How do I claim SR&ED tax credits in Ontario?

By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

Claiming Scientific Research & Experimental Development (SR&ED) tax credits in Ontario involves a detailed federal and provincial application process that can return 35-60% of eligible R&D expenses to your business. While the program is incredibly valuable—worth billions annually to Canadian innovators—the technical documentation requirements and CRA scrutiny mean many businesses leave money on the table or face claim denials.

Here’s exactly how to claim SR&ED tax credits successfully in Ontario, from eligibility assessment through to receiving your refund.

Understanding SR&ED Eligibility

SR&ED credits are available for work that meets three criteria:

1. Scientific or technological advancement: Your project must seek to achieve a technological advancement or overcome a scientific/technological uncertainty. Routine engineering, quality control, market research, and cosmetic improvements don’t qualify.

2. Systematic investigation: You must follow a structured hypothesis-test-analyze approach. Trial-and-error without documentation or one-off custom projects for clients typically don’t meet this standard.

3. Experimental development: The work must involve experimentation to resolve technological uncertainty. This includes software development, prototype engineering, materials science, process optimization, and product innovation.

Common qualifying activities in Ontario:

• Software algorithm development and AI/machine learning
• New product design and prototyping
• Manufacturing process improvements
• Chemical and materials formulation
• Automation and robotics development
• Environmental technology and clean energy
• Medical device and pharmaceutical development

Our AI advisory services often qualify for SR&ED credits, particularly when developing patent-pending governance frameworks and novel algorithmic approaches.

Eligible SR&ED Expenses

You can claim:

Salaries and wages (typically 55-65% of total claims): Direct labor for employees performing SR&ED work, including:

• Engineers, scientists, and developers
• Technicians and technologists supporting R&D
• Managers directly supervising SR&ED activities (typically limited to 10-20% of their time)

Contractors (subcontractors and third-party R&D):

• Canadian contractors: 80% of contract amount is eligible
• Foreign contractors: Not eligible (major planning consideration)

Materials consumed or transformed: Prototypes, raw materials, test samples—consumed means depleted, not purchased and retained as equipment.

Overhead (proxy method): You can claim an additional 55% of eligible salaries as overhead without detailed tracking—this covers facility costs, utilities, equipment depreciation, and administrative support.

Or Traditional Method: Track actual overhead expenses (rent, utilities, equipment depreciation, etc.) allocated to SR&ED. Most small to mid-size businesses use the proxy method for simplicity.

Understanding what records to keep for CRA is critical, as SR&ED claims face higher scrutiny than standard tax filings.

Federal SR&ED Credits

The federal Investment Tax Credit (ITC) provides:

Canadian-Controlled Private Corporations (CCPCs):

• 35% refundable credit on the first $3 million of qualifying expenditures
• 15% non-refundable credit on expenditures above $3 million
• Refundable means cash refund even if you have no tax owing
• The $3M limit is reduced dollar-for-dollar when prior-year taxable income exceeds $500,000 or taxable capital exceeds $10 million

Other corporations and individuals:

• 15% non-refundable credit (reduces taxes payable, no cash refund)

The federal program is administered by the CRA and claimed on your T2 corporate return (Schedule T661).

Ontario SR&ED Credits

Ontario provides additional provincial credits on top of federal:

Ontario Innovation Tax Credit (OITC):

• 8% refundable credit on eligible Ontario SR&ED expenditures
• Available to CCPCs with permanent establishment in Ontario
• Maximum $4 million in qualifying expenditures per year

Ontario Business-Research Institute Tax Credit (OBRITC):

• 20% refundable credit for payments to eligible Ontario research institutes
• Encourages collaboration with universities and research institutions

Combined federal and provincial credits can reach 43% for Ontario CCPCs performing R&D in-house, or up to 55% when partnering with eligible research institutes.

If you’re considering incorporating your business, SR&ED eligibility is a significant factor favoring CCPC status.

The SR&ED Claim Process: Step by Step

Step 1: Identify eligible projects (ongoing during the year)

Don’t wait until year-end to assess SR&ED eligibility. Implement systems to:

• Track time spent on R&D vs. routine work
• Document technological uncertainties and hypotheses
• Record experimental approaches and results
• Maintain detailed project logs and technical notebooks

Our fractional CFO services help Mississauga and GTA businesses implement financial controls that capture SR&ED-eligible activities in real-time.

Step 2: Gather supporting documentation

The CRA requires substantial technical and financial documentation:

Technical documentation:

• Detailed project descriptions explaining the technological advancement sought
• Identification of scientific/technological uncertainties
• Description of systematic investigation and experimentation
• Results, iterations, and learnings (including failures)
• Contemporaneous records (time tracking, lab notebooks, design documents)

Financial documentation:

• Detailed time tracking for all employees claiming SR&ED labor
• Contractor agreements and invoices
• Materials purchase receipts and consumption tracking
• General ledger reconciliation to SR&ED claims

Step 3: Complete Form T661

Form T661 (SR&ED Expenditures Claim) is the core technical and financial filing. It includes:

• Part 1: Claim preparer information
• Part 2: Total SR&ED expenditures (line-by-line financial summary)
• Part 3: Project descriptions (detailed technical narratives for each project)
• Part 4: Expenditures by project
• Part 5: Calculation of allowable expenditures and ITCs

Critical: Project descriptions must clearly articulate technological uncertainties and systematic investigation. Generic descriptions like “we developed a new app” almost always fail. You must explain what technological challenge existed, why existing solutions were inadequate, and how you systematically experimented to overcome the uncertainty.

Step 4: File with your T2 corporate return

T661 must be filed within 18 months of your corporate tax year-end. Missing this deadline forfeits your entire claim for that year—the CRA has no discretion to extend.

File Form T661 along with:

• Schedule T2SCH31 (Investment Tax Credit – Corporations)
• Supporting project documentation
• Financial worksheets and time tracking summaries

Step 5: CRA review process

The CRA reviews SR&ED claims through:

Financial review: Verification that claimed amounts match books and records, and that expenses are properly classified.

Technical review: CRA scientific advisors assess whether projects meet SR&ED criteria. They may request additional documentation, conduct phone or site interviews, or deny projects that don’t demonstrate technological advancement.

First-time claimant reviews: Expect extra scrutiny on your first claim. The CRA typically conducts more detailed reviews to establish your understanding of SR&ED criteria.

Reviews can take 6-24 months. The CRA may request additional information, and your response time affects processing speed.

Step 6: Receive your refund

Once approved, refundable credits are paid via direct deposit or cheque. Non-refundable credits reduce your corporate taxes payable and can be carried back three years or forward twenty years.

Common SR&ED Claim Mistakes

1. Poor or missing documentation: Reconstructing projects from memory months later rarely satisfies CRA requirements. Document contemporaneously.

2. Including ineligible routine work: “We built a website” isn’t SR&ED unless you solved a novel technological problem. Custom work using known technologies doesn’t qualify.

3. Overclaiming eligible time: Claiming 100% of developer time when they also perform routine maintenance, client support, and project management invites denial. Be realistic and supportable.

4. Generic project descriptions: CRA reviewers are scientists and engineers. Vague descriptions like “improved performance” without quantifying the technological barrier fail.

5. Mixing SR&ED and capital expenditures: Equipment purchases are generally not SR&ED-eligible (though lease costs may be under traditional method, and equipment usage is covered under proxy method overhead).

6. Missing the 18-month deadline: Absolutely fatal. No extensions, no relief, no claim.

Understanding what triggers a CRA audit helps you appreciate the level of scrutiny SR&ED claims receive.

Should You Use an SR&ED Consultant?

Many businesses use specialized SR&ED consultants who:

• Identify eligible projects and activities
• Prepare technical project descriptions
• Quantify and document eligible expenditures
• Represent you during CRA reviews
• Charge on contingency (typically 15-25% of credits recovered)

Pros: Expertise in CRA expectations, higher claim amounts, reduced administrative burden, audit defense.

Cons: Cost (though contingency means you only pay if successful), potential over-claiming by aggressive consultants, loss of direct control.

At Insight Accounting CPA in Toronto, we provide comprehensive SR&ED services including:

• Eligibility assessment and project scoping
• Financial quantification and documentation
• T661 preparation and filing
• CRA liaison and representation
• Integration with overall corporate tax planning strategy

Our approach balances maximizing legitimate claims with defensibility during CRA review—we’ve successfully represented dozens of Ontario technology, manufacturing, and innovation businesses through the SR&ED process.

Ready to claim SR&ED credits for your Ontario business? Call (905) 270-1873 or start here.

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Frequently Asked Questions

Can I claim SR&ED for failed projects or abandoned research?

Absolutely. SR&ED credits are based on the process of systematic investigation, not successful outcomes. Failed experiments that followed scientific method and documented learnings are fully eligible. In fact, demonstrating that you explored multiple approaches (including failures) strengthens your claim by proving systematic investigation.

How far back can I claim SR&ED credits I didn’t know about?

You can amend previous tax returns to claim SR&ED within three years of the original return filing deadline (not the year-end—the deadline). For example, a corporation with a December 31, 2023 year-end had a T2 deadline of June 30, 2024. They can amend to add SR&ED until June 30, 2027. However, retroactive claims require robust contemporaneous documentation, which most businesses lack if they weren’t tracking SR&ED in real-time.

Do I need a patent or published research to qualify for SR&ED?

No. SR&ED credits are available for proprietary, unpublished R&D that provides competitive advantage to your specific business. You don’t need to patent inventions, publish papers, or share results publicly. In fact, most SR&ED claims involve confidential business R&D. What matters is technological advancement and systematic investigation, not public disclosure.

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Insight Accounting CPA specializes in SR&ED tax credit claims for Ontario businesses in technology, manufacturing, and innovation sectors. Our team serves Mississauga, Toronto, and the Greater Toronto Area with expert corporate tax planning, bookkeeping, and AI-powered advisory services—many of which qualify for SR&ED credits themselves through our patent-pending governance frameworks.

Maximize your R&D tax credits: (905) 270-1873 or get started.