DIY SR&ED

SR&ED Eligible Costs: What You Can Claim & Refund Amounts

SR&ED Eligible Costs: What You Can Claim & Refund Amounts

Filing an SR&ED claim isn’t just about knowing if your project qualifies—you also need to understand what expenses you can claim and how much you’ll get back. Many businesses miss out on thousands of dollars because they don’t include all eligible costs in their claim. In this guide, we’ll break down what expenses qualify, how to estimate your refund, and how other funding sources (like grants) affect your claim. By the end, you’ll have a clear formula to estimate your SR&ED refund—without needing a consultant.

1. What Costs Are Eligible for SR&ED?

Not all R&D expenses qualify for SR&ED, but if a cost is directly related to your R&D work, it can likely be claimed.

A. Salaries & Wages (Usually the Largest SRED Expense)

  • Employees directly engaged in R&D → Developers, engineers, scientists, technicians, etc.
  • Supervisors & support staff (if their work contributes to SR&ED).
  • Note -> Administrative roles & non-R&D employees are NOT eligible.
  • Tracking time properly → Keep time-sheets, project logs, and task breakdowns to justify your claim.
  • Founders/shareholders share of time on the R&D project

💡 Example: If an AI engineer spends 70% of their time working on an experimental machine-learning model, 70% of their salary qualifies for SR&ED.

B. Subcontractors & Consultants (Limited to 80%)

  • Work must be R&D-focused (not general consulting or implementation).
  • Only Canadian-based subcontractors are eligible.
  • Limited to 80% of claimed costs (CRA assumes contractors include profit margins).

💡 Example: If you paid a Canadian consultant $100,000 for eligible R&D work, only $80,000 can be claimed under SR&ED.

C. Materials Consumed or Transformed in Experiments

  • Materials used in testing and experiments (e.g., chemicals, electronics, prototype components).
  • Materials consumed (completely used up) are fully claimable.
  • Materials transformed (repurposed into something else during the process of SR&ED) 

💡 Example: A biotech company using $50,000 worth of lab chemicals in their research can claim the full amount.

D. Third-Party Payments (SR&ED Performed by External Organizations)

  • Payments made to approved organizations for SR&ED including Universities, colleges, research institutes,  and Industry associations
  • The SR&ED must be performed in Canada.
  • The research must be related to your business.
  • You must have the right to use the results of the R&D work.
  • Limited 80% of claimed costs (in some provinces you can claim for the extra 20%)

💡 Example: An Ontario-based cleantech company pays $100,000 to the University of Toronto for research on new battery materials. Since the company retains the right to use the research results, the full $100,000 qualifies as an SR&ED-eligible expense. The company can claim $80,000 through the SR&ED federal program and the remaining $20,000 through the Ontario Business Research Institute Tax Credit (OBRITC), ensuring they recover the entire research investment. 

E. Overhead & Indirect Costs (Two Calculation Methods)

There are two ways to claim indirect costs:

1. Proxy Method (Most Common, Simplified Approach)

  • Adds a fixed percentage (55%) of SR&ED salaries and wages instead of tracking individual expenses.
  • Easier to manage → No need to track rent, utilities, office supplies separately.
  • 📌 Note: For founder/shareholder salaries and wages, a 75% adjustment is applied to calculate the overhead amount under the proxy method.

2. Traditional Method (More Detailed, Less Common)

  • Requires tracking actual SR&ED-related overhead expenses (rent, power, insurance, office supplies).
  • Only recommended if indirect costs are unusually high.

💡 Most companies choose the proxy method because it simplifies calculations and maximizes claims.

F. SR&ED Capital Expenditures (No Longer Eligible)

  • Since 2013, capital costs (equipment, buildings) are NOT claimable under SR&ED.
  • However, materials used in experiments (such as prototype components) can be claimed.

💡 Example: Buying a 3D printer for R&D use is not eligible, but the filament used for prototyping experimental designs may qualify.

2. How to Estimate Your SR&ED Refund (Rule of Thumb)

Here’s a simple step-by-step formula to estimate your SR&ED refund:

Step 1: Identify Your SR&ED Expenditures

  • Salaries & Wages (e.g., R&D employee costs).
  • Subcontractors (80% rule).
  • Third-parties (80% rule)
  • Materials Used in Experiments.
  • Overhead Costs (if using the proxy method, add 55% of salaries).

Step 2: Apply Federal SR&ED Credit

  • CCPCs (Canadian Small Businesses) → 35% refundable tax credit (on the first $3M in expenditures).
  • Non-CCPCs (Large/Public Companies) → 15% non-refundable tax credit.

Step 3: Add Provincial Credits (If Applicable)

You can find the percentage of provincial tax credits here. 

Example Refund Calculation

A CCPC in Ontario with $100,000 in eligible SR&ED expenses could receive: 

  • Federal SR&ED Credit → $48,000
  • Ontario SR&ED Credit (refundable) → $12,000
  • Ontario SR&ED Credit (non-refundable) → $5,000
  • Total SR&ED Credit → $65,000

💡 Pro Tip: You can estimate your refund using DIY SR&ED calculator (coming soon).

3. SR&ED and Other Government Grants: Can You Stack Them?

Many businesses receive government grants (like IRAP, MITACS, or provincial R&D grants), but how do these affect SR&ED claims?

How Funding Affects Your SR&ED Claim

  • Government grants & subsidies reduce eligible SR&ED expenses → If a grant pays for part of your project, you can only claim the portion you funded yourselves.
  • Private investment and loans do NOT affect SR&ED. 

Example: Funding Adjustment

  • Total SR&ED Expenses = $500,000
  • Received an IRAP Grant = $100,000
  • Adjusted SR&ED Claim = $400,000 (because IRAP is government-funded).

💡 Rule of Thumb: If you receive government funding, expect a reduction in SR&ED claimable expenses.

4. Refundable vs. Non-Refundable R&D Credits

SR&ED tax credits can be refundable or non-refundable, depending on your business type and location.

🔹 Refundable Credits (CCPCs – Cash Back!)

✅ Canadian-Controlled Private Corporations (CCPCs) can receive refundable SR&ED tax credits, meaning you get cash back, even if your company has no taxable income.

🔹 Non-Refundable Credits (Tax Reduction Only)

There are two types of non-refundable credits:

1️⃣ For Non-CCPCs (Larger/Public/Foreign-Owned Corporations):

  • SR&ED tax credits are non-refundable, meaning they can only be used to reduce taxes owed—not claimed as a cash refund.

2️⃣ For CCPCs (Provincial Tax Credits):

  • Some provincial R&D tax credits offer a mix of refundable and non-refundable credits.
  • Refundable credits = Cash back.
  • Non-refundable credits = Can only be applied against taxes owed.

💡 Example: A CCPC in Ontario may receive both refundable SR&ED credits at the federal level and a mix of refundable and non-refundable provincial R&D tax credits, depending on the program.

Final Thoughts: Get the Maximum SR&ED Refund

  • Understanding eligible costs is key to maximizing your claim.
  • Use our estimation formula to get a rough idea of your refund (coming soon).
  • Government funding can impact your claim—plan accordingly.

Next Up:

👉 How to Maximize Your SR&ED Claim In our next blog post, we’ll cover specific strategies to get the largest possible SR&ED refund—from documentation best practices to smart claim structuring.