant can include in its salary base for an individual who is a specified employee of the corporation is restricted further. This is the case if, in the corporation's tax year ending in a particular calendar year, the corporation is associated with another corporation that has employed the same individual in its tax year ending in that particular calendar year.

The total amount of salaries or wages that the corporate claimant can include in its salary base in respect of the specified employee cannot be more than 2.5 times the YMPE and must be shared between the associated corporations. In other words, the maximum salary or wages a claimant can include for a specified employee in calculating its salary base cannot be more than 2.5 times the YMPE, minus the amount the associated corporation has included in its salary base for its tax year ending in the same calendar year for the specified employee.

For the purposes of the above rule, the following individuals or partnerships are deemed to be corporations associated with a particular corporation for the purposes of the salary base:

Legislative references Income Tax Regulations
Subsection 2900(8) Specified employee employed by an associated corporation
Subsection 2900(10) Deemed to be a corporation and associated

Other reference
Canada Pension Plan section 18, Year's Maximum Pensionable Earnings (YMPE)

5.0 Overall cap on prescribed proxy amount

For most claimants, the prescribed proxy amount (PPA) is a percentage of the salary base as calculated in section 3.0. However, in certain situations, an overall cap on the PPA may limit the PPA that the claimant has otherwise determined.

The objective of the overall cap is to ensure that the total qualified SR&ED expenditures and PPA and other deductions specifically allowed under the Regulations are not greater than the total business expenditures made in the year. Generally, the overall cap on the PPA should not apply to claimants carrying on a diversified business (that includes, for example, production, marketing, and research and development). The overall cap will usually not restrict the calculated PPA if the claimant has deducted more than $55 of non-SR&ED expenses (excluding the deductions specifically identified by the Regulations as mentioned below) for each $100 of eligible salary included in the salary base.

The overall cap is calculated based on the total expenditures for tax purposes minus certain deductions allowed under other sections of the Income Tax Act. These latter deductions are specifically identified by the Regulations, for example capital cost allowance (CCA), SR&ED deduction as per line 411 of Schedule T2SCH1, building rent, interest, etc.

The following formula calculates the overall cap on the PPA.

A - B - C

In this formula:

A is the total amounts deducted when calculating the net income for tax purposes from the business for the year (including the cost of goods sold).

B is the deductions claimed in the year under sections 20 (for example, CCA, interest, bad debts), 24 (if you cease to carry on a business), 26 (for a bank), 30 (improving land for farming), 32 (if your business is that of an insurance agent or broker), 37 (for SR&ED expenditures), 66 to 66.8 (for example, exploration and development expenses), and 104 (for a trust) of the Act.

C is the amount of expenditures incurred for the use of, or the right to use, a building.

If a claimant carries on more than one business, the claimant should add the amounts specified under the Regulations that were deducted when calculating the claimant's income for the year from all businesses.

For an example of the overall cap calculation, refer to Part 5, Section B – Prescribed proxy amount (PPA) of the T4088, Guide to Form T661 – Scientific Research and Experimental Development (SR&ED) Expenditures Claim.

Legislative reference Income Tax Regulations
Subsection 2900(6) Overall cap on the prescribed proxy amount

Appendix A – References

A.1 Legislative references

List of provisions
Income Tax Act Description
Section 6 Taxable benefits
Section 7 Stock options
Subsection 9(1) Income from a business or property
Paragraph 37(1)(a) Pool of deductible SR&ED expenditures – current expenditures
Subclauses 37(8)(a)(ii)(B) (I) to (VI) SR&ED expenditures in Canada under the proxy method
Subsection 78(4) Unpaid remuneration and other amounts
Subsection 127(9) Definition of “qualified expenditures” – includes the prescribed proxy amount
List of regulations
Income Tax Regulations Description
Subsection 2900(4) Calculation of the prescribed proxy amount
Subsection 2900(5) ASA salary or wages – proxy method
Subsection 2900(6) Overall cap on the prescribed proxy amount
Subsection 2900(7) Restrictions for specified employees
Subsection 2900(8) Specified employee employed by an associated corporation
Subsection 2900(9) Exclusions to salary base
Subsection 2900(10) Deemed to be a corporation and associated

A.2 Other reference

Canada Pension Plan section 18, Year's Maximum Pensionable Earnings (YMPE)

Appendix B – Revisions

B.1 Explanation of changes

The following are the explanation of changes to the Prescribed Proxy Amount Policy as part of the revision of April 28, 2022:

Section 3.0 has been revised to delete the references to 60% for 2013, and 65% for 2012 and prior years. The formula to calculate the PPA is updated to delete the reference that accounts for a proration of the rate for the 2013 and 2014 calendar years.

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

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