Filing for the SR&ED tax credit can feel like a maze—especially when you’re a lean startup juggling product development and limited funds. But with the right strategy (and compliance with CRA’s SR&ED guidelines), you can significantly increase your refund.

Here’s how to structure salaries, expenses, and R&D spending to boost your claim—without breaking a sweat or calling a consultant.

1. SR&ED Guidelines to Structure Payroll for Maximum Refunds

A. Prioritize Salaries (T4) Over Contractor Payments

• Salaries are fully claimable.
  
• Subcontractors? Only 80% is eligible.
  
• Use the proxy method to add 55% overhead to salaries for a bigger claim.

💡 Startup Tip: Hire R&D employees (T4) instead of relying on contractors when possible.

B. Founders Doing R&D? Pay Yourself a Salary

• Actively coding, designing, or running experiments? Don’t just take dividends—pay yourself.

💡 Example: A founder building AI models should log hours and claim that time under SR&ED.

C. Use Canadian Talent When Possible

• Only Canadian wages and subcontractors are eligible.
  
• Provincial incentives vary—hire locally!

💡 Example: Ontario startups can claim an extra 11.5% by using local talent.

2. Track Expenses for Better Cash Flow

Working remotely? Using personal tools for R&D?

• Track everything: cloud software, dev tools, even home office costs (if R&D-related).
  
• Use categorized bookkeeping and clear records.

💡 Tip: Every tracked dollar strengthens your SR&ED claim.

3. Max Out Your Overhead Claim (Choose Proxy Wisely)

A. Proxy Method (Best for Most Businesses)

Proxy Method = Simpler, Bigger Claims

• Automatically adds 55% of R&D wages as overhead.
  
• No need to track rent, power, or office supplies.

B. Traditional Method = For Big-Spend Overhead

• Track actual R&D-related overhead manually.
  
• Only worth it if your overhead is unusually high.

💡 Guideline Tip: Most startups should stick with the proxy method.

4. Fully Claim Subcontractors, Materials, and Third-Parties

A. Subcontractor Costs: Follow the 80% Rule

Subcontractors → Remember the 80% Rule

• Only 80% of Canadian subcontractor work is eligible.
  
• Foreign contractors? Not eligible.

B. Third-Party R&D (Universities, Institutes)

• Must be Canadian universities, colleges, research institutes, and research hospitals.
  
• Often gives higher ROI (and more claimable credit in some provinces) than private contractors.

C. Materials Used in Experiments

Claim all materials consumed in experiments (e.g., lab reagents, prototype parts).

• If a material was used up in testing, it qualifies for SR&ED.
• If a material was transformed into another product, eligibility varies. 

💡 Startup Move: Keep receipts and clearly tag R&D-use materials.

5. Stack SR&ED With Other Grants (the Smart Way)

Know What Affects Your Claim

• Government funding (IRAP, MITACS, NRC): Reduce your eligible SR&ED expenses.
• Private Funding (VCs, loans): Doesn’t reduce your SR&ED claim.

💡 Tip: Use grants for business dev or marketing—not R&D—to avoid deductions.

B. University Partnerships Can Supercharge Your Claim

• Work with Canadian schools or research hospitals.
  
• Retain IP rights, and claim back most (or all) of your investment.

6. Avoid These SR&ED Mistakes (Per CRA SR&ED Guidelines)

🚫 Not logging R&D hours → No support = no claim.
🚫 Claiming admin or marketing → Not eligible.
🚫 Missing the 18-month deadline → Your claim gets denied.
🚫 Skipping failed projects → Failed R&D still qualifies!

💡 Reminder: CRA doesn’t penalize you for trying and failing—they reward experimentation.

Final Thoughts: Stick to SR&ED Guidelines and Win Bigger Refunds

• Focus on salary-based claims with the proxy method.
  
• Use Canadian workers and track everything.
  
• Plan grants and SR&ED together for max total funding.

Next Up:

👉 SR&ED Documentation In DIY SR&ED‘s next blog post, we’ll talk about the importance of documentation, what to collect and how to track them.