Calculate allowable expenditures

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Identify your allowable expenditures

Your allowable expenditures represent the 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:

You may only claim expenditures for the year in which they occurred.

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, such as:
    • operating a machine that is required for an experiment
    • feeding raw materials into a machine
      (must be supervised by staff with scientific or technological qualifications)
  • 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 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.

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 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.

For detailed information about contracts, review the Contract Expenditures for SR&ED Performed on Behalf of a Claimant 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 the tax year you’re claiming. You cannot change the calculation method you chose after you have submitted 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
  • May result in actual overhead and other expenditures incurred being greater than the prescribed proxy amount (PPA)
  • Do not need to calculate the salary base and determine the PPA in Part 5 of form T661
  • Do not need to calculate the overall proxy cap

Disadvantages of the traditional method

  • Must specifically identify the overhead and other expenditures that are directly related and incremental to the SR&ED work
  • 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)
  • Must identify (track) and allocate which overhead and other expenditures are for the SR&ED work
  • Must explain how you determined the amount and provide support for 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, T4088 guide to R&ED Expenditures Claim.

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):

  • Salary or wages for support or clerical staff
  • Office supplies
  • Utilities

Advantages of the proxy method

  • No need to specifically identify (track) and allocate overhead and other expenditures for SR&ED
  • Investment tax credit is earned on the PPA
  • Easy to determine the PPA once 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

  • The PPA or any expenditures it represents cannot be included in the pool of deductible SR&ED expenditures
  • The salary base must be calculated
  • Overall cap on the PPA may need to be calculated
  • the PPA may be less than the actual overhead and other expenditures incurred

For detailed information about choosing between the traditional or proxy methods, review Traditional and Proxy Methods Policy.

To compare how expenditures are treated under traditional vs proxy, review Table 1, T4088 guide to SR&ED Expenditures Claim.

Third-party payments

A third-party payment for SR&ED work carried out in Canada during the tax year may be claimed as an allowable expenditure if:

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 in that the third party, such as a university or research institute, may 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 preferential right to the payer to exploit the results
  • 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
  • Usually limited to one payer
  • The SR&ED work often has a commercial focus
  • Tax treatment is accrual

For detailed information about third-party payments, review the Third-Party Payments Policy.

Get support with allowable expenditures

Review the policies for allowable expenditures

Review the policy for partnerships

SR&ED Claims for Partnerships Policy

Review the guide to the SR&ED expenditures claim

T4088, SR&ED Expenditures Claim - Guide to T661

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