Many businesses leave money on the table because they don’t structure expenses correctly. Salaries, materials, subcontractors and third-parties have different claim rates—optimizing these can increase your refund significantly. This guide breaks down strategies to maximize your claim while staying 100% compliant.

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

A. Prioritize Salaries (T4) Over Contractor Payments

• Salaries are 100% claimable, while subcontractors are limited to 80%.
• Using the proxy method, you can add an overhead allowance of 55% based on your R&D employees’ salaries, increasing your claimable amount.
• If you’re outsourcing R&D, consider hiring employees (T4) instead of contractors where possible.

💡 Example: If you pay a Canadian R&D employee $100,000, the full amount qualifies. But if you contract out the same work, only $80,000 could be eligible.

B. If You’re a Founder with a Technical Role, Pay Yourself!

• Are you actively involved in SR&ED work? If yes, pay yourself a salary and claim your eligible R&D hours.
• PhDs, MSc holders, and technical founders should structure their compensation to reflect their direct R&D contributions.

💡 Example: A founder with an MSc in AI developing a machine-learning model should allocate part of their salary to SR&ED rather than taking dividends.

C. Consider Hiring Canadian Employees Over Foreign Contractors

• Only Canadian wages qualify for SR&ED.
• Canadian subcontractors qualify, but at 80%—foreign subcontractors do not.
• Even the province you hire in matters (since provincial credits vary).

💡 Example: If you are based in Ontario and your sub-contractor is based in Ontario you can get get 11.5% additional tax credits (refundable and non-refundable).

2. Cash Flow Matters: Track Home Office & Other Expenses

• Work-from-home expenses (if related to R&D) should be documented.
• Keep detailed records → Bookkeeping, receipts, invoices.
• Ensure R&D-related costs are properly categorized.

💡 Example: If an engineer is working remotely and incurring additional software costs, keep track of these expenses.

3. Optimize Your Overhead Claim (Proxy vs. Traditional Method)

A. Proxy Method (Best for Most Businesses)

• Automatically adds 55% of eligible wages as overhead.
• No need to track individual expenses like rent, utilities, and admin costs.
• Most startups and small businesses should use this method for higher claims with less paperwork.

B. Traditional Method (Only for High Overhead Businesses)

• If your company has high R&D-related rent, utilities, or supply costs, it might be worth tracking these separately.
• Requires detailed accounting records—not recommended unless overhead is unusually high.

💡 Rule of Thumb: Use the proxy method unless your overhead is exceptionally high.

4. Claim All Eligible Subcontractor and third-parties Work & Materials

A. Subcontractor Costs: Follow the 80% Rule

• Only 80% of subcontractor costs qualify for SR&ED.
• Only Canadian subcontractors are eligible—foreign contractors do not count.
• Clearly document subcontracted R&D tasks to avoid CRA scrutiny.

B. Third-Party Payments: Universities, Research Institutes & More

• Payments to universities, colleges, research institutes, and research hospitals may qualify under SR&ED.
• Only Canadian third-party organizations are eligible.
• 80% of the payment can be claimed, with some provinces offering additional credits.

C. Ensure Materials Used in R&D Are Fully Claimed

• 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. 

💡 Example: A company testing new battery materials can claim the cost of chemicals used in the testing process.

5. Strategic Planning: Using Grants & Funding Without Reducing Your SR&ED Refund

A. Can You Stack SR&ED With Grants?

• Government funding (IRAP, MITACS, NRC) reduces claimable SR&ED expenses.
• Non-government funding (VCs, loans) does NOT affect SR&ED.
• Best strategy: Use grants for non-SR&ED work (e.g., business development) to maximize total funding.

B. Paying Universities & Research Institutions = High ROI for SR&ED

• Payments to universities & research bodies often qualify for higher SR&ED credits.
• If outsourcing R&D, consider partnerships with Canadian institutions.

💡 Example: Funding a university-led AI research project may result in higher claimable SR&ED credits than hiring private subcontractors.

6. Avoiding Common SR&ED Mistakes That Reduce Your Claim

🚫 Not tracking employee time properly → No documentation = lower claim.
🚫 Claiming ineligible expenses → Admin work, marketing, and sales do NOT count.
🚫 Missing deadlines → SR&ED claims must be filed within 18 months of your fiscal year-end.
🚫 Assuming failed projects don’t count → Even unsuccessful R&D qualifies!

💡 Example: If your company spent months developing a new product that never launched, you still qualify for SR&ED.

Final Thoughts: Get the Most Out of Your SR&ED Claim

• Maximizing SR&ED isn’t just about what you claim—it’s how you structure expenses.
• Focus on salaries (T4), track expenses carefully, and use Canadian subcontractors and third-parties for a higher refund.
• Strategically plan grants & SR&ED to maximize total funding.

Next Up:

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