SR&ED Claim Guide: Quick Summary
The Scientific Research and Experimental Development (SR&ED) program is Canada's largest tax incentive for R&D. It provides refundable investment tax credits of up to 35% for Canadian-controlled private corporations (CCPCs) and 15% for other businesses. Over $3 billion in SR&ED credits are claimed by Canadian companies each year, covering work in software development, manufacturing, engineering, life sciences, and any other field where genuine technological challenges are being solved through systematic experimentation.
This guide walks you through the complete SR&ED claim process in 10 detailed steps: from determining whether your work qualifies under CRA's 3-part eligibility test, through tracking expenditures and completing Form T661, to calculating your investment tax credit, handling CRA reviews, and receiving your refund. Whether you are filing for the first time or preparing your annual claim, this walkthrough covers everything you need to submit an accurate SR&ED claim and avoid common mistakes that trigger CRA adjustments.
How to File an SR&ED Claim: 10-Step Walkthrough
Filing an SR&ED claim involves technical documentation, financial tracking, and completing specific CRA forms. Follow these steps to prepare and submit a successful claim.
Determine Eligibility: The CRA 3-Part Test
Before beginning your claim, you need to confirm that your work meets CRA's three mandatory eligibility criteria. All three must be satisfied for the work to qualify as SR&ED. CRA reviewers assess each criterion independently, and failure on any single test disqualifies the project.
1. Technological Uncertainty
Could the desired outcome be achieved using standard practice or existing knowledge? If not, you have technological uncertainty. This is the most critical test. Example: You need your software to process 10 million records in under 2 seconds, but known algorithms cannot achieve this at your data scale. The solution is not obvious from available literature or industry knowledge.
2. Systematic Investigation
Did you follow a methodical approach involving hypothesis, experimentation, and analysis? CRA wants to see that you formulated a theory, designed experiments to test it, recorded results, and drew conclusions. Example: You tested three different database architectures, benchmarked each under production-like conditions, documented failure modes, and iteratively refined your approach based on measured performance data.
3. Technological Advancement
Did the work aim to generate new knowledge or capabilities beyond the current state of the art in your field? The advancement does not need to be revolutionary. Example: Developing a novel caching strategy that achieves sub-second response times for a specific class of query that previously required 15+ seconds represents a genuine technological advancement, even if caching itself is well-known.
Important: Both successful and failed projects can qualify. SR&ED eligibility is based on the nature of the work attempted, not whether it succeeded. If you set out to resolve a genuine technological uncertainty through systematic investigation, the work qualifies regardless of the outcome.
Identify Eligible Projects
Review all technical work conducted during your fiscal year and identify projects that meet the 3-part test. SR&ED eligibility spans virtually every industry, but the work must involve genuine technical challenges, not routine development or implementation.
Software Development
Novel algorithms, AI/ML model development with uncertain outcomes, real-time processing at unprecedented scale, new compiler or language features, security architectures addressing novel threat vectors. Custom integrations and standard CRUD applications generally do not qualify.
Manufacturing & Engineering
New manufacturing processes overcoming material limitations, precision engineering beyond existing tolerances, tooling innovations, novel automation systems, and prototype development requiring iterative testing. Routine tool changeovers and standard production optimization do not qualify.
Food & Life Sciences
New product formulations with uncertain shelf stability, novel preservation techniques, pharmaceutical development, medical device prototyping, and agricultural biotechnology. Adapting an existing recipe with known ingredients or standard food preparation methods does not qualify.
Common Misconceptions
These typically do NOT qualify: market research, quality control testing for production, cosmetic or style changes, data collection for business purposes, implementing known solutions from documentation, adopting commercial off-the-shelf software, and routine maintenance or troubleshooting.
When in doubt about a specific project, ask yourself: "Would a competent professional in my field know how to achieve this result using standard methods?" If the answer is yes, the work likely does not qualify. If the answer is no, and you had to experiment to find a solution, the work likely qualifies.
Track Eligible Expenditures
Accurately tracking eligible costs is essential for maximizing your SR&ED claim. Employee salaries and wages typically represent 60-80% of most claims, but overlooking materials and contractor costs leaves money on the table.
Salaries & Wages (Largest Category)
Wages of employees directly performing, supervising, or directly supporting SR&ED work. Only the portion of time spent on eligible activities is claimable. Use timesheets to allocate time between SR&ED and non-SR&ED duties. Include salary, bonuses, and taxable benefits attributable to SR&ED time.
Materials Consumed or Transformed
Raw materials, supplies, and components consumed or permanently altered during R&D. Prototyping materials, chemicals used in experiments, and test specimens qualify. Materials incorporated into a product for sale or that remain usable after testing are generally not eligible.
Contractor Fees (80% Rule)
Payments to arm's-length subcontractors for SR&ED work are eligible at 80% of the invoiced amount. For non-arm's-length parties, the eligible amount is limited to the subcontractor's actual costs. Ensure contracts clearly specify that the work performed constitutes SR&ED-eligible activities.
Overhead (Traditional vs Proxy)
You must choose one method for all projects in a given year. The proxy method (55% of eligible salary costs) is simpler and requires less documentation. The traditional method (actual overhead costs: rent, utilities, equipment depreciation) may yield higher claims for companies with significant R&D facility costs. Most SMEs use the proxy method.
Key tracking tip: Set up dedicated cost centres or project codes in your accounting system at the start of the fiscal year. Retroactively extracting SR&ED costs from general ledger accounts at filing time is error-prone and time-consuming. Proactive tracking produces more accurate claims and better withstands CRA review.
Choose Your Reporting Method
Canada offers two methods for reporting SR&ED overhead costs. You must select one method and apply it consistently to all SR&ED projects within the same fiscal year. The choice cannot be changed after filing.
Proxy Method (Most Common)
Claim 55% of your eligible salary and wages as a substitute for actual overhead costs. No need to track rent, utilities, or equipment depreciation. Significantly simpler documentation. Best for: companies where R&D employees work in shared office spaces with minimal dedicated lab equipment.
Traditional Method
Claim actual overhead costs directly attributable to SR&ED work, including rent for R&D space, utilities, equipment maintenance and depreciation, and supplies. Requires detailed cost allocation records. Best for: companies with dedicated R&D labs, expensive equipment, or specialized facilities where actual overhead exceeds 55% of salaries.
Decision framework: Calculate your eligible salaries, then multiply by 0.55 to estimate the proxy method overhead. Compare this to your actual overhead costs attributable to SR&ED. If actual overhead is higher, the traditional method yields a larger claim, but requires substantially more record-keeping. For most small and medium businesses, the proxy method's simplicity outweighs the potential marginal increase from the traditional method.
Maintain Contemporaneous Documentation
This is where most SR&ED claims succeed or fail. Contemporaneous documentation means records created at the time the work was performed, not reconstructed after the fact for the claim. CRA reviewers heavily weight this evidence, and the absence of real-time records is the single most common reason claims are reduced or denied.
What CRA expects to see:
- Project descriptions: What problem you were trying to solve and why existing solutions were inadequate
- Hypotheses: What you believed might work and why, documented before beginning experiments
- Experiment logs: Step-by-step records of what you tried, parameters used, and outcomes observed
- Test results: Quantitative data from benchmarks, lab tests, prototype evaluations, or field trials
- Meeting minutes: Technical discussions about approaches, challenges encountered, and decisions made
- Design iterations: Versions of designs, schematics, or code showing the evolution of your approach
- Records of failure: Documentation of approaches that did not work and the analysis of why they failed
- Conclusions: What you learned, whether the uncertainty was resolved, and what advancement was achieved
Best practices for documentation:
- Use project management tools (Jira, Asana, Notion) and tag SR&ED-related tasks
- Maintain a shared engineering or lab notebook updated weekly at minimum
- Keep all code in version control with descriptive commit messages referencing SR&ED projects
- Save email threads discussing technical challenges and proposed solutions
- Take photos or videos of physical prototypes at each iteration stage
- Schedule monthly "SR&ED documentation check-ins" to ensure records are current
Complete Form T661
Form T661 (Scientific Research and Experimental Development Expenditures Claim) is the core document of your SR&ED filing. It contains both financial and technical information. Understanding each section is critical for a successful submission.
Part 2: Project Information
Provide basic project details: title, start and end dates, field of science or technology, and whether the project is new or continuing from a prior year. Each distinct SR&ED project gets its own Part 2 section. Group related work into logical projects rather than filing dozens of micro-projects.
Part 3: Expenditure Details
Report all eligible expenditures by category: salaries and wages, materials, subcontractor costs, and overhead (proxy or traditional method). Amounts must be allocated to specific projects. Ensure your numbers reconcile with your accounting records and payroll, as CRA cross-references this data.
Part 6: Project Description (Technical Narrative)
This is the most important section and the one most often done poorly. For each project, you must answer three questions in clear, technical language:
- What technological advancement were you trying to achieve? Describe the specific capability or knowledge you aimed to develop beyond what was currently available.
- What technological obstacles or uncertainties did you face? Explain why the desired outcome could not be achieved through standard practice. Identify the specific unknowns.
- What work did you perform to address the uncertainty? Describe the systematic investigation: hypotheses tested, experiments conducted, methodologies used, and conclusions drawn.
Common mistakes in Part 6:
- Using marketing language instead of technical descriptions
- Describing what the product does instead of the technical challenges overcome
- Failing to articulate the specific technological uncertainty
- Not demonstrating systematic investigation (just saying "we tried different approaches")
- Mixing business objectives with technical objectives
Calculate Your Investment Tax Credit (Schedule T2SCH31)
After completing Form T661, use Schedule T2SCH31 (Investment Tax Credit - Corporations) or Form T2038(IND) (Investment Tax Credit for Individuals) to calculate the actual dollar amount of your credit.
CCPC Enhanced Rate: 35%
Available to Canadian-controlled private corporations on the first $3 million of qualified SR&ED expenditures per year. This credit is fully refundable, meaning CRA pays you cash even if you owe no tax. The $3M threshold is shared among associated corporations.
Basic Rate: 15%
Applies to all other eligible claimants: public corporations, foreign-controlled companies, and CCPC expenditures exceeding the $3 million threshold. This credit is generally non-refundable (can only reduce taxes owed), though certain small CCPCs may receive partial refundability.
Provincial credit stacking: Most provinces offer their own R&D tax credits that stack on top of the federal SR&ED credit. Provincial credits are claimed on your provincial tax return, not on Form T661. Combined federal-provincial rates range from approximately 30% (provinces with no R&D credit) to over 60% (Quebec, for qualifying SMEs). Calculate your provincial credit separately and factor it into your total expected benefit.
Example calculation (CCPC in Ontario):
- Eligible SR&ED expenditures: $500,000
- Federal ITC (35% enhanced rate): $175,000
- Ontario Innovation Tax Credit (8%): $40,000
- Total combined credit: $215,000 (43% effective rate)
File With Your Tax Return
Your SR&ED claim is submitted as part of your annual income tax return. The claim is not a separate filing; it accompanies your T2 corporate return (or T1 individual return).
Filing deadline: You have 18 months after your fiscal year-end to file your SR&ED claim. This deadline is absolute and CRA does not grant extensions. For example:
- Fiscal year ending December 31, 2025: deadline is June 30, 2027
- Fiscal year ending March 31, 2026: deadline is September 30, 2027
- Fiscal year ending June 30, 2026: deadline is December 31, 2027
Electronic filing: Most corporations are required to file electronically. Ensure your tax preparation software supports Form T661 and Schedule T2SCH31. If you are using a different software than your accountant, coordinate to ensure all forms are included in the final filed return.
Amended returns: If you missed including SR&ED in your original tax return but are still within the 18-month window, you can file an amended return to add the claim. Work with your accountant to prepare the amended T2 with the T661 and T2SCH31 attached.
Handle CRA Review
Approximately 20% of SR&ED claims are selected for review by CRA. Being selected does not mean your claim is incorrect; it is a routine part of the process. However, preparation is critical to maintaining your full claim amount.
Types of CRA reviews:
- Financial review: CRA verifies expenditure amounts, payroll records, contractor invoices, and accounting allocations. They check that claimed amounts match your books.
- Technical review: A CRA Research and Technology Advisor (RTA) assesses whether the work meets the 3-part SR&ED eligibility test. They may request documentation, conduct phone interviews with your technical staff, or schedule an on-site visit.
- Combined review: Both financial and technical reviews conducted simultaneously. This is more common for larger claims or first-time filers.
Common review triggers:
- First-time SR&ED claims (CRA often reviews new claimants)
- Claims that are significantly larger than previous years
- High proportion of contractor costs relative to salaries
- Vague or poorly written technical descriptions in Part 6
- Industries where CRA has found frequent ineligible claims
- Claims prepared by certain SR&ED firms with high audit rates
How to prepare: Organize all contemporaneous documentation by project before the review begins. Have your technical leads available for interviews. Prepare a project summary that walks the reviewer through each project's uncertainty, investigation, and advancement. Respond to all CRA requests within the specified timeframe. Reviews typically take 2-6 months to complete.
Receive Your Refund
After CRA processes your claim, you will receive your SR&ED investment tax credit. The timeline and form of payment depend on your business structure and claim complexity.
Typical timelines:
- No review: 6-8 months from filing date
- Financial review only: 8-12 months from filing date
- Technical review: 10-18 months from filing date
- Complex or disputed claims: 12-24+ months
How refunds are delivered:
- CCPCs (refundable credit): CRA issues a direct deposit (if enrolled) or mails a cheque for the refundable portion of your credit. Set up direct deposit through your CRA My Business Account to receive funds faster.
- Non-refundable credits: Applied against taxes owed. Any unused credit can be carried back 3 years or forward 20 years to offset future tax liabilities.
If the refund differs from your claim: CRA will issue a Notice of Assessment (or Reassessment) explaining any adjustments. Common reasons include: expenditures reclassified as ineligible, projects deemed not to meet the 3-part test, or mathematical errors. You have the right to object to the assessment within 90 days by filing a Notice of Objection. Consult with an SR&ED specialist or tax lawyer before filing an objection.
Self-Filing vs. Hiring an SR&ED Consultant
Deciding whether to prepare your SR&ED claim in-house or hire a specialist is one of the most important choices you will make
| Aspect | Self-Filing | SR&ED Consultant |
|---|---|---|
| Cost | Free (your internal time only) | 15-30% of refund received (contingency), or fixed fee |
| Your Time Investment | High (40-80+ hours for preparation, Form T661, and calculations) | Low (5-10 hours of your time for interviews and document gathering) |
| Claim Accuracy | Moderate risk of under-claiming eligible work or expenditures | Higher accuracy; consultants identify work you might miss |
| CRA Review Risk | Higher; technical descriptions may not use optimal CRA language | Lower; experienced firms know CRA expectations and review patterns |
| Claim Size | Often smaller; first-time self-filers tend to be conservative | Typically 20-40% larger claims due to identifying more eligible work |
| Learning Curve | Significant first year; decreases with experience | Minimal; consultant handles complexity |
| Best For | Small, straightforward claims under $50K; companies with internal tax expertise | First-time claims, complex projects, claims over $100K, or limited internal capacity |
Pro tip: Many companies self-file for the first 1-2 years using a consultant, then transition to in-house preparation once they understand CRA's expectations and language. Some consultants offer a hybrid model where they review and optimize a self-prepared claim for a lower fee.
10 Common SR&ED Claim Mistakes to Avoid
These are the errors that most frequently result in reduced claims, CRA adjustments, or missed opportunities. Avoiding them significantly increases both the value and success rate of your SR&ED filing.
Not Claiming Because the Project Seems "Too Small"
Many businesses assume SR&ED is only for large R&D departments or pharmaceutical companies. In reality, even a single developer spending 30% of their time solving a genuine technical challenge can generate a meaningful claim. A software company with $200,000 in eligible salaries could recover $70,000+ at the CCPC enhanced rate. There is no minimum claim amount, and small claims are less likely to trigger CRA review.
Missing the 18-Month Filing Deadline
The 18-month deadline after fiscal year-end is absolute. CRA does not accept late SR&ED claims under any circumstances, and there is no appeal mechanism for missed deadlines. Thousands of dollars in credits are forfeited every year by businesses that simply forgot or procrastinated. Set a calendar reminder 12 months after your fiscal year-end to begin preparation, giving yourself a 6-month buffer.
Insufficient Contemporaneous Documentation
Reconstructing project records after the fact for the sole purpose of filing an SR&ED claim is the single biggest red flag for CRA reviewers. If your documentation was clearly created months or years after the work was done, it significantly weakens your claim. Start documenting R&D activities in real time from day one of your fiscal year, even if you are unsure whether the work will qualify.
Including Ineligible Routine Work
Padding a claim with routine engineering, standard debugging, or regular product development work that does not involve technological uncertainty is counterproductive. It increases the risk of CRA review and can cause the reviewer to scrutinize your entire claim more aggressively. Be honest and precise about which work involved genuine uncertainty. A smaller, well-documented claim is far more valuable than a larger claim that gets reduced by 50% during review.
Not Claiming Overhead or Materials
Many first-time filers only claim salaries and wages, forgetting that the proxy method allows you to add 55% of eligible salaries as overhead with no additional documentation. On a $300,000 salary claim, this adds $165,000 in eligible expenditures, increasing your credit by over $57,000. Materials consumed during R&D are also commonly overlooked. Every prototype material, test chemical, or component destroyed during testing is potentially claimable.
Using the Wrong Expenditure Method
Choosing between the proxy and traditional method without analysis can cost you thousands. If your R&D team works in a dedicated lab with expensive equipment, the traditional method may yield significantly more than the 55% proxy. Conversely, companies where developers work from home or shared offices almost always benefit from the proxy method. Run the numbers for both methods before committing, as you cannot change your choice after filing.
Poor Technical Descriptions in Form T661
The Part 6 technical narrative is where most claims are won or lost. Common failures include: describing the product's commercial features instead of the technical challenges, using vague language like "we worked hard to solve this problem" without specifying the uncertainty, and failing to demonstrate systematic investigation. Write your descriptions as if explaining to a fellow engineer or scientist who is unfamiliar with your specific project but understands your field.
Not Separating SR&ED From Commercial Work
Employee time must be accurately split between SR&ED-eligible and non-eligible activities. A developer who spends 60% of their time on eligible R&D and 40% on routine bug fixes can only claim 60% of their salary. Without timesheets or time-tracking data to support this allocation, CRA may reduce the claimed percentage significantly. Implement time tracking from the start of the fiscal year, not retroactively at claim time.
Claiming Capital Expenditures
Since January 2014, capital expenditures such as equipment purchases are no longer eligible for SR&ED. Some claimants still mistakenly include equipment costs, which triggers CRA adjustments and can flag the entire claim for deeper review. Equipment used for R&D can still be depreciated under normal CCA rules, but it cannot be included in your SR&ED expenditure base. Leased equipment costs may be eligible as overhead under the traditional method.
Not Planning for Next Year While Filing This Year
The best time to start preparing next year's SR&ED claim is while you are filing the current one. Identify documentation gaps, set up better time-tracking processes, create project templates, and brief your technical staff on what CRA considers eligible work. Companies that treat SR&ED as an ongoing process rather than an annual fire drill consistently file larger, more successful claims with less effort each year.
Frequently Asked Questions About SR&ED Claims
SR&ED claims must be filed within 18 months of your fiscal year-end. For example, if your fiscal year ends December 31, 2025, the deadline to file your SR&ED claim is June 30, 2027. This deadline is strict and non-negotiable. CRA does not grant extensions for SR&ED claims, and there is no appeal process for late filings. If you miss the deadline, you forfeit the entire investment tax credit for that fiscal year. We strongly recommend beginning claim preparation at least 6 months before the deadline.
Yes, you can file SR&ED claims retroactively for any fiscal year where the 18-month filing window has not yet closed. If you have never claimed SR&ED before, you may be able to go back and file for the most recent fiscal year, or even two years, as long as each is within its respective 18-month window. You will need to amend your tax return by submitting a T2 adjustment request along with Form T661 and the investment tax credit schedule. Many businesses discover SR&ED eligibility years into their operations and successfully file retroactive claims. An SR&ED consultant can help you identify and document eligible work from prior years.
Software development can qualify for SR&ED, but it depends entirely on the nature of the work. Building standard websites, mobile applications, or database-driven systems using known frameworks and documented approaches generally does not qualify. However, work that involves genuine technological uncertainty qualifies: developing novel algorithms where the approach and outcome are uncertain, creating AI or machine learning models that require experimentation to achieve target accuracy, solving complex performance or scalability problems beyond known solutions, building compilers or interpreters for new programming paradigms, or developing security architectures to address unprecedented threat vectors. The key question is: could a competent software engineer have solved this using known methods? If the answer is no, and you needed to experiment, the work likely qualifies.
Approximately 20% of SR&ED claims are selected for review by CRA. A review typically involves two components: a financial review (verifying expenditure amounts, payroll records, contractor invoices, and accounting allocations) and a technical review (assessing whether the claimed work meets the 3-part SR&ED eligibility test). A CRA Research and Technology Advisor (RTA) may request additional documentation, conduct phone interviews with your technical staff, or schedule an on-site visit to your office or lab. Reviews typically take 2-6 months to complete. Having organized contemporaneous documentation, clear technical descriptions in Form T661, and financial records that reconcile with your claim significantly improves the outcome. Being selected for review does not indicate wrongdoing; it is a routine quality assurance process.
Yes, and this is one of the most powerful aspects of the SR&ED program for early-stage companies. Canadian-controlled private corporations (CCPCs) receive refundable SR&ED tax credits at the enhanced 35% rate. "Refundable" means CRA sends you a direct cash payment even if your company has zero revenue and owes no tax. This makes SR&ED one of the most valuable non-dilutive funding mechanisms available to pre-revenue technology startups in Canada. Many early-stage companies rely on annual SR&ED refunds as a core component of their funding strategy, alongside venture capital, angel investment, and grants like IRAP. There is no minimum revenue, employee count, or company age requirement.
The 35% enhanced rate is available exclusively to Canadian-controlled private corporations (CCPCs) on the first $3 million of qualified SR&ED expenditures per year. This credit is fully refundable, meaning you receive cash from CRA regardless of your tax liability. The $3 million threshold is shared among associated corporations. The 15% basic rate applies to all other eligible claimants, including public corporations, foreign-controlled private corporations, and CCPC expenditures that exceed the $3 million threshold. The basic rate credit is generally non-refundable (it can only reduce taxes owed), though certain small CCPCs may receive partial refundability on the basic rate portion. The difference in rates makes CCPC status extremely valuable for R&D-intensive businesses.
Yes, you can claim both SR&ED tax credits and IRAP grant funding on the same project, but you cannot double-claim the same expenditures. IRAP-funded costs must be deducted from your SR&ED-eligible expenditure pool. For example, if IRAP reimburses $100,000 of a developer's $150,000 salary, only the remaining $50,000 of that salary can be included in your SR&ED claim. Strategic planning of which costs to allocate to each program can maximize your total recovery. Some companies structure their projects so that IRAP covers certain employees' salaries while SR&ED covers others. Working with an advisor who understands both programs can optimize your total funding.
Most SR&ED consultants work on a contingency fee basis, charging 15-30% of the refund received. This means you pay nothing upfront and only pay if the claim is successful. The industry average is approximately 20-25% of the refund. Some firms offer fixed-fee arrangements for larger or recurring claims, which can be more cost-effective for companies with established SR&ED histories. While the contingency fee reduces your net benefit, consultants typically identify more eligible work and expenditures than self-filers, and their claims are generally 20-40% larger. For first-time claimants or complex technical projects, the reduced CRA review risk and higher claim accuracy often result in a larger net refund even after paying the consultant's fee.
Find More R&D Funding Programs
SR&ED is just one of many programs available to Canadian businesses conducting R&D. Use our intelligent matching tool to discover every grant, tax credit, and funding program you qualify for in 60 seconds.
Start Grant Matching →Need Help With Your SR&ED Claim?
SR&ED claims require detailed technical writing and precise expenditure tracking. Professional consultants can maximize your claim value and reduce CRA review risk. Most work on contingency (you only pay if you receive a refund).
SR&ED consultants typically work on a contingency basis (15-30% of the refund received)