Accounting for Software Development Costs Under ASPE 3064: Capitalization vs. Expense for Canadian Businesses

Software development costs receive preferential tax treatment under Canadian law — the rules differ depending on whether you are buying off-the-shelf software, building internally, or doing qualifying R&D. Getting the classification right determines whether you expense immediately, capitalize and amortize, or claim a 35% refundable SR&ED credit.

What software development costs can be capitalized under ASPE 3064?

Under ASPE 3064, only costs in the application development stage can be capitalized: direct coding, testing, and installation costs incurred after management has authorized and committed to the project. Costs in the preliminary project stage (vendor selection, feasibility studies) and the post-implementation stage (training, routine maintenance) must be expensed immediately. Capitalized costs are amortized over the software’s estimated useful life — typically 3–5 years.

How is purchased software treated under the Income Tax Act?

Off-the-shelf software falls under CCA Class 12, providing a 100% deduction in the year of acquisition with no half-year rule. Custom-developed software acquired from a third party is generally also Class 12. If software is bundled with hardware as a single purchase, CRA may characterize the entire purchase under a different class — get the vendor to itemize software separately on the invoice.

Do SR&ED tax credits apply to software development?

Yes — software development that resolves a technological uncertainty qualifies for SR&ED. The key test: did your team face a technological problem that existing knowledge could not resolve? Qualifying software SR&ED earns a 35% refundable federal ITC for CCPCs (on first $3M of qualified expenditures), plus an 8% Ontario OITC. Many software companies under-claim because they misidentify routine coding as non-qualifying.

How should SaaS subscription revenue be recognized under ASPE?

SaaS revenues are recognized over the subscription term as the service is delivered — straight-line ratable recognition in most cases. Upfront setup or onboarding fees integral to the subscription are deferred and recognized over the expected customer relationship period. Advance annual payments create a deferred revenue liability until earned month by month.

What is the tax treatment of software development costs for employees vs. contractors?

Employees’ salaries allocated to SR&ED are 100% eligible. Arm’s length contractors are eligible at 80% of payments made. Non-arm’s length contractors are eligible at the lower of 80% of payments or the contractor’s actual SR&ED expenditures. This distinction significantly affects the SR&ED claim for software companies relying on offshore or related-party development teams.

Should a software company use the traditional or proxy method for SR&ED overhead?

The proxy method calculates SR&ED overhead as 55% of direct labour — simpler, no detailed allocation required. The traditional method allows claiming actual overhead costs directly attributable to SR&ED — potentially higher than 55%, but requires thorough documentation. Most early-stage companies use the proxy method; the traditional method is worth modeling if overhead is disproportionately high relative to labour.

Reviewed by: Bader A. Chowdry, CPA CA LPA — Insight Accounting CPA Professional Corporation, Mississauga, Ontario. Last reviewed: June 6, 2026.