Calculate allowable expenditures
Identify your allowable expenditures
Your allowable expenditures represent the total current and capital expenditures you incurred conducting SR&ED work. To claim SR&ED tax incentives, you need to calculate how much you spent in relation to your SR&ED work during the tax year. This means linking your eligible work to the expenditures you can claim.
If the work is eligible, you may be able to claim the following expenditures:
Current expenditures
- Salary or wages
- Materials (consumed or transformed)
- Contracts for SR&ED
- Lease costs of equipment (incurred after December 15, 2024)
- Overhead and other expenditures (traditional method only)
- Third party payments
You may only claim current expenditures for the year in which they occurred.
Capital expenditures
- Expenditures that result in the acquisition of depreciable property (after December 15, 2024).
Select the calculation method: traditional or proxy
To calculate your allowable expenditures, you must use either the traditional method or the proxy method.
To learn more about the traditional and proxy methods, refer to Traditional and proxy methods.
Salary or wages
Allowable salary or wage expenditures include the portion of salary or wages that you incurred in the tax year for SR&ED work done in Canada. The amounts must be paid by the end of the tax year or within 180 days of the end of the tax year.
- Employees directly engaged in SR&ED
You may include the salary or wages of employees who are directly engaged in SR&ED doing hands-on work.
The portion of salary or wages you include must be based on the time employees spent on SR&ED activities and the tasks they performed, regardless of their job title.
Review tasks that are considered directly engaged in SR&ED
- Experimentation and analysis
- Support work of engineering, design, operations research, mathematical analysis, computer programming, data collection, testing, or psychological research
- Certain tasks performed by non-specialized employees (must be supervised by staff with scientific or technological qualifications), such as:
- operating a machine that is required for an experiment
- feeding raw materials into a machine
- Supervision of employees performing SR&ED, and SR&ED contract administration and coordination (technical input only)
- Technological planning for ongoing SR&ED projects you claimed in the tax year, such as planning for:
- assignment of technological personnel
- job priorities
- development of technological strategies
- quality of materials used
- Technological feasibility studies relating to SR&ED projects carried out
- Technical documentation for internal use
To learn more about salary or wages of employees directly engaged in SR&ED, review Part 3, Section B, T4088 Guide to SR&ED Expenditures Claim.
Review criteria for claiming work outside Canada
In some cases, you may claim a portion of the salary or wages of employees who conducted SR&ED work outside Canada. This portion is the permissible salary.
The salary or wages you can claim for SR&ED done outside Canada must meet all the following criteria:
- The SR&ED work must be done directly by an employee and not a contractor
- The employee who did the work was a resident of Canada at the time the expense was incurred
- The work was related to the business of the claimant
- The work done outside Canada was an integral part and solely in support of the SR&ED project carried out in Canada
- The salary or wages paid must not be subject to income or profits tax from another country
To learn more about salary or wages of employees outside Canada, review Section 10, SR&ED Salary or Wages Policy
- Employees not directly engaged in SR&ED
If you use the traditional method, you may be able to claim the salary or wages of employees not directly engaged in SR&ED work (such as clerical staff) as overhead and other expenditures.
If you use the proxy method, their salary or wages are considered included in a substitute (or proxy) amount.
For detailed information about salary or wages, review the SR&ED Salary or Wages Policy.
Materials
Materials for SR&ED include all the raw materials, substances, or other items that compose the body of a thing at any time during the SR&ED work carried out in the tax year.
Expenditures may include the original cost to acquire an item plus all reasonable costs to bring that item to the condition and location required to be consumed or transformed as part the SR&ED work.
What are materials consumed
Materials consumed during SR&ED are materials that were destroyed or made valueless as a result of the work. This includes materials that were absorbed, used up, or broken down into small pieces.
For detailed information about materials consumed, review Section 5, Materials for SR&ED Policy.
What are materials transformed
Materials transformed during SR&ED are materials that have been changed or incorporated into another material or product, and that retain some value to you or another party.
For detailed information about materials transformed, review Section 6, Materials for SR&ED Policy.
For detailed information about production runs and developing assets, review:
Determining if an item is a material for SR&ED is a question of fact that can only be made on a case-by-case basis.
When an item does not qualify as material for SR&ED, the associated cost may be allowable as an overhead or other expenditure (traditional method only).
If you purchase materials that you will use later in SR&ED work, you may only claim their cost in the year that the materials are consumed or transformed.
For detailed information about materials, review the Section 5, Materials for SR&ED Policy.
Contracts for SR&ED work
You may claim the amount you paid or that was payable to contractors or sub-contractors who did SR&ED work in Canada on your behalf during the tax year.
You must separate your contract expenditures between arm’s length contractors and non-arm’s length contractors.
- Arm’s length contracts can be included in the calculation of qualified SR&ED expenditures for an investment tax credit (ITC)
- Non-arm’s length contracts can be included in the calculation of deductible expenditures, but they do not qualify for an ITC
For detailed information about contracts, review the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.
Lease costs of equipment
You can claim eligible lease costs for equipment used in the performance of SR&ED in Canada incurred after December 15, 2024. The amount of lease costs you can claim depends on the method you choose to claim your SR&ED expenditures (traditional or proxy method).
Lease costs under proxy method
When the leased equipment (other than general-purpose office equipment or furniture) is used 90% or more of the time for SR&ED, you can claim 100% of the expenditure as a lease cost.
When the equipment is used primarily for SR&ED more than 50% of the time, you can claim 50% of the lease costs of the equipment (other than general-purpose office equipment or furniture).
Lease costs under traditional method
When the leased equipment is used 90% or more of the time for SR&ED, you can claim 100% of the expenditure as a lease cost.
When the leased equipment is used less than 90% of the time for SR&ED and you are using the traditional method, you can claim the cost only as an overhead expenditure. And the amount claimed is proportional to the percentage it is used for SR&ED.
For detailed information about lease costs of equipment, review SR&ED Lease Expenditures Policy.
Overhead and other expenditures
All overhead and other expenditures must be directly attributable to conducting SR&ED work in Canada.
The expenditure must be directly related to the SR&ED work and incremental, meaning the expenditure would not have been incurred if the work had not happened.
For detailed information about overhead and other expenditures, review SR&ED Overhead and Other Expenditures Policy.
Traditional and proxy methods
You must choose to use either the traditional method or the proxy method to calculate your expenditures for each tax year you file a claim. You cannot change the calculation method after you submit your SR&ED claim. If you don’t select a method, the CRA will process your claim using the traditional method.
- Traditional method
- Using the traditional method, you must identify all your overhead and other expenditures in your calculation of allowable expenditures.
- Proxy method
- Using the proxy method, you do not have to calculate your overhead expenses. Instead, you calculate a substitute (or proxy) amount that is not deductible but will earn an ITC.
Each method has its own advantages and disadvantages.
Why use the traditional method
The traditional method allows you to calculate and deduct overhead and other expenditures. It requires you to specifically identify each overhead cost that was directly related and incremental to SR&ED work as "overhead and other expenditures".
Advantages of the traditional method
- Overhead expenditures can be included in the pool of deductible SR&ED expenditures
- This method may result in actual overhead and other expenditures incurred being greater than the prescribed proxy amount (PPA)
- You do not need to calculate the salary base and determine the PPA in Part 5 of Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim
- You do not need to calculate the overall proxy cap
Disadvantages of the traditional method
- You must specifically identify the overhead and other expenditures that are directly related and incremental to the SR&ED work
- This method can be complex in certain situations, such as when SR&ED and non-SR&ED work are done in the same facility (for example, shop-floor SR&ED)
- You must identify, track, and allocate the overhead and other expenditures that are for the SR&ED work
- You must explain how you determined the amount and keep documents that support the determination
- The PPA may be greater than the actual overhead and other expenditures incurred
To learn more about what qualifies as overhead and other expenditures under the traditional method, review Table 5 in Guide T4088 Scientific Research and Experimental Development (SR&ED) Expenditures Claim - Guide to Form T661.
Why use the proxy method
If you use the proxy method, you do not need to specifically identify and claim SR&ED overhead and other expenditures for the tax year. Instead, you use a formula to calculate a substitute amount called the prescribed proxy amount (PPA).
With the proxy method, the substitute amount covers the following expenditures (so you don’t need to report them):
- general purpose office equipment or furniture
- salary or wages for support or clerical staff
- office supplies
- utilities
- and other overhead expenditures
Advantages of the proxy method
- You don't need to specifically identify, track, and allocate overhead and other expenditures for SR&ED
- An ITC is earned on the PPA
- It is easy to determine the PPA after you establish the salary base (PPA is calculated in Part 5 of T661)
- Actual overhead and other expenditures incurred may be less than the PPA
Disadvantages of the proxy method
- You cannot include the PPA or any expenditures it represents in the pool of deductible SR&ED expenditures
- You must calculate the salary base
- You may need to calculate the overall cap on the PPA
- The PPA may be less than the actual overhead and other expenditures incurred
For detailed information about choosing between the traditional and proxy methods, review Traditional and Proxy Methods Policy.
To compare how expenditures are treated under traditional vs proxy, review Table 1 in Guide T4088.
Third-party payments
You can claim a third-party payment for SR&ED work carried out in Canada if:
- The work is done by a CRA approved entity or another third-party entity
Third-party entities
Approved entities
- Approved associations
- Approved universities, colleges, and research institutes or similar institutions
- Approved organizations (granting councils) that make payments to an association, institution, or corporation identified in the third-party entities below
Other third-party entities
- Corporations resident in Canada
- Non-profit SR&ED corporations resident in Canada and exempt from tax
- The work relates to the claimant’s business
- The claimant is entitled to exploit the results of the work
Third-party payments can be direct financial contributions, funding for students or employees doing the SR&ED work, or payments in kind.
If you made a third-party payment, you must complete Form T1263 for each payment and attach to your claim:
How third-party payments differ from contract costs
Third-party payments are different from contract expenditures. The third party, such as a university or research institute, might have done the work anyway, regardless of your SR&ED project.
Third-party payments vs contracts for SR&ED work
Third-party payment
- The SR&ED work is controlled by the performer
- Rights to the work are non-exclusive (generally published), but there must be a preferential right to the payer to exploit the results
- There is usually more than one payer
- The SR&ED work is often basic or applied research
- Tax treatment is generally on a cash basis
Contracts for SR&ED work
- The SR&ED work is controlled by the payer
- Rights to the work are exclusive to the payer
- The contract is usually limited to one payer
- The SR&ED work often has a commercial focus
- The tax treatment is accrual
For detailed information about third-party payments, review the Third-Party Payments Policy.
Capital expenditures
A capital expenditure for SR&ED is an expenditure you made to acquire new or used depreciable property for which you intend one of the following:
- You will use it in the performance of SR&ED in Canada for more than 90% of its expected useful life
- More than 90% of its value will be consumed in the performance of SR&ED in Canada
When you claim SR&ED capital expenditures, do not include the same expenditure on Schedule 8, Capital Cost Allowance (CCA).
For detailed information about capital expenditures, review the SR&ED Capital Expenditures Policy.
Get support with allowable expenditures
Review the policies for allowable expenditures
- SR&ED Salary or Wages Policy
- Materials for SR&ED Policy
- SR&ED During Production Runs Policy
- SR&ED while Developing an Asset Policy
- Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy
- SR&ED Lease Expenditures Policy
- SR&ED Overhead and Other Expenditures Policy
- Third-Party Payments Policy
- SR&ED Capital Expenditures Policy
Review the policy for partnerships
SR&ED Claims for Partnerships Policy
Review the guide to the SR&ED expenditures claim
Guide T4088, SR&ED Expenditures Claim - Guide to T661
Contact us
Call us if you have any questions about the SR&ED program or calculating your allowable expenditures.