Estimated reading time: 14 minutes
SR&ED Tax Credits in Canada: What Owners Need to Know for 2025-2026 (and Beyond)
If your incorporated business is building or improving technology in Canada, SR&ED may refund a meaningful portion of your R&D spend through investment tax credits (ITCs). But SR&ED is often misunderstood – and that’s why many claims get reduced during a CRA review.
This guide explains SR&ED in a simple language, with a focus on what changes in 2025/2026 and how to keep your claim defensible.
Table of contents
- SR&ED Tax Credits in Canada: What Owners Need to Know for 2025-2026 (and Beyond)
- What SR&ED is (and what it isn’t)
- SR&ED eligibility: the two CRA tests
- What costs can you claim for SR&ED Tax Credits?
- 2025/2026 updates: what’s changing in SR&ED (and what’s still “proposed”)
- SR&ED tax credits rates: the simple version (federal)
- A simple SR&ED calculation framework (how owners should think about it)
- Ontario SR&ED credits: OITC and ORDTC (how they work)
- Practical SR&ED example table (Federal + Ontario: OITC + ORDTC)
- SR&ED Calculator for Ontario – Estimate Using Your Own Values
- Filing deadlines and forms
- CRA review/audit: what usually causes claims to be reduced
- Documentation checklist
- FAQs
- 1) What are SR&ED Tax Credits in Canada?
- 2) What makes a project “SR&ED eligible”?
- 3) Do I need to succeed for SR&ED Tax Credits to apply?
- 4) What expenses can be claimed for SR&ED Tax Credits?
- 5) What is the proxy method and the PPA?
- 6) What is changing for SR&ED Tax Credits in 2025/2026?
- 7) Is the enhanced expenditure limit $3M, $4.5M, or $6M?
- 8) When is the SR&ED claim deadline?
- 9) Can SR&ED be claimed if I received grants or wage subsidies?
- 10) What triggers an SR&ED audit/review?
- Table 2: SR&ED eligibility “quick screen” for owners
- Final Takeaway
What SR&ED is (and what it isn’t)
SR&ED stands for Scientific Research and Experimental Development. It’s a federal tax incentive program meant to encourage businesses to do R&D in Canada.
A simple way to think about it:
- SR&ED rewards technical work where you’re trying to overcome technological uncertainty through a systematic investigation (experiments, testing, analysis).
- SR&ED does not reward “normal” product development, routine debugging, standard upgrades, or implementing known solutions.
CRA is explicit that SR&ED is about advancing scientific or technological knowledge – not advancing your business process or commercial outcomes.
SR&ED eligibility: the two CRA tests
CRA’s current eligibility framing is refreshingly straightforward. To be SR&ED, your work must be done in Canada and meet both requirements:
1) The “Why” test: you’re trying to achieve a technological advancement
You must be trying to generate or discover new technological knowledge … meaning you’re pushing beyond what’s readily available or known in your field. Success isn’t required; learning that a hypothesis fails can still be eligible.
2) The “How” test: you used a systematic investigation (experiment/analysis)
You need more than a structured project plan. CRA expects a real technical process: define the problem, form a hypothesis, test it, and draw conclusions based on results.
Key term you’ll hear in SR&ED reviews:
Technological uncertainty = it’s unknown whether (or how) a result can be achieved due to insufficient technological knowledge.
What costs can you claim for SR&ED Tax Credits?
Once the work is eligible, you claim allowable SR&ED expenditures that relate to that work. CRA lists common categories such as salaries/wages, materials, and SR&ED contracts.
Here are the main buckets most incorporated businesses deal with:
1) Salaries and wages (often the biggest piece)
You can claim the portion of employee compensation tied to SR&ED work performed in Canada (subject to SR&ED rules and support).
Work performed outside Canada (limited):
In some cases, CRA allows a permissible salary amount for SR&ED work done outside Canada if strict conditions are met (employee, Canadian resident at the time, integral support of Canadian SR&ED, etc.).
2) Contractors
Contract expenditures can be eligible when contractors perform SR&ED in Canada on your behalf, but you must track the facts carefully (including arm’s length vs non-arm’s length treatment).
3) Materials
Materials consumed or transformed in SR&ED can qualify when linked to eligible work.
4) Overhead: traditional vs proxy method (and the 55% proxy rate)
If you use the proxy method, you typically don’t claim specific overhead lines; you claim a Prescribed Proxy Amount (PPA) calculated using a legislated percentage (commonly referenced as 55%).
5) Grants and other assistance can reduce your SR&ED
Many forms of government assistance reduce SR&ED-eligible expenditures and/or ITCs. (This includes some wage subsidy programs, for example.)
2025/2026 updates: what’s changing in SR&ED (and what’s still “proposed”)
First: a timing rule owners miss
Many SR&ED enhancements are tied to taxation years that begin on or after December 16, 2024.
So, for example:
- A corporation with a December 31 year-end has a 2025 tax year beginning January 1, 2025 — that generally falls after Dec 16, 2024.
- A corporation with a November 30 year-end has a 2025 tax year beginning December 1, 2024 — that begins before Dec 16, 2024 (so timing may shift to the next year).
What’s been announced for those tax years (Dec 16, 2024 start dates and later)
Government communications describe these enhancements:
- Increase to the enhanced-credit expenditure limit (previously announced at $4.5M) and higher phase-out thresholds
- Expand enhanced credit eligibility to certain Canadian public corporations
- Restore capital expenditure eligibility (pre-2014 style) for SR&ED deduction and ITC (for property acquired after Dec 15, 2024 / lease costs after that date)
Budget 2025 proposal: expenditure limit up to $6M
Budget 2025 proposes to further increase the enhanced-rate expenditure limit to $6 million, effective for taxation years beginning on or after December 16, 2024.
Important status note (as of January 2026)
Some CRA SR&ED pages still show the older $3M enhanced threshold.
At the same time, Budget 2025 materials and other government communications describe the new limits, and the Budget 2025 implementation bill is still moving through Parliament (in committee as of Dec 10, 2025).
Practical takeaway: plan for the updated framework if you’re eligible (especially for capital and the higher limits), but confirm the final enacted rules for your specific tax year before filing.
SR&ED tax credits rates: the simple version (federal)
At a high level:
- Basic federal ITC rate is 15% on qualified SR&ED expenditures.
- Enhanced federal ITC rate is 35% for many CCPCs on qualified expenditures up to the expenditure limit (with phase-outs depending on size metrics).
What’s changing: the expenditure limit and phase-out thresholds have been the focus of the 2024–2025 reform announcements/proposals.
Table 1: Federal SR&ED ITC rates and key limits
| Item | What owners should know |
|---|---|
| Basic federal ITC rate | Generally 15% of qualified SR&ED expenditures (non-refundable in many cases). Confirm refundability based on your corporation type and facts. |
| Enhanced federal ITC rate (CCPCs) | Many CCPCs can earn 35% on qualified SR&ED expenditures up to an “expenditure limit”; amounts above the limit generally fall to the basic rate. |
| Expenditure limit updates (2025/2026+) | Government announcements/proposals increase the limit (and phase-out thresholds) for taxation years beginning on/after Dec 16, 2024, with Budget 2025 proposing a $6M limit. Check enacted legislation for your filing year. |
| Capital expenditures | Government announcements restore SR&ED capital expenditure eligibility for certain property acquired after Dec 15, 2024 (and certain lease costs). Refundability can differ for capital vs current costs. |
A simple SR&ED calculation framework (how owners should think about it)
SR&ED calculations can get complex fast (especially with associated companies, assistance, provincial layering, and refundability rules). But the owner-friendly framework is:
- Identify eligible SR&ED projects (work that meets the “Why” + “How” tests).
- Build your qualified expenditure pool (wages, materials, contracts, overhead via proxy/traditional, etc.).
- Apply the ITC rate(s) (enhanced vs basic; limits and phase-outs).
- Reduce for assistance where required.
- Layer provincial credits if applicable (province-specific and very fact-dependent).
Ontario SR&ED credits: OITC and ORDTC (how they work)
If your SR&ED work is performed in Ontario, you may be able to claim Ontario SR&ED-related tax credits in addition to the federal SR&ED ITC. Ontario’s two main SR&ED credits are the Ontario Innovation Tax Credit (OITC) and the Ontario Research and Development Tax Credit (ORDTC).
These credits are administered through the CRA as part of your corporate tax filing (T2), and both rely on the concept of qualified/eligible SR&ED expenditures tied to SR&ED performed in Ontario.
Ontario Innovation Tax Credit (OITC)
The OITC is an 8% refundable Ontario tax credit based on the corporation’s qualified SR&ED expenditures incurred in Ontario (plus certain eligible repayments).
“Refundable” means it can generate a cash refund (subject to the program rules), even if you don’t owe Ontario corporate income tax.
Two limits matter for planning:
- Annual Ontario expenditure limit: OITC is generally available on up to $3 million of qualified Ontario SR&ED expenditures each year (associated corporations must share this limit).
- Potential phase-outs: The $3M limit can be reduced where the corporation (and associated corporations) exceed certain thresholds (for example, based on prior-year taxable income and specified capital amount).
OITC is claimed on Schedule 566 with your T2 return.
Ontario Research and Development Tax Credit (ORDTC)
The ORDTC is a 3.5% non-refundable Ontario tax credit (for tax years starting after May 31, 2016).
“Non-refundable” means it can reduce Ontario corporate income tax otherwise payable. If you can’t use it all in the current year, CRA indicates it can generally be carried back 3 years and carried forward 20 years.
A key technical point owners should know: ORDTC “eligible expenditures” are reduced by government or non-government assistance and contract payments that relate to the SR&ED.
In practice, that often means the OITC (a refundable Ontario credit) reduces the base used to calculate the ORDTC, because it’s a form of government assistance tied to the same SR&ED spending.
ORDTC is claimed on Schedule 508 with your T2 return.
How Ontario credits affect the federal SR&ED credit
CRA policy generally treats provincial SR&ED credits as “assistance” that can reduce federal qualified SR&ED expenditures for ITC purposes.
That’s why the cleanest way to plan your SR&ED outcome is to model Ontario credits first (OITC/ORDTC), then the federal ITC, and make sure your documentation and cost pools support the claim.
Practical SR&ED example table (Federal + Ontario: OITC + ORDTC)
Assumptions:
- CCPC is eligible for the enhanced federal SR&ED ITC rate (35%) and is under the federal expenditure limit shown on CRA’s current page (still shown as $3M).
- All SR&ED work is performed in Ontario/Canada, all costs are SR&ED-eligible, and contractor work is arm’s length and performed in Canada.
- Proxy method is used: PPA = 55% of salary base.
- Contract payments: only 80% count as qualified SR&ED expenditures for ITC purposes.
- Ontario credits: OITC 8% refundable (assume under the $3M Ontario expenditure limit and no phase-out) and ORDTC 3.5% non-refundable.
- Provincial credits are treated as assistance that reduces federal qualified SR&ED expenditures.
Inputs used in the worked example:
- SR&ED salaries & wages (Ontario): $400,000
- SR&ED contractors (arm’s length, Canada): $150,000
Worked SR&ED Example (CCPC in Ontario): Federal ITC + OITC + ORDTC
Proxy method (PPA = 55% of salary base) and arm’s-length contractors (80% qualified for ITC purposes). Adjust the inputs for your case.
| Inputs | |
|---|---|
| SR&ED salaries & wages (Ontario) | $400,000 |
| SR&ED contractors (arm’s length, Canada) | $150,000 |
| Proxy method PPA rate | 55% |
| Qualified % of SR&ED contracts for ITC purposes | 80% |
| Ontario Innovation Tax Credit (OITC) rate | 8% (refundable) |
| Ontario R&D Tax Credit (ORDTC) rate | 3.5% (non-refundable) |
| Federal SR&ED ITC rate used in this example | 35% (enhanced CCPC rate) |
| Step-by-step calculation | ||
|---|---|---|
| Line item | Formula | Result |
| Prescribed Proxy Amount (PPA) | 55% × salaries | $220,000 |
| Qualified contract amount for ITC purposes | 80% × contractors | $120,000 |
| Total qualified SR&ED expenditures (Ontario/Canada) | salaries + PPA + qualified contracts | $740,000 |
| OITC (refundable) | 8% × min($740,000, Ontario limit) | $59,200 |
| ORDTC eligible base (simplified) | $740,000 − OITC (assistance) | $680,800 |
| ORDTC (non-refundable) | 3.5% × $680,800 | $23,828 |
| Federal qualified expenditures after ON credits (simplified) | $740,000 − OITC − ORDTC | $656,972 |
| Federal ITC (enhanced rate) | 35% × $656,972 | $229,940 |
| Credit summary (this example) | |
|---|---|
| Ontario Innovation Tax Credit (OITC) — refundable | $59,200 |
| Ontario Research & Development Tax Credit (ORDTC) — non-refundable | $23,828 |
| Federal SR&ED ITC (enhanced CCPC rate used here) | $229,940 |
| Total SR&ED credits (Ontario + Federal) | $312,968 |
1) OITC has an annual $3M Ontario expenditure limit and can phase out based on prior-year income/capital tests. This example assumes you’re under those thresholds.
2) ORDTC’s base is reduced by government/non-government assistance (which typically includes refundable credits like OITC).
3) Federal qualified SR&ED expenditures are reduced by provincial/territorial credits as assistance. In real filings, tax software schedules handle the mechanics; this is a simplified illustration.
4) The CRA currently shows the enhanced federal expenditure limit as $3M, but announced/proposed enhancements for years beginning on/after Dec 16, 2024 may change limits—confirm for your filing year.
SR&ED Calculator for Ontario – Estimate Using Your Own Values
Note – calculations below are for demonstration only and should not be relied upon a formal advice.
SR&ED Credit Estimator (Federal + Ontario OITC + ORDTC)
Interactive estimator for planning. Actual filings can differ based on eligibility, refundability, associated corps, phase-outs, and assistance rules.
Inputs
Rates & limits
Results
| Line | Amount |
|---|---|
| Prescribed Proxy Amount (PPA) | $0 |
| Qualified contract amount (contracts × qualified %) | $0 |
| Total qualified SR&ED expenditures (planning base) | $0 |
| OITC (refundable) = rate × min(qualified, cap) | $0 |
| ORDTC base (simplified) = max(0, qualified − OITC − other assistance) | $0 |
| ORDTC (non-refundable) = rate × ORDTC base | $0 |
| Federal base (simplified) | $0 |
| Federal SR&ED ITC (based on selected mode) | $0 |
| Total credits (OITC + ORDTC + Federal ITC) | $0 |
Filing deadlines and forms
For most corporations, SR&ED has a hard deadline:
- You generally have up to 18 months after your tax year-end to file the prescribed SR&ED information with your return (e.g., Form T661 and Schedule T2SCH31 as applicable).
If you miss the SR&ED reporting deadline, CRA can process your return without the SR&ED benefit.
Owner takeaway: treat SR&ED like a year-end process, not a last-minute add-on.
CRA review/audit: what usually causes claims to be reduced
Most reductions happen for a few predictable reasons:
- The project reads like “product development,” not “technological uncertainty + experiments.”
- Missing or weak contemporaneous documentation (no hypotheses, test results, iterations, or conclusions).
- Over-claiming time (no time evidence, no reasonable allocation method).
- Contractor costs not properly supported or not clearly “on your behalf” in Canada.
- Assistance not netted correctly.
CRA also publishes SR&ED review process resources and updates to help claimants understand what to expect.
Documentation checklist
If you only fix one thing, fix documentation. Aim to capture this as you go:
- Technical narrative: What uncertainty existed? Why couldn’t existing knowledge solve it?
- Hypotheses and iterations: What did you test, and what changed after each result?
- Experiment/test evidence: Logs, test plans, benchmark outputs, experiment results.
- Version history: Commits, tickets, lab notes, change logs that map to experiments.
- Who did the SR&ED work: Roles, time evidence, and allocation logic.
- Costs tie-out: Payroll, invoices, contracts, materials, and any assistance netting.
FAQs
1) What are SR&ED Tax Credits in Canada?
SR&ED is a federal tax incentive program that provides deductions and investment tax credits for eligible R&D work performed in Canada.
2) What makes a project “SR&ED eligible”?
Your work must aim for scientific or technological advancement and be carried out through systematic investigation (experiment/analysis) in Canada.
3) Do I need to succeed for SR&ED Tax Credits to apply?
No. CRA focuses on the attempt to achieve advancement through systematic work; failure can still produce new knowledge.
4) What expenses can be claimed for SR&ED Tax Credits?
Common categories include salaries/wages, materials, and SR&ED contracts, plus overhead under traditional or proxy methods.
5) What is the proxy method and the PPA?
The proxy method replaces detailed overhead claiming with a formula-based amount (PPA). CRA policy references a 55% rate for the PPA calculation.
6) What is changing for SR&ED Tax Credits in 2025/2026?
Government announcements/proposals increase key limits for taxation years beginning on/after Dec 16, 2024, and restore capital expenditure eligibility for certain property acquired after Dec 15, 2024. Budget 2025 proposes a higher enhanced-rate expenditure limit.
7) Is the enhanced expenditure limit $3M, $4.5M, or $6M?
Some CRA SR&ED pages still show $3M, while government announcements/proposals describe increases for tax years beginning on/after Dec 16, 2024 (including a Budget 2025 proposal to move to $6M). Confirm the enacted rule for your filing year.
8) When is the SR&ED claim deadline?
For most corporations, the SR&ED reporting deadline is up to 18 months after the tax year-end (with prescribed forms/info).
9) Can SR&ED be claimed if I received grants or wage subsidies?
Often yes, but assistance can reduce eligible expenditures and/or credits. Netting must be handled carefully.
10) What triggers an SR&ED audit/review?
Common triggers include weak project narratives, missing experiment evidence, aggressive time allocations, and unsupported costs — especially contractor and overhead assumptions.
Table 2: SR&ED eligibility “quick screen” for owners
| Question | SR&ED-leaning answer | Usually not SR&ED |
|---|---|---|
| Did you face a real technological uncertainty (not just lack of skill/time)? | Yes – it wasn’t known how/if it could be done with existing knowledge. | No – known approach existed; you were implementing it. |
| Did you run experiments/tests and learn from results? | Yes – hypotheses, test plans, iterations, conclusions. | No – routine build/config/debug without experimental evidence. |
| Was the goal to achieve technological advancement (new knowledge)? | Yes – advancing understanding of technology, even if it failed. | No – only commercial or cosmetic changes. |
| Was the SR&ED work performed in Canada (with limited exceptions)? | Yes – primarily in Canada; outside-Canada work tightly limited. | No – mainly outside Canada, or contractor work outside Canada. |
Final Takeaway
SR&ED can be one of the most valuable funding tools for incorporated Canadian businesses … but only when your claim tells a clear technical story, your costs are calculated correctly, and your documentation matches CRA’s eligibility tests.
At Think Accounting, we work closely with you and your SR&ED consultant to coordinate the process and layer on the SR&ED forms on to the T2 Corporate Tax Return, and keep track of the credits in your tax and accounting records. Reach out for a no obligation preliminary call or email us at info@thinkaccounting.ca.
