Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy

Date: May 22, 2026

1.0 Overview

1.1 Purpose

This policy document deals with determining the total qualified SR&ED expenditures for investment tax credit (ITC) purposes on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. The purpose of this document is to clarify the position of the Canada Revenue Agency (CRA) regarding total qualified SR&ED expenditures for ITC purposes when administering the SR&ED legislation under the federal Income Tax Act and the Income Tax Regulations.

This document will:

• Explain what may be included and what must be excluded on Form T661 in calculating total qualified SR&ED expenditures for ITC purposes
• Explain how the legislation for SR&ED ITC under the Act relates to the calculating of total qualified SR&ED expenditures for ITC purposes

1.2 Introduction

The term "total qualified SR&ED expenditures for ITC purposes" is not defined in the Act, but the term is found on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. The term represents the amount that is used to calculate a claimant's ITC for SR&ED for a particular tax year. This calculation takes into consideration the terms "qualified expenditure" and "SR&ED qualified expenditure pool" which are defined in the Act. These terms and the additional legislative support for the calculation of total qualified SR&ED expenditures for ITC purposes found on Form T661 are discussed in section 2.0. A summary of the calculation of total qualified SR&ED expenditures for ITC purposes is provided in section 3.0.

The starting point in the Act for calculating the total qualified SR&ED expenditures that qualify for ITC purposes on Form T661 is the total allowable expenditures for SR&ED. A listing of SR&ED expenditure policies is in section 3.0. Each expenditure is discussed in the respective policy for the expenditure. The next step is calculating qualified expenditures (see sections 2.1 and 2.1.1). In calculating qualified expenditures, certain amounts are added to, or deducted from, the allowable expenditures.

A claimant uses the qualified expenditures to calculate the SR&ED qualified expenditure pool (see Section 2.2). The claimant’s SR&ED qualified expenditure pool includes:

• Qualified expenditures incurred in the tax year, and
• Qualified expenditures that a non-arm's length (NAL) performer transferred to the claimant (see Section 7.2)

The claimant must deduct the amount of qualified expenditures they transferred to an NAL payer, if any (see Section 7.2). For more information on transfers, refer to Section 7.0.

Repayments of assistance or contract payments are not qualified expenditures under the Act. However, repayments do earn an ITC because the Act includes them in the definition of investment tax credit. To calculate the total qualified SR&ED expenditures for ITC purposes, add any repayments of assistance or contract payments to the amount of the SR&ED qualified expenditure pool. For more information, refer to the SR&ED Investment Tax Credit Policy and Assistance and Contract Payments Policy.

There is a final step in determining the total qualified SR&ED expenditures for ITC purposes. Claimants must subtract from the amount in the annual pool any expenditure toward a business with income exempt from Part I tax. For more information on exempt income, refer to Section 11.0.

Claiming an ITC is not done on Form T661. To claim an ITC, a claimant has to file either Schedule T2SCH31, Investment Tax Credit – Corporations or Form T2038(IND), Investment Tax Credit (Individuals). For more information, refer to the SR&ED Filing Requirements Policy.

2.0 Legislation

The legislation that supports the calculation of total qualified SR&ED expenditures that qualify for investment tax credit (ITC) purposes found on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim is discussed in the following sections 2.1 to 2.3. Section 3.0 summarizes how to calculate the total qualified SR&ED expenditures that qualify for ITC purposes. Sections 4.0 to 12.0 have detailed explanations of the topics in Section 3.0.

2.1 Qualified expenditure

Before December 16, 2024

The term "qualified expenditure" is defined in the Income Tax Act and means:

• • An expenditure incurred in the tax year by the claimant in respect of scientific research and experimental development carried on in Canada and is:
    • An allowable expenditure of a current nature for SR&ED directly undertaken by the claimant
    • 80% of an expenditure which is:
      • A contract expenditure for SR&ED performed on behalf of the claimant
      • A third-party payment
• • A prescribed proxy amount (PPA) of the claimant for the tax year

Section 3.0 lists various interpretation policies applicable to SR&ED expenditures. For more information on the PPA, refer to the Prescribed Proxy Amount Policy.

Qualified expenditure as defined in the Act does not include:

• A prescribed expenditure (see section 10.0) incurred in the tax year by the claimant
• An expenditure (other than an expenditure that is salary or wages of an employee of the claimant) incurred by the claimant in respect of SR&ED to the extent that it is performed by another person or partnership at a time when the claimant and the other person or partnership to which the expenditure is paid or payable do not deal with each other at arm’s length
• An SR&ED expenditure of a current nature that is paid or payable by the claimant to, or for the benefit of, a person or partnership that is not a taxable supplier (see section 9.0) in respect of the expenditure, other than an expenditure in respect of SR&ED directly undertaken by the claimant
• An amount that would otherwise be a qualified expenditure to the extent that any government assistance, non-government assistance, or contract payments in respect of the SR&ED that the claimant has received, is entitled to receive, or can reasonably be expected to receive on or before the filing-due date for the tax year

For more information on contract expenditures for SR&ED performed on behalf of a claimant, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy. For more information on assistance and contract payments, refer to the Assistance and Contract Payments Policy.

After December 15, 2024

The Income Tax Act defines the term "qualified expenditure" as meaning:

• • An expenditure that a claimant made in the tax year for scientific research and experimental development that they carried on in Canada and:
    • That is an allowable expenditure of a current nature for SR&ED the claimant directly carried out
    • Where 80% of the expenditure is:
      • A contract expenditure for SR&ED that another party carried out on behalf of the claimant
      • A third-party payment
    • That is an expenditure for shared-use-equipment (SUE)
    • That is an allowable expenditure of a capital nature
• • A prescribed proxy amount (PPA) of the claimant for the tax year

Section 3.0 lists various interpretation policies applicable to current and capital expenditures for SR&ED. For more information on SUE, refer to the SR&ED Shared-Use-Equipment Policy. For more information on the PPA, refer to the Prescribed Proxy Amount Policy.

The Act’s definition of a qualified expenditure excludes:

• A prescribed expenditure (see Section 10.0) a claimant made in the tax year
• An expenditure (other than an expenditure of salary or wages for a claimant’s employee) that the claimant made toward SR&ED if:
  • Another person or partnership carried out the SR&ED
  • A claimant and the other person or partnership to whom the expenditure is paid or payable do not deal with each other at arm’s length during the SR&ED process
• A current SR&ED expenditure that a claimant paid to, made payable to, or made for the benefit of a person or partnership that is not a taxable supplier (see Section 9.0) for the expenditure unless:
  • A claimant made the expenditure for SR&ED that it directly carried out
• An amount that would otherwise be a qualified expenditure and that a claimant has received, is entitled to receive, or can reasonably be expected to receive on or before the filing-due date for the tax year, which includes:
  • Government assistance for SR&ED
  • Non-government assistance for SR&ED
  • Contract payments for SR&ED

For more information on expenditures claimants made on SR&ED contracts that another party had carried out, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy. For more information on assistance and contract payments, refer to the Assistance and Contract Payments Policy.

2.1.1 Further additions and reductions in the Income Tax Act for determining qualified expenditures

Qualified expenditures are further reduced by any expenditure of a current nature incurred for SR&ED that is unpaid within 180 days of the end of the tax year. An addition to qualified expenditures will be made in the year the expenditure is actually paid. For more information on unpaid amounts, refer to section 4.0. However, these unpaid amount rules do not apply to salary or wages as particular unpaid rules apply to them. For more information on unpaid salary or wages, refer to section 11.0 of the SR&ED Salary or Wages Policy.

When the claimant makes a purchase of goods or services from a non-arm’s length (NAL) party, an adjustment (reduction) to their qualified expenditures (other than a PPA) may be required. Determining the extent the claimant's qualified expenditures are reduced as a result of these NAL purchases is discussed in section 12.0.

2.2 SR&ED qualified expenditure pool

The term "SR&ED qualified expenditure pool" is defined in the Act. At the end of a claimant's tax year, the claimant's SR&ED qualified expenditure pool will equal the total of the amount of the claimant's qualified expenditures incurred in the year (see sections 2.1 and 2.1.1), plus the amount of qualified expenditures transferred from a NAL taxpayer (performer), less the amount of qualified expenditures transferred to a NAL taxpayer (payer). For more information on transfers of qualified expenditures, refer to section 7.0.

This pool does not function like an expense pool, such as the pool of deductible SR&ED expenditures. The SR&ED qualified expenditures pool is an amount that is calculated at the end of each tax year. This amount does not carry over to another tax year.

2.3 Further additions and reductions in the Income Tax Act to determine investment tax credits earned in a year

After the amount of a claimant's SR&ED qualified expenditure pool is determined, there are subsequent legislative additions and reductions that are made in order to determine a claimant's total qualified SR&ED expenditures for ITC purposes for the tax year.

A repayment of assistance or contract payments is a further addition when calculating the total qualified SR&ED expenditures for ITC purposes earned in a year. For more details on repayments of assistance or contract payments, refer to the Assistance and Contract Payments Policy.

A reduction is made for any expenditure incurred in a business where income from the business is exempt from Part I tax. For more information on exempt income, refer to section 11.0.

3.0 Summary: Calculating the total qualified SR&ED expenditures for investment tax credit purposes on Form T661

The following is a summary of the calculation of the total qualified SR&ED expenditures for investment tax credit (ITC) purposes on the Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. This summary focuses on the steps of the calculation as discussed in section 1.2. The calculation in this summary refers to the legislation outlined in sections 2.0 to 2.3. The topics contained in this calculation summary are discussed in detail in sections 4.0 to 12.0.

Calculation of allowable SR&ED expenditures (on Form T661)

The total allowable SR&ED expenditures (line 400 on Form T661) includes the total current and capital SR&ED expenditures (lines 380 and 390, respectively). Claimants use the amounts on lines 380 and 390 as a starting point to calculate the total qualified SR&ED expenditures for ITC purposes on Form T661. For more information on SR&ED expenditures, refer to the following policies:

• SR&ED Salary or Wages Policy
• Materials for SR&ED Policy
• Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy
• SR&ED Lease Expenditures Policy
• SR&ED Overhead and Other Expenditures Policy
• Third-Party Payments Policy
• SR&ED Capital Expenditures Policy

Total allowable SR&ED expenditures (on Form T661)

The total allowable SR&ED expenditures is included in the calculation of total qualified SR&ED expenditures for ITC purposes due to the Income Tax Act definition of qualified expenditures (see section 2.1).

Calculation of qualified SR&ED expenditures for ITC purposes (on Form T661)

Further additions and deductions are made to the total allowable SR&ED expenditures in order to calculate the total qualified SR&ED expenditures for ITC purposes on Form T661:

Addition: Income Tax Act definition of qualified expenditures (see section 2.1):

• The prescribed proxy amount (PPA)
• Expenditures for shared-use-equipment (SUE) acquired and available for use after December 15, 2024

Addition: Further addition in the Act (see section 2.1.1):

• Payment of prior years' unpaid amounts (other than salary or wages) (see section 4.0)

Addition: Act definition of SR&ED qualified expenditure pool (see section 2.2):

• Qualified expenditures transferred to the claimant (see section 7.0)

Deductions: Act definition of qualified expenditures (see section 2.1):

• Government assistance, non-government assistance and contract payment that are in respect of the SR&ED
• Amounts paid or payable in respect of an SR&ED contract to a non-taxable supplier (see section 9.0)
• 20% of:
  • Arm’s length contract expenditures for SR&ED performed on behalf of the claimant
  • Third-party payments
• Prescribed expenditures that are not allowed by the Regulations (see section 10.0)
• Non-arm’s length (NAL) transactions:
  • For assistance allocated to the claimant, refer to the Assistance and Contract Payments Policy
  • For contract expenditures for SR&ED performed on behalf of the claimant by a performer with whom the claimant is not dealing at arm's length, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy

Deductions: Further reduction in the Act (see section 2.1.1):

•  Expenditures of a current nature (other than salary or wages) not paid within 180 days of the tax year-end (see section 4.0)
• NAL transactions:
  • Adjustment resulting from purchases of goods and services from non-arm's length suppliers (see section 12.0)

Deduction: Act definition of SR&ED qualified expenditure pool (see section 2.2):

• NAL transactions:
  • Qualified expenditures transferred from the claimant (see section 7.0)

Deduction: Other Act requirements (see section 2.3):

• Other deductions (see section 11.0)

Subtotal: Qualified SR&ED expenditures (on Form T661)

The term "qualified SR&ED expenditures" is a term used on Form T661 to represent the Act term "SR&ED qualified expenditure pool" as discussed in section 2.2. A further addition is made to qualified SR&ED expenditures in order to calculate total qualified SR&ED expenditures for ITC purposes on Form T661:

Addition: Act definition of investment tax credit (see section 2.3):

• Repayments of assistance and contract payments made in the year, refer to the Assistance and Contract Payments Policy

Total qualified SR&ED expenditures for ITC purposes (on Form T661)

This is the amount of total qualified SR&ED expenditures to be used to calculate the ITC for the tax year.

4.0 Unpaid amounts

For the purposes of calculating total qualified SR&ED expenditures for investment tax credit (ITC) purposes, as well as the refundable ITC calculation, a claimant's expenditure for SR&ED of a current nature (other than unpaid salary or wages and other remuneration, see below) that is unpaid on the day that is 180 days after the end of the tax year in which the expenditure is otherwise incurred is deemed:

• Not to have been incurred in the year
• To be incurred at the time it is paid

Determining whether or not an amount is actually paid within the 180-day period involves a finding of fact that can only be established after examining all the evidence that would support such a conclusion.

For more information on unpaid amounts, refer to Interpretation Bulletin IT109R2, Unpaid Amounts.

4.1 Identification of unpaid amounts on Form T661

A claimant must identify on Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, for a particular tax year, the amount of current expenditures (other than salary or wages) incurred in the year but not paid within 180 days of the tax year-end. These unpaid amounts are deducted in the calculation of the total qualified SR&ED expenditures for ITC purposes. Unpaid amounts from previous years that are paid in the current year are included in the calculation of total qualified SR&ED expenditures for ITC purposes on Form T661 for the current year.

Although an unpaid amount for a current expenditure is deemed not to have been incurred in a tax year, the amount must be identified on the prescribed forms for an SR&ED claim on or before the day that is 12 months after the claimant's filing-due date for the particular tax year (for a corporation, this is 18 months after the end of the tax year in which the SR&ED expenditure was incurred). For more information on the SR&ED filing requirements, refer to the SR&ED Filing Requirements Policy. Unpaid amounts that are not identified on the Form T661 within the 18-month reporting deadline will not be included in calculating total qualified SR&ED expenditures for ITC purposes, even if they are paid in a subsequent year.

Treatment of unpaid SR&ED contract expenditures

In calculating qualified SR&ED expenditures, 2 deductions are made on Form T661 for contract expenditures for SR&ED performed on behalf of the claimant that are not paid within 180 days of the tax year end. The first deduction is to reduce the arm’s length contract expenditures by 20%. The second deduction is to identify the remaining 80% of the arm’s length contract, which the claimant incurred in the year but did not pay within 180 days of the tax year-end. The claimant must identify these 2 deductions on their 2 respective lines on Form T661 (see Section 3.0). This ensures the total amount of the unpaid expenditure is not included as a qualified SR&ED expenditure in the year. Further, in the year the expenditure is paid, only 80% of the amount paid (for an example, see section 4.1.1) that was identified is added to the qualified SR&ED expenditures.

4.1.1 Example: Unpaid amount, SR&ED contract expenditures

B Limited has a tax year-end of December 31, 2024, and incurs an SR&ED contract expenditure of $100,000 in the year payable to C Limited, an arm’s length corporation. B Limited still has not paid the expenditure 180 days after the end of the 2024 tax year. The expenditure is paid in September 2025.

• B Limited must identify the expenditure on the "contract expenditures for SR&ED performed on your behalf: arm's length contracts" line of Form T661 by the SR&ED reporting deadline in order for it to be included as an allowable SR&ED expenditure (see section 3.0) deductible in 2024
• B Limited should enter 20% of the contract expenditure, $20,000, as a reduction to qualified expenditures on Form T661 since only 80% of contract expenditures qualify for investment tax credits (see section 2.1)
• B Limited has to enter 80% of the unpaid amount, $80,000, on the "current expenditures (other than salary or wages) not paid within 180 days of the tax year end" line of Form T661 for the 2024 tax year. For ITC purposes, 100% of the expenditure is considered not to have been incurred in 2024
• When B Limited pays the expenditure in the 2025 tax year, it should enter 80% of the amount paid on the "payment of prior years' unpaid amounts (other than salary or wages)" line of Form T661 for that year in order to be included in calculating the total qualified SR&ED expenditures for ITC purposes

5.0 Prescribed proxy amount

Claimants have 2 ways to calculate their SR&ED expenditures. They can elect to use the proxy method or choose to use the traditional method. The traditional method involves specifically identifying and claiming all SR&ED overhead and other expenditures incurred during the year. For more information, refer to the Traditional and Proxy Methods Policy.

Claimants that elect to use the proxy method to determine their expenditures on or in respect of SR&ED do not include any portion of overhead and other expenditures in calculating total qualified SR&ED expenditures for ITC purposes. In lieu of these SR&ED overhead and other expenditures, these claimants can include an amount referred to as the prescribed proxy amount (PPA). The PPA is a notional amount calculated under the Regulations. For more information, refer to the Prescribed Proxy Amount Policy.

6.0 Shared-use-equipment

An expenditure for depreciable property acquired after December 15, 2024, that does not meet the all or substantially all (ASA) criteria, cannot be claimed as an allowable expenditure.

However, a portion of the expenditure for depreciable property may qualify as shared-use-equipment (SUE) if the following requirements are met. The property is:

• Used primarily during its operating time in the first period for the prosecution of SR&ED (first term SUE)
• Used primarily during its operating time in the second period for the prosecution of SR&ED (second term SUE), and was claimed as first term SUE in a prior tax year
• Not general purpose office equipment or furniture

For more information, refer to the SR&ED Shared-Use-Equipment Policy.

7.0 Qualified SR&ED expenditures transferred between the claimant and an SR&ED performer not dealing at arm's length

7.1 Meaning of at arm's length

Although the term at arm's length is used throughout the Income Tax Act, the Act does not precisely define it. The term at arm's length refers to a situation where 2 parties that deal with each other are not related to each other, no control exists between them, nor does one party have a beneficial (financial) interest in the other. It is a question of fact whether 2 parties not related to each other are dealing with each other at arm's length. For more information, refer to Income Tax Folio, S1-F5-C1: Related Persons and Dealing at Arm's Length, which describes in general terms the criteria the CRA considers when determining whether persons deal with each other at arm's length.

The Act refers to 3 categories of persons when determining arm's length relationships. Income Tax Folio S1-F5-C1 deals with each category separately. The first category of persons discussed is related persons which includes discussions on: blood relationship, marriage, common-law partnership, adoption, corporations and other persons, and options and rights. The second category includes personal trusts and their beneficiaries, and the third category includes persons not related to each other.

7.2 Not dealing at arm's length situations

If a claimant (known as the payer) contracts a person (known as the performer) to carry on SR&ED on its behalf, and the payer and the performer are not dealing at arm's length (see section 7.1), the expenditures incurred by the payer for the non-arm's length (NAL) contract are not included in the total qualified SR&ED expenditures for investment tax credit (ITC) purposes. These contract expenditures do not qualify for ITC purposes. For more information on contract expenditures for SR&ED performed on behalf of a claimant, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

In addition, in these NAL contract situations the amount received or receivable by the performer of the SR&ED is not considered to be a contract payment and does not reduce the total qualified SR&ED expenditures for ITC purposes of the performer. For more information on contract payments, refer to definition of contract payment in the Assistance and Contract Payments Policy.

7.3 Transferring qualified SR&ED expenditures between persons not dealing at arm's length

If the payer of the SR&ED is not dealing at arm's length (see section 7.1) with the performer of the SR&ED, the performer can transfer its qualified SR&ED expenditures (see section 3.0) to the payer up to a maximum of the contract amount. To make such a transfer, the payer and the performer must each complete Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, and Form T1146, Agreement to Transfer Qualified Expenditures Incurred in Respect of SR&ED Contracts Between Persons Not Dealing at Arm's Length. For information on the reporting deadline for filing Form T1146, refer to the SR&ED Filing Requirements Policy.

For further clarification, ownership rights to property arising from any SR&ED activity, including property resulting from a qualified SR&ED expenditure which was transferred as stated above, are not part of the (Form T1146) agreement. Only qualified SR&ED expenditures are transferred on Form T1146.

A partnership cannot transfer or receive qualified SR&ED expenditures to or from a NAL party since a partnership is not considered to be a person for the purpose of these rules. For more information, refer to the SR&ED Claims for Partnerships Policy.

7.4 Determining the transferable amount

The amount of qualified SR&ED expenditures (see section 3.0) that the performer can transfer for its tax year is the least of the following 3 amounts:

1. The amount specified by the payer (transferee) and performer (transferor) in their agreement (Form T1146)
2. The performer's SR&ED qualified expenditure pool (see section 2.2) at the end of its tax year, before deducting the transfer of qualified expenditures (see section 2.1) to the payer
3. The total of all amounts where each of the amounts, if the payer and performer were dealing at arm's length, would be a contract payment:
   • For performing SR&ED on behalf of the payer
   • Paid by the payer to the performer on, or before, the day that is 180 days after the end of the performer's tax year and for:
     • A qualified expenditure the performer incurred in the particular year (not considering any unpaid salary or wages or any unpaid expenditures) for that portion of the SR&ED that was performed when the performer did not deal at arm’s length with the payer, and is paid by the performer on or before the day that is 180 days after the end of its tax year; or
     • An amount in respect of SR&ED that is transferred to the performer by a NAL party

Determining the transferable amount (the least of the 3 amounts above) is shown in Appendix A.

The performer cannot transfer to the payer more than the amount that their qualified SR&ED expenditures would have been at the end of the tax year had it not been for this transfer. If the performer attempts to do so, the Act states that no amount can be transferred.

7.5 Other considerations when transferring qualified SR&ED expenditures between persons not dealing at arm's length

7.5.1 Different year-ends for the performer and the payer

Since ITC eligibility arises at the performer's tax year-end, the transfer is made in respect of a particular tax year of the performer (transferor). Timing issues may arise if the performer and the payer have different tax year-ends.

The qualified SR&ED expenditures (see section 3.0) transferred in a particular year (as determined in section 7.4) are excluded from the performer's qualified SR&ED expenditures at the end of the tax year, but are included in the payer's qualified SR&ED expenditures for the payer's first tax year that ends at, or after, the particular year in which the transfer is made.

Thus, if the payer's tax year ends earlier than the performer's year-end, the payer's ITC claim that includes the transferred qualified SR&ED expenditures will be delayed until the first tax year that ends at, or after, the particular year of the performer in which the transfer is made.

7.5.2 Anti-avoidance

The Act provides an anti-avoidance rule that reduces to nil the addition in the payer's (transferee's) qualified SR&ED expenditure (see section 3.0) for the transferred qualified SR&ED expenditures when the payer and the performer (transferor) do not deal at arm’s length as a result of a transaction, event or arrangement, or a series of transactions, events or arrangements, the principal purpose of which was to enable the payer and the performer to enter into the agreement (Form T1146).

The Act provides for an additional anti-avoidance rule so that a claimant cannot circumvent the NAL rules by including an arm's length party between a payer and a NAL performer. For more information, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

8.0 Government assistance, non-government assistance and contract payments

The intent of SR&ED legislation is to provide tax incentives to businesses on the net costs of performing SR&ED in Canada. Thus, government assistance, non-government assistance, or contract payments in respect of the SR&ED work performed in the year will reduce the total qualified SR&ED expenditures for investment tax credit (ITC) purposes. The rules are different when making a reduction for assistance to the pool of deductible SR&ED expenditures. For more information on assistance and contract payments, refer to the Assistance and Contract Payments Policy.

9.0 Expenditures relating to SR&ED contracts paid or payable to a person or partnership that is not a taxable supplier

Total qualified SR&ED expenditures for investment tax credit (ITC) purposes cannot include an SR&ED expenditure of a current nature that is paid or payable to, or for the benefit of (see section 9.3) a person or partnership that is not a taxable supplier (see section 9.1) in respect of the expenditure, other than an expenditure for SR&ED directly undertaken by the claimant (see section 9.4.1). Therefore, this exclusion generally only applies to SR&ED contract situations. However, this taxable supplier rule will generally only apply to expenditures relating to arm's length SR&ED contract situations because a specific provision of the Income Tax Act applies to remove expenditures in respect of SR&ED contracts between persons (or partnerships) not dealing at arm's length from the calculation of total qualified SR&ED expenditures for ITC purposes. For more information, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy. If the expenditure relating to the SR&ED contract is paid or payable to or for the benefit of a person or partnership who is not a taxable supplier, then it will not be included in the calculation of total qualified SR&ED expenditures for ITC purposes.

9.1 Definition of taxable supplier

A taxable supplier in respect of an amount as defined in the Act, means:

• A person resident in Canada
• A Canadian partnership, or
• A non-resident person or non-Canadian partnership that pays or receives the amount in the course of carrying on a business through a permanent establishment (see section 9.4.2) in Canada

The term "taxable supplier" is also relevant for the purpose of the definition of contract payment in the Act and for the purpose of the deemed contract payment rules. For more information, refer to the Assistance and Contract Payments Policy.

9.2 Tax policy intent of taxable supplier rules

To promote Canadian SR&ED

One of the intentions of the SR&ED program is to promote Canadian SR&ED and foster the development of a domestic research and development infrastructure. The taxable supplier rules (sections 9.0 to 9.5.3) were implemented to encourage claimants to enter into SR&ED contracts with Canadians or non-Canadians that have a permanent establishment in Canada. This was intended to promote Canadian SR&ED and, in turn, strengthen Canadian research and development capabilities.

Accordingly, when a claimant enters into SR&ED contracts with a non-resident person or non-Canadian partnership, it is not enough that the SR&ED be performed in Canada.

For a payment for an SR&ED contract, to be included in calculating total qualified SR&ED expenditures for ITC purposes, the SR&ED performer must also have a permanent establishment (see section 9.4.2) in Canada.

To stop double-dipping

Another intention of the SR&ED legislation is that only 1 Canadian claimant should benefit from the ITC incentives on any SR&ED contract. The taxable supplier rules were implemented to clarify the intent of the legislation and ensure that, as they apply to SR&ED contracts, the appropriate party receives the ITC entitlements on the total qualified SR&ED expenditures for ITC purposes.

For example, in a situation where a Canadian company contracts with a foreign company that in turn subcontracts the SR&ED work to another Canadian company, the taxable supplier rule will apply to prevent the double dipping of ITC by 2 Canadian corporations on that same SR&ED project (see example in section 9.5.1).

9.3 For the benefit of

For the purposes of the taxable supplier rules (see section 9.0), the term "for the benefit of" describes the benefit conferred on either the person (or partnership) who receives a payment under the contract or another party that ultimately benefits from the payment. However, the term does not refer to the benefit obtained by the payer through the fulfillment of the contract. For an illustration of the term for the benefit of, see the examples in sections 9.3.1 and 9.3.2.

9.3.1 Example 1: Contracts and subcontracts

The Canadian corporation D Limited, contracts with another Canadian corporation, E Limited, to perform SR&ED. E Limited in turn contracts with a foreign corporation, F Limited, to actually perform the SR&ED work.

In applying the taxable supplier rules and the term "for the benefit of," the payment made by D Limited to E Limited would be for the benefit of E Limited. The payment made by E Limited to F Limited would be for the benefit of F Limited.

9.3.2 Example 2: Third-party payment

The Canadian corporation, G Limited, makes a third-party payment to a Canadian university through a foreign subsidiary, F Limited.

In applying the taxable supplier rules and the term "for the benefit of," a payment made by G Limited directly or through F Limited to a Canadian university would be for the benefit of the university.

9.4 Circumstances where taxable supplier rules do not apply

9.4.1 Directly undertaken by the claimant

For the purpose of calculating total qualified SR&ED expenditures for ITC purposes, the taxable supplier rules do not apply to payments of expenditures of a current nature for SR&ED if the SR&ED is directly undertaken by the claimant. For example, this means that the taxable supplier rules do not apply to the purchase of materials by the claimant from a person (or partnership) who is not a taxable supplier where they are used in SR&ED the claimant directly undertakes in Canada.

Example: To undertake its own SR&ED, a Canadian corporation acquires $10,000 in materials from an arm's length supplier located in the United States.

The taxable supplier rules do not apply, since the SR&ED is directly undertaken in Canada by the claimant (the materials are consumed or transformed in SR&ED directly undertaken by the claimant in Canada).

9.4.2 Carries on a business through a permanent establishment

The taxable supplier rules will not apply where an arm’s length SR&ED contract is entered into with a non-resident person or non-Canadian partnership that carries on a business in Canada through a permanent establishment.

Whether or not a permanent establishment exists is a question of fact that must be determined on a case-by-case basis. For the purposes of the definition of taxable supplier in the Act, a permanent establishment is defined in the Regulations. However, the term permanent establishment is also defined in detail in each reciprocal income tax treaty or convention that Canada has with another country. When determining whether a permanent establishment exists, the definition under a treaty or convention always takes precedence over the definition in the Regulations.

Determining whether a permanent establishment exists in Canada, according to the definition in the Regulations or a tax treaty or convention, relies on the definition of a fixed place of business. A non-resident person or non-Canadian partnership that carries on business through a fixed place of business in Canada will have a permanent establishment in Canada. A fixed place of business may include a branch, an office, a factory, or a workshop. In certain cases, a non-resident that has no fixed place of business in Canada may also be deemed to have a permanent establishment in Canada if the establishment satisfies specific criteria set out in the Regulations or a tax treaty or convention.

It is up to the SR&ED claimant to provide the CRA with evidence supporting the position that an amount was paid or payable to a non-resident person or non-Canadian partnership with a permanent establishment in Canada.

9.5 Application of the taxable supplier rules

For the examples below, on the application of the taxable supplier rules, the contract payment rules of the Act are also relevant. For more information on contract payments, refer to the Assistance and Contract Payments Policy.

9.5.1 Example 1: Arm's length foreign contract

The Canadian corporation, H Limited, contracts out its SR&ED to a foreign corporation, F Limited, for a contract amount of $1,000. H Limited and F Limited deal with each other at arm's length throughout the period in which the SR&ED is performed. F Limited does not have a permanent establishment in Canada and is therefore not a taxable supplier.

However, F Limited does not actually perform the SR&ED. Instead it contracts out the SR&ED to a Canadian corporation, J Limited, for a contract price of $900. J Limited incurs SR&ED expenditures of $850 relating to the SR&ED contract with F Limited.

In applying the taxable supplier rules, the SR&ED is not directly undertaken by H Limited. Therefore, the $1,000 would be considered to be paid or payable to, or for the benefit of, a non-resident corporation that is not a taxable supplier (F Limited). As a result, the $1,000 would be included in the pool of deductible SR&ED expenditures of H Limited but not be included in the calculating the total qualified SR&ED expenditures for ITC purposes.

J Limited, on the other hand, has $850 to include in its pool of deductible SR&ED expenditures and in the total qualified SR&ED expenditures for ITC purposes. J Limited would not have to reduce its total qualified SR&ED expenditures for ITC purposes by the payment under the contract since the amount is received from F Limited, which is not a taxable supplier.

9.5.2 Example 2: Arm's length Canadian contract with a foreign subcontract

The Canadian corporation, K Limited, contracts out its SR&ED to another Canadian corporation, L Limited, with a contract amount of $1,000. K Limited and L Limited deal with each other at arm's length (see section 7.1) throughout the period in which the SR&ED is performed.

However, L Limited does not actually perform the SR&ED. Instead it contracts out the SR&ED to a foreign corporation, F Limited, for a contract price of $950. F Limited in turn contracts it to a third Canadian corporation, M Limited, with a contract amount of $900. M Limited incurs SR&ED expenditures of $850 relating to the SR&ED contract. F Limited does not have a permanent establishment in Canada and is therefore not a taxable supplier.

Since K Limited does not directly undertake the SR&ED, $950 of the $1,000 would be considered to be paid or payable to or for the ultimate benefit of a corporation that is not a taxable supplier in respect of the $950. Therefore, the $950 would not be included in K Limited's calculation of the total qualified SR&ED expenditures for ITC purposes because of the taxable supplier rules. Since the SR&ED is performed in Canada, K Limited may still be able to claim $1,000 as allowable SR&ED expenditures and $50 of qualified SR&ED expenditures in calculating the ITC.

L Limited would have $950 of allowable SR&ED expenditures, but would not have any qualified expenditure for 2 reasons. First, the $950 paid or payable by L Limited to F Limited would not qualify because F Limited is not a taxable supplier. Second, there is a contract payment of $1,000 paid or payable to L Limited from K Limited.

M Limited would have $850 of allowable SR&ED expenditures and qualified expenditures for ITC purposes. M Limited would not have to reduce its total qualified SR&ED expenditures for ITC purposes by the payment under the contract, since the amount is received from F Limited, which is not a taxable supplier.

9.5.3 Example 3: Arm's length contract to non-resident individual

The Canadian corporation, N Limited, contracted out its SR&ED to a non-resident individual for a contract amount of $40,000. N Limited also reimbursed other expenses of the non-resident individual (such as travel and accommodation) for a total of $5,000. The non-resident individual is not an employee of N Limited and performs the SR&ED at N Limited's place of business in Canada. (If the non-resident individual were an employee of N Limited, the taxable supplier rules would not apply). N Limited and the non-resident individual deal with each other at arm's length throughout the period in which SR&ED is performed. The non-resident individual is not a taxable supplier because he has no permanent establishment in Canada. Determining whether the non-resident individual has a permanent establishment in Canada is a question of fact that is made on a case-by-case basis.

In applying the taxable supplier rules, N Limited does not directly undertake the SR&ED. Therefore, the contract amount of $40,000 and the $5,000 paid for the other expenses of the individual would be considered to be paid or payable to, or for the benefit of, a non-resident individual who is not a taxable supplier. Thus, the total expenses of $45,000 would be an allowable SR&ED expenditure to N Limited but cannot be included in calculating the total qualified SR&ED expenditures for ITC purposes, even if the SR&ED was performed in Canada.

10.0 Prescribed expenditures

Prescribed expenditures within the meaning of the Regulations are not qualified SR&ED expenditures and, therefore, do not earn investment tax credits (ITCs).

10.1 Prescribed expenditures of a current nature

Prescribed expenditures of a current nature include expenditures incurred by a claimant for the general administration or management of a business.

The term general administration or management of a business includes, but is not limited to, the following expenditures incurred by a claimant:

• Administrative salaries or wages and related benefits for a person whose duties are not all or substantially all directed to the prosecution of SR&ED, except to the extent that such expenditures are directly attributable to the prosecution of SR&ED as determined by the Regulations
• A legal or accounting fee
• Interest and other financing costs described in any of paragraphs 20(1)(c) to (g) of the Income Tax Act
• An entertainment expense
• An advertising or selling expense
• A conference or convention expense
• A due or fee for membership in a scientific or technical society or organization
• A fine or penalty

For more information on expenditures directly attributable to the prosecution of SR&ED, refer to the SR&ED Overhead and Other Expenditures Policy.

Prescribed expenditures also include expenditures of a current nature for the maintenance and upkeep of premises, facilities or equipment to the extent that such expenditures are not attributable to the prosecution of SR&ED.

Claimants must exclude the prescribed expenditures in the Regulations when calculating the total qualified SR&ED expenditures for ITC purposes. The prescribed expenditures would generally not be included in the pool of deductible SR&ED expenditures . However, some expenditures of a current nature that are directly related and incremental to the prosecution of SR&ED may be included in the pool of deductible SR&ED expenditures under the traditional method but will not be included in calculating the total qualified SR&ED expenditures for ITC purposes because they are prescribed. Examples of such expenditures are:

• Fees for preparing SR&ED claims (whether the fees relate to the financial or technical portion of the claim)
• Cost to attend conventions or conferences
• Interest expenses

For more information on the deductibility of these expenditures, refer to section 4.8 of the SR&ED Overhead and Other Expenditures Policy.

10.2 Prescribed expenditures

Before December 16, 2024

Prescribed expenditures of a capital nature before December 16, 2024, are expenditures that are in respect of:

• The acquisition of property that is qualified property or qualified resource property as defined in the Act, or
• The acquisition of property that has been used, or acquired for use or lease for any purpose before it was acquired by the claimant (see section 10.2.1)

The expenditures for the property described above are generally not expenditures of a current nature (see Section 3.0).

Expenditures of a capital nature incurred after December 15, 2024

The following explains prescribed expenditures of a capital nature after December 15, 2024. Before December 16, 2024, expenditures of a capital nature for SR&ED could not be claimed.

Prescribed expenditures of a capital nature incurred after December 15, 2024, are expenditures that are incurred to acquire:

• Property, unless the expenditure is for:
  • First term shared-use-equipment (SUE)
  • Second term SUE
  • The provision of premises, facilities, or equipment for which the all or substantially all (ASA) rule for capital expenditures applies,
• Qualified property as defined in the Act
• Property that has been used; or acquired for use, or lease, or for any purpose before it was acquired by the claimant (see Section 10.2.1)

For more information on first term or second term SUE, refer to the SR&ED Shared-Use-Equipment Policy. For more information on capital expenditures, refer to the SR&ED Capital Expenditures Policy.

Note
The Act defines "qualified property" and “qualified resource property.” These properties earn ITC under another incentive program and therefore, they cannot earn ITCs under the SR&ED program.

10.2.1 Used property

Capital expenditures incurred before December 16, 2024, do not qualify for SR&ED tax incentives because they are neither allowable nor qualified SR&ED expenditures.

Capital expenditures incurred after December 15, 2024, for the purchase of previously used equipment:

• Can be included in the pool of deductible SR&ED expenditures
• Is not allowed in calculating the total qualified SR&ED expenditures for ITC purposes

For ITC purposes, property must not only be new when the claimant acquired it, but it must not have been acquired for use, lease, or any purpose whatever by any previous owner. In other words, the new owner is not entitled to the ITC on a property if a previous owner:

• Used the property
• Acquired it for a use, but did not actually use it

However, a lessor may acquire new property which has yet to be leased. They can jointly elect with the first lessee of the property to deem the property as being directly acquired by the lessee. The property will not be considered to have been used or acquired for use or lease, for any purpose whatever before the lessee acquired the leasehold interest in the property.

The cost of a piece of equipment that is used regularly for demonstration purposes is used equipment and therefore, a prescribed expenditure. However, new equipment that is demonstrated to or tested by, a prospective purchaser would not normally be considered to have been used for a purpose. In certain cases, refurbished property can qualify for the ITC as a capital expenditure. For more information, refer to the SR&ED Capital Expenditures Policy.

10.3 Other prescribed expenditures

Expenditures made to acquire rights in, or arising out of, SR&ED are prescribed expenditures. Such expenditures are also excluded from the pool of deductible SR&ED expenditures. For more information, refer to section 4.0 of the Pool of Dedcutible SR&ED Expenditures Policy. 

SR&ED expenditures in respect of which an amount is deductible as charitable donations under section 110.1 or 118.1 of the Act are also prescribed expenditures.

10.4 Reimbursements of expenditures

An expenditure incurred by a claimant that is reimbursed by a person resident in Canada, or in certain cases by a person that is not resident in Canada, is a prescribed expenditure.

11.0 Other reductions in calculating the total qualified SR&ED expenditures for investment tax credit purposes

For the purposes of calculating the investment tax credit (ITC), a claimant cannot include any amount in respect of an expenditure incurred in the course of earning income in a particular tax year if any of the income is exempt income or is exempt from tax under Part I of the Income Tax Act. The legislation ensures that an ITC can only be generated when the income from the business, to which a particular expenditure relates, is subject to Part I tax.

Such expenditures are deducted in calculating the total qualified SR&ED expenditures for ITC purposes on the "other deductions" line of Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim.

11.1 SR&ED expenditures incurred by a corporation owned by the Crown

SR&ED expenditures incurred by a corporation owned by the Crown, (except for Prescribed Federal Crown Corporations), are excluded in calculating the ITC, since the income of such a corporation is exempt from tax under Part I of the Income Tax Act.

An example of exempt income is a situation where the statutory exemptions of the Act apply.

12.0 Purchase of goods and services from non-arm's length suppliers

There are different rules for each of the 3 types of non-arm’s length (NAL) transactions:

• Contract for SR&ED performed on behalf of the claimant

As explained in section 2.1 the definition of qualified expenditures provides that expenditures for contracts for SR&ED performed on behalf of the claimant by a NAL person (or partnership) do not qualify for investment tax credit (ITC) purposes. For purposes of Form T661 they reduce the total qualified SR&ED expenditures for ITC purposes. For more information, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

• Purchase of services (other than a contract for SR&ED)
• Purchase of goods

A claimant (performer) of SR&ED may purchase goods or services (other than a contract for SR&ED) from a person (or partnership) with whom the performer does not deal at arm's length (see section 7.1) at the time of the transaction. In such a case, the amount eligible for an ITC to the claimant (performer) is limited to the cost to the NAL person (or partnership) of providing the goods or services. Purchases from NAL suppliers of goods and services (other than a contract for SR&ED) are discussed in the following sections.

Section 12.4.1 summarizes the application of adjusted service cost and adjusted selling cost under the proxy method and traditional method.

12.1 Adjustments to total qualified SR&ED expenditures for investment tax credit purposes that result from purchases of goods and services from non-arm's length suppliers

The Income Tax Act provides rules for determining the amount of expenditures in respect of purchases of goods (property) or services from NAL suppliers. The Act deems the claimant's qualified expenditure to be the amount after adjusting for situations where a claimant purchases goods (property) or services from a person (or partnership) with whom the claimant does not deal at arm’s length.

The amount entered on the "adjustments to purchases of goods and services from non-arm's length suppliers" lines 542 and 543 of Form T661 is the difference between the amount determined in respect of the purchase of goods or services from NAL suppliers (the amount included as allowable SR&ED expenditures (see section 3.0)) and what may be included in calculating the claimant's total qualified SR&ED expenditures for ITC purposes. An exception to this rule is shared-use-equipment (SUE). If the property is SUE, no amount is entered on line 543 of Form T661, "adjustments to purchases of goods and services from non-arm's length suppliers". Instead, claimants will first apply the rules in Section 12.2 and Appendix B.2. They can then enter the expenditure for the SUE that they acquired and that was available for use after December 15, 2024, on line 504 of Form T661, "expenditures on shared-use-equipment". For more information on SUE, refer to the SR&ED Shared-Use-Equipment Policy.

12.2 Determining the amount of expenditures in respect of purchases of goods and services from non-arm's length suppliers

The amount of an expenditure a claimant incurs for a service or good (property) and the claimant's cost of the property are deemed to be:

• For a service provided to the claimant, either the expenditure the claimant incurred or the adjusted service cost (see Appendix B.1), whichever amount is less
• For a good (property) sold to the claimant, either the cost of the good (property) to the claimant otherwise determined or the adjusted selling cost (see Appendix B.2) to the supplier of the property, whichever amount is less

12.3 Gifts are not to be deemed acquired at fair market value

The Act normally deems a taxpayer to have acquired a gift at fair market value. For the purposes of determining the amount of expenditures in respect of purchases of goods or services from NAL suppliers (see section 12.2), the Act provides that gifts will not be deemed to have been acquired at fair market value.

12.3.1 Example

The Canadian corporation, O Limited, performs SR&ED in Canada. O Limited and Canadian corporation, P Limited, do not deal at arm's length. O Limited purchases a property from P Limited that was originally received by P Limited as a gift.

Tax consequences: The cost of the property to O Limited will be nil, because the adjusted selling cost (see Appendix B.2) of the property to P Limited is nil. The result is consistent with the situation where a claimant (performer) of SR&ED receives property directly as a gift.

12.4 Leasing of a property is deemed to be the rendering of a service for lease costs incurred after December 15, 2024

The following rule and the example in Section 12.4.1 apply to lease costs incurred after December 15, 2024. Lease costs incurred before December 16, 2024, do not qualify for SR&ED tax incentives.

The Act provides that the leasing of property is deemed to be the rendering of a service. It is intended that the owner of a property will base the cost of leasing the property on the normal accounting depreciation available for the property. However, this intention is not found in the Act or in the Regulations, but is only in the explanatory notes the Department of Finance Canada published. The example in Section 12.4.1 is from those notes.

12.4.1 Example

An R&D performer, O Limited, leases a machine from January 2024 to December 2025 from a NAL person, R Limited, for $1,000 per month. R Limited, which does not own the machine, leased it from another NAL person, S Limited, for $900 per month. S Limited acquired the machine from an arm's length person for $20,400. The life expectancy of the machine is 2 years. The normal depreciation method S Limited used is the straight-line method. Immediately after it acquired the machine, S Limited leased the machine to R Limited. R Limited in turn immediately leased it to O Limited.

The monthly expenditure O Limited incurred for the lease would be $850 ($20,400 prorated over 24 months). O Limited can claim only lease costs incurred after December 15, 2024. Therefore, assuming a December 31, 2024 year end and that O Limited used the machine ASA for SR&ED, O Limited would be able to claim $425 (1/2 of $850) as lease expenditures for SR&ED in its 2024 tax year.

12.5 Summary of determining non-arm's length costs

For expenditures incurred before December 16, 2024

Under the proxy method, there are no situations involving a determination of the adjusted service cost since expenditures incurred for other types of services would be claimable only under the traditional method as overhead and other expenditures.

The situations where a determination of the adjusted selling cost is required are the same under the proxy and traditional methods since they both only involve the purchase of materials.

For expenditures incurred after December 15, 2024

Under the proxy method, situations involving a determination of the adjusted service cost include only the leasing or rental of machinery or equipment from a NAL supplier. Situations may also include a lease expense that was all or substantially all (ASA) attributable to using premises or facilities other than a building (for example a structure). For more information on structures, refer to the SR&ED Capital Expenditures Policy.

When equipment is leased from a NAL supplier, the Act deems the leasing to be the rendering of a service. Expenditures incurred for other types of services can only be claimed under the traditional method as overhead and other expenditures, since they would be replaced by the prescribed proxy amount (PPA) when using the proxy method.

The situations where a determination of the adjusted selling cost is required are almost the same under the proxy and traditional methods, except for purchases of general-purpose office equipment or furniture (GPOEF).

12.5.1 Summary of the application of adjusted service cost and adjusted selling cost under the proxy and traditional methods

Non-arm’s length purchase implications of goods or services under the proxy and traditional methods.

Adjusted service cost

Proxy method

• Lease or rental of equipment for lease costs incurred after December 15, 2024
• Other services: not applicable – they are overhead and other expenditures

Traditional method

• Lease or rental of equipment for lease costs incurred after December 15, 2024
• Other services for which an expenditure may be claimed as an SR&ED overhead and other expenditures (if it is directly related and incremental). For example: maintenance, servicing equipment, clerical services

Adjusted selling cost

Proxy method:

• Purchase of materials
• SUE (after December 15, 2024)
• ASA equipment other than GPOEF (after December 15, 2024)

Traditional method:

• Purchase of materials
• SUE (after December 15, 2024)
• ASA equipment including GPOEF (after December 15, 2024)

Appendix A: Transferrable amount on Form T1146

A.1 Steps to determine the transferable amount on Form T1146

The steps required to determine the maximum amount that can be transferred from the performer (transferor) to the payer (transferee) are summarized as follows. These steps are included on Form T1146.

Step 1:  (line 100 of Form T1146): Determine the performer's SR&ED qualified expenditure pool (see section 2.3) at the end of the tax year, before the transfer.

Step 2:  (line 110 of Form T1146): Determine the notional contract payment (NCP). An NCP is a payment from the payer to the performer for SR&ED performed on the payer's behalf that would be a contract payment if the payer and the performer were dealing at arm's length. For information on the definition of contract payment, refer to Assistance and Contract Payments Policy.

An expenditure may relate to a contract for services, but the services are not performed before the end of the payer's tax year. In such a situation, the Income Tax Act provision regarding prepaid expenses will apply to treat the expenditure of the payer as not being made or incurred in the year (therefore not deductible in the tax year) but rather made or incurred in the tax year in which the services are actually performed.

Step 3:  (line 112 of Form T1146): Determine the amount in respect of the NCP that the payer has not paid to the performer on or before the day that is 180 days after the end of the performer's tax year. This requirement is similar to the requirements for unpaid expenditures (unpaid amounts), except that the 180-day period for the payment of the NCP is based on the performer's tax year-end.

Step 4:  (line 114 of Form T1146): Calculate the maximum NCP.

Step 5: Determine the qualified expenditures that relate to the NCP, which are incurred and paid by the performer on or before the day that is 180 days after the end of the tax year of the performer.

Items to consider in this determination are:

• Unpaid salary or wages and unpaid amounts that relate to the non-arm’s length (NAL) SR&ED
• SR&ED projects performed at a time when the payer and the performer were dealing at arm's length
• Qualified expenditures incurred for other SR&ED projects

Step 6: Determine if there is any amount transferred to the performer (transferor) for expenditures attributable to the SR&ED. This would be the case where the performer (transferor) has subcontracted all or a portion of the SR&ED to a NAL subcontractor, and the subcontractor transferred its qualified expenditures attributable to the SR&ED to the performer (transferor).

Step 7: Determine the qualified expenditures that relate to the NCP and that are incurred by the performer before subtracting unpaid amounts. Items to consider in this determination are:  

• SR&ED projects performed at a time when the payer and the performer were dealing at arm's length, and
• Qualified expenditures incurred for other SR&ED projects

Step 8 (line 102 on Form T1146): Calculate [A ÷ B] x the amount calculated in Step 4 (line 114 of Form T1146)

A = qualified expenditures of the performer paid within 180 days of the performer's year-end (Step 5), plus the amount transferred to the performer from a subcontractor (Step 6).

B = qualified expenditures of the performer including unpaid amounts (Step 7), plus the amount transferred to the performer from a subcontractor (Step 6).

Step 9 (line 104 on Form T1146): The amount that may be transferred is the amount up to the lesser of:

• The amount determined in Step 1
• The amount determined in Step 8

Step 10 (line 106 on Form T1146): Specify the amount for the transfer (up to the amount determined in Step 9).

The Act specifies the least of 3 amounts (see section 7.4). The 3 amounts are those determined in steps 1 and 8, plus the amount specified in the agreement (Step 10).

A.2 Examples of determining transferable amount

The following examples illustrate different aspects of the transferable amount.

Example 1: T Limited performed SR&ED on behalf of U Limited, a NAL party. Both companies have the same December 31, 2025 tax year-end. The total amount of the SR&ED contract was $125,000 of which U Limited had not paid $5,000 within 180 days of the tax year-end. The work was completed by the tax year-end of U Limited. T Limited elected the proxy method and incurred expenditures of $80,000 as follows:

T  Limited paid the salary or wages expenditures in the year. Expenditures of $10,000 for materials were still unpaid 180 days after the end of the year.

The amount that may be transferred is determined as follows:

Step 1: The SR&ED qualified expenditure pool of T Limited (performer and transferor) is $100,250 ($110,250 less $10,000 of material expenditures not paid).

Step 2: The notional contract payment (NCP) is $125,000 between U Limited and T Limited.

Step 3: The portion of the NCP that is unpaid by U Limited (payer and transferee) is $5,000.

Step 4: The portion of the NCP that is paid is $120,000. This is the maximum NCP.

Step 5: All of the qualified expenditures of T Limited relate to the NCP; this was the only SR&ED performed by T Limited. Of the total qualified expenditures of $110,250, the portion paid within 180 days of the end of the year is $100,250.

Step 6: There are no amounts transferred to T Limited. This would only happen if T Limited contracted out a portion of the work to a NAL party, and thereby became a payer to whom expenditures could be transferred.

Step 7: All of the qualified expenditures of T Limited relate to the NCP; this was the only SR&ED performed by T Limited. The total qualified expenditures is $110,250.

Step 8: ($100,250 + $0) ÷ ($110,250 + $0) × $120,000 = $109,116

Step 9: The maximum amount of expenditures that may be transferred is the lesser of the amounts from Step 1 ($100,250) and Step 8 ($109,116).

T Limited will not be able to transfer any amount in respect of the unpaid $10,000 (even if the amount is eventually paid) because the expenditure incurred by T Limited was not paid within 180 days after its tax year-end.

If T Limited transferred the maximum amount of $100, 250, the agreement to transfer between the corporations would show a transfer of current qualified expenditures of $85,250 and capital qualified expenditures of $15,000.

Example 2: V Limited performs SR&ED for a NAL corporation, W Limited, under a contract. Both W Limited and V Limited have a December 31 tax year-end. The contract amount is $10,000.

V Limited performs all the SR&ED in year 1 and incurs $9,800 of qualified expenditures. V Limited pays all its qualified expenditures in respect of the SR&ED in year 1. However, W Limited pays V Limited only $5,000 under the contract before June 30 of year 2. V Limited and W Limited file an agreement with the CRA requesting a transfer of $9,800 from V Limited to W Limited for year 1.

Since W Limited has only paid $5,000 within the stipulated time frame, the third limit (see section 7.4) is $5,000 (see Step 4 in Appendix A.1). Therefore, the amount transferred under the agreement is limited to $5,000 despite that the amount specified in the agreement is $9,800.

V Limited will not be able to transfer the remaining $4,800 paid in year 2. The NCP that is in respect of an expenditure incurred by V Limited in year 2 is $0.

Example 3: X Limited, performs SR&ED for a NAL corporation, Z Limited, under a contract. Both X Limited and Z Limited have a December 31 tax year-end. The contract price is $10,000, which Z Limited paid fully in year 1. X Limited performed all the SR&ED in year 1 and incurred $9,000 of qualified expenditures. However, X Limited only paid $3,000 of the qualified expenditures by the 180th day after December 31 of year 1. The remaining $6,000 was paid on December 31 of year 2. X Limited and Z Limited want to file an agreement with the CRA to transfer qualified expenditures from X Limited to Z Limited for year 1.

For qualified SR&ED expenditures to be transferable, the performer (X Limited) must have paid them within 180 days after the performer's tax year-end. In this case, only $3,000 of X Limited's qualified expenditures for the SR&ED performed under the contract is paid within the time limit. Accordingly, only $3,000 of the contract amount between X Limited and Z Limited is taken into account in determining the least of the 3 amounts.

Therefore, X Limited may transfer no more than $3,000 to Z Limited, despite the full payment by Z Limited.

Even though X Limited pays the remaining $6,000 at the end of year 2, X Limited will not be able to transfer any amount in respect of the $6,000 of qualified expenditures to Z Limited for any tax year.

Appendix B: Determining adjusted service cost and adjusted selling cost

The following sections provide information for determining the adjusted cost when there is a purchase of goods or services from non-arm's length suppliers. 

B.1 Adjusted service cost

The term adjusted service cost (for a supplier who renders a particular service) is defined in the Income Tax Act.

The formula for determining the adjusted service cost is:  A - B - C - D - E

A is the cost to the non-arm's length (NAL) supplier of rendering the particular service.

In the case where a NAL proprietorship or partnership is rendering the service:

• If a service is rendered directly by an individual operating a proprietorship, the cost of rendering the service is considered to be nil when only the time of the individual is required to provide the service. That is because there is no salary cost
• If an employee of the proprietorship renders the service, since the employee's time would entail salary costs, this would be the cost to render the service
• The same principle applies to partners and employees of a partnership. A partner's time would not represent a cost to the partnership, but the time of an employee of the partnership would

B is the difference between the cost to the supplier for a service rendered by a non-arm’s length (NAL) sub-supplier and the adjusted service cost to the NAL sub-supplier of rendering the service. This amount has the effect of eliminating the markup in a service contract where, for the purpose of rendering the service, the supplier incurs an expense for a service rendered by another person or partnership (sub-supplier) not dealing at arm's length with the supplier.

C is the markup of a property acquired from a NAL supplier, where the cost of the property is reflected in the cost of rendering the service.

D is the portion of the cost that relates to remuneration based on profits or a bonus paid or payable to any employee of the supplier. For comparison purposes, had the payer of the service used its own employees to render the service, only such amounts paid to specified employees would not be allowable SR&ED expenditures.

E is any government assistance or non-government assistance that can reasonably be considered to be in respect of rendering the particular service and that the supplier has received, is entitled to receive or can reasonably be expected to receive.

B.1.1 Example of adjusted service cost calculation and adjustment to qualified expenditures

The following example illustrates the adjusted service cost calculation and the adjustment to reduce qualified expenditures in the following situation.

Facts:

• AA does SR&ED and has chosen the traditional method for its claim
• AA gives BB, a NAL party, an $80,000 maintenance contract that is an allowable SR&ED overhead expenditure (purchase of services other than a contract for SR&ED (see section 12.0)
• BB incurs the following expenditures: 

  • Salaries

    $30,000

    Supplies

    $15,000

    ---

    Total

    $45,000

• BB purchased the $15,000 of supplies from CC, a NAL party
• CC had purchased the supplies from DD, an arm's length party, for $8,000
• BB and CC did not receive, are not entitled to receive, or cannot reasonably be expected to receive government assistance or non-government assistance

Calculation of the adjusted service cost to BB (supplier) is: A-B-C-D-E

• A = $45,000 (cost of service to BB)
• B = $0
• C = $7,000 [purchase of supplies from CC minus cost to CC ($15,000 - $8,000)]
• D = $0
• E = $0
• Total = $45,000 - $0 - $7,000 - $0 - $0 = $38,000

The amount that AA may include for the service as qualified SR&ED expenditures is the lessor of: 

• The service cost to AA: $45,000
• The adjusted service cost to BB (supplier): $38,000

The adjustment required to qualified SR&ED expenditures for AA on Form T661

As a result of the NAL transactions, the adjustment required to qualified SR&ED expenditures to achieve the desired result is the difference between $80,000^{Footnote 1}  and $38,000, which is $42,000.

B.2 Adjusted selling cost

The term adjusted selling cost is defined in the Act. The definition of adjusted selling cost is similar to the definition of adjusted service cost. Both definitions trace the costs incurred by NAL parties in providing a service or a property.

The adjusted selling cost of a property is determined by the formula: A - B

A is the amount that is determined based on the situation that applies:

• If the supplier purchased the property from a person (or partnership) with whom the supplier does not deal at arm’s length, A is equal to the lessor of: 
  • The cost to the supplier 
  • Adjusted selling cost to the other NAL person (or partnership)
• If the supplier purchased the property from a person (or partnership) with whom the supplier does deal at arm’s length, A is the cost to the supplier (purchase price).
• If the supplier creates, manufactures, or assembles the property, A is the cost of making the property, subject to the following rules:
  • If part of the cost of the property is attributable to another property (such as, a component) acquired from a NAL person or partnership (the seller), then that component's cost to the supplier is the lesser of the actual cost to the supplier and the adjusted selling cost to the seller.
  • If part of the cost of the property is attributable to a service rendered by a NAL person or partnership (the seller), then the cost to the supplier is the lesser of the actual cost to the supplier and the adjusted service cost to the seller.
  • The cost to the supplier should not include any remuneration based on profits or bonuses paid or payable to any employee of the supplier.

B is any government assistance or non-government assistance in respect of the property that the supplier has received, is entitled to receive, or can reasonably be expected to receive in respect of the property.

B.2.1 Example of adjusted selling cost calculation and adjustment to qualified expenditures

The following example illustrates the adjusted selling cost calculation and the adjustment to reduce qualified expenditures in the following situation:

Facts:

• EE needs to perform SR&ED on a part
• EE orders the part for $50,000 from V, a NAL party
• FF decides to build the part and incurs the following expenditures:

  • Salaries

    $20,000

    Materials

    $10,000

    Material component

    $8,000

    ---

    Total

    $38,000

• FF purchased the $8,000 material component from GG, an NAL party
• GG had purchased the same component for $5,000 from HH, an arm's length party
• FF and GG did not receive, are not entitled to receive, and cannot reasonably be expected to receive government assistance or non-government assistance

Calculation of the adjusted service cost to FF (NAL supplier) is: A-B

• A = $38,000 - $3,000 (the adjusted selling cost to Z, being $8,000 - $5,000) = $35,000
• B = $0
• The adjusted selling cost to FF = $35,000 - $0 = $35,000

The amount that EE may include for this property as qualified SR&ED expenditures is the lesser of: 

• The cost of the property for EE:  $50,000 
• The adjusted selling cost to FF:  $35,000

The adjustment required to qualified SR&ED expenditures for EE on Form T661

As a result of the NAL transaction, the adjustment required to qualified SR&ED expenditures to achieve the desired result is the difference between $50,000^{Footnote 2}  and $35,000 which is $15,000.

B.3 Must be a qualified expenditure of the ultimate purchaser

The Act provides that any cost to a supplier shall not include any amount that would not be a qualified expenditure if the amount were incurred directly by the ultimate purchaser or user of the goods or services. The following 2 examples in sections B.3.1 and B.3.2 illustrate this concept.

B.3.1 Amount claimable by ultimate purchaser: Example of 2 non-arm's length entities

Facts:

• JJ (ultimate purchaser) gives a $100,000 NAL cleaning contract (purchases of services other than a contract for SR&ED, see section 12.0) to LL (supplier)
• LL's expenses are as follows:

  • Salaries

    $70,000

    Rent

    $1,000

    Amortization

    $2,000

    Interest

    $1,500

    ---

    Total

    $74,500

The Act states that JJ can only claim costs in respect of the NAL cleaning contract to the extent that they would be qualified expenditures if JJ had incurred them directly. Rent, amortization, and interest are not qualified expenditures. Thus, JJ can only claim expenditures of $70,000 (LL's salaries) as a qualified expenditure.

As a result of the NAL transaction between JJ and LL, the adjustment required for JJ in calculating total qualified SR&ED expenditures for investment tax credit purposes to achieve the desired result ($70,000), is the difference between $74,500 and $70,000 which is $4,500.

B.3.2 Amount claimable by ultimate purchaser: Example of 3 or more non-arm's length entities

Facts:

• MM (ultimate purchaser) gives a $100,000 NAL cleaning contract to OO (supplier). OO in turn, gives an $80,000 NAL contract to RR (supplier) for the same cleaning services
• RR's expenses are as follows:

  • Salaries

    $70,000

    Rent

    $1,000

    Amortization

    $2,000

    Interest

    $1,500

    ---

    Total

    $74,500

The Act ensures that MM cannot circumvent the rule in respect of the expenditures by interposing another party between itself and the supplier of the goods or service. In this case, MM can still only claim $70,000 as a qualified expenditure.

The Act also addresses situations where the circumstances are the same as above except that OO is an arm's length party to both MM and RR, which operate with each other not at arm's length. A claimant cannot circumvent the NAL rules by including an arm's length party between a payer and a NAL performer. For more information, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy.

Appendix C: References

C.1 Legislative references

Appendix D: Revisions

D.1 Explanation of changes

The following are the explanation of changes to the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy as part of the revision of May 22, 2026:

Throughout the document, we updated the dates to reflect the current legislation, which reinstated capital acquisitions for SR&ED after December 15, 2024. Capital acquisitions for SR&ED before December 16, 2024, are ineligible for tax incentives.

Appendix A.2 example 1, has been changed to include the prescribed proxy amount in the total qualified SR&ED expenditures for determining the transferable amount.

Appendix C.1 has been revised by updating the legislative references.

The names of the corporations in examples in sections 4.1.1, 9.3.1, 9.3.2, 9.5.1, 9.5.2, 9.5.3, 12.3.1, 12.4.1 and A.2 have been renamed to "a letter Limited".

In Appendix B , we replaced single capital letters with double capital letters to identify the entities in the examples.

Other minor formatting and editing corrections were made throughout the document.