If you are a Canadian business paying for custom software, an AI agent or a tricky integration, there is a federal program you should know about. The Scientific Research and Experimental Development program, usually called SR&ED, gives tax credits for research and development work done in Canada. And it does not only cover work by your own staff. It can also cover work you pay a contractor to do on your behalf.
It will not make a project free. Most routine development does not qualify at all. But when part of a build is genuinely experimental, SR&ED can bring a meaningful slice of that cost back to you, often as cash.
Here is how it works, in plain language. We are not tax advisors, so treat this as a starting point for a conversation with your accountant or an SR&ED specialist, not as advice on your own claim.
What SR&ED actually pays for
The Canada Revenue Agency (CRA) sets two tests. To be eligible, the work must be done in Canada and meet both:
- The "why". It is done to achieve a scientific or technological advancement. That means trying to generate new knowledge because it is uncertain whether, or how, a result can be achieved with what is already known.
- The "how". It is a systematic investigation: defining the problem, forming a hypothesis, testing it by experiment or analysis, and drawing conclusions from the results.
Two details surprise most owners:
- You do not have to succeed. If the work shows that an approach cannot work, that can still count as new knowledge.
- Size and complexity do not count on their own. A big, complicated system is not automatically SR&ED. The question is whether the team hit a real technological unknown and worked through it systematically.
What usually does not qualify
Being honest about this saves you from a painful review later. The following are usually not SR&ED:
- Setting up or configuring off-the-shelf software, like a standard CRM rollout
- Connecting two systems using their documented APIs in the usual way
- Building screens, forms and reports with well-known tools
- Fixing bugs where the fix is known
- Work where the only uncertainty is commercial, like whether customers will use it
That covers a lot of what any software firm does, including us. Most of a typical portal or integration project is routine engineering, and that is fine. It just is not SR&ED.
Where custom work can qualify
The eligible part of a project is usually narrower: the specific problem nobody knew how to solve. In the kind of work we do, that might look like:
- Getting an AI agent to read messy, inconsistent documents reliably enough to be trusted, where off-the-shelf approaches failed and the team had to test new methods
- Matching and reconciling records between systems with no shared identifiers, where known techniques did not hold up
- Processing live data from connected equipment at a scale or reliability that available approaches could not deliver
- Making two systems behave as one when their designs conflict in ways no documented method resolves
Often only part of a project is eligible. That is normal, and claims are commonly built around that part, along with the support work directly needed for it.
How contractor invoices are treated
This is the part most owners have not heard. If you hire an arm's-length contractor to carry out SR&ED work in Canada on your behalf, you, the client, can claim it. Under the CRA's contract expenditures policy, it is up to you to show that the work was SR&ED, that it was done in Canada and that it relates to your business.
There is a haircut. Only 80% of what you pay an arm's-length contractor for that SR&ED work counts. The CRA takes the rest off to account for the contractor's profit.
For a Canadian-controlled private corporation, the federal credit on qualifying expenditures is generally 35% and refundable, on up to $6 million of qualifying spending a year. Larger companies earn a lower, non-refundable rate. Ontario also has its own R&D tax credits on top of the federal one. Ask your accountant for the current Ontario rates, because they are reviewed regularly.
A simple illustration, not a promise. Say you pay $100,000 for a project, and $60,000 of it is work an SR&ED specialist agrees is eligible:
| Step | Amount |
|---|---|
| Eligible part of the contract | $60,000 |
| 80% that counts for the credit | $48,000 |
| Federal credit at 35% (if you qualify for the enhanced rate) | $16,800 |
Provincial credits may add to that. If none of the work is eligible, the credit is zero. The numbers depend entirely on your own facts.
Conditions to know before you claim
- Your business has to be the one that claims. The client claims contract work done on its behalf, and has to show the work was SR&ED, done in Canada and related to its business.
- It has to be arm's length for the 80% rule. Different rules apply when the contractor is related to you.
- Only one party claims the same work. A contractor who is paid by you to do the work cannot also claim it as their own.
- Records matter. The CRA wants to see the uncertainty, the hypotheses, the tests and the results, ideally written down as the work happens, not rebuilt a year later.
- There is a deadline. The claim (Form T661) has to be filed within 12 months of your corporate tax return's filing due date. Miss it and the credit is gone.
- You can ask first. The CRA offers a self-assessment tool, pre-claim consultations and a pre-claim approval process, so you can get more certainty before you spend.
How to claim custom development invoices
- Before the project, talk to your accountant or an SR&ED specialist. Describe what you are building and where the unknowns are. They can tell you whether a claim is realistic.
- Write the uncertainty into the plan. In your agreement and project plan, name the technical problems that are not solved by known methods and how they will be investigated.
- Keep records as you go. Hypotheses, test results, what failed and why. Ask your contractor to keep technical notes you can hand to your advisor.
- Keep invoices clear. It helps when the experimental work can be told apart from routine work in the invoices or project reports.
- File with your tax return, on time. Your accountant or specialist prepares Form T661 and the related schedules, and claims the eligible contract payments.
Where we fit
We do not prepare SR&ED claims and we will not tell you a project qualifies. That is your advisor's call. What we do is make claims easier to support when the work genuinely has technical unknowns:
- We name the technical risks up front in the project plan
- We keep dated technical notes on what we tried, what failed and what worked
- We split routine work from experimental work in our reporting, so your advisor can see the difference
If you are planning custom software, an AI agent or a difficult integration, bring it up on our first call. We will tell you honestly whether any part of it looks experimental, so you can take it to your accountant before the work starts.
Read more from the CRA
- What work is eligible for SR&ED
- Guidelines on the eligibility of work for SR&ED tax incentives
- Contract expenditures for SR&ED performed on behalf of a claimant
- Assistance and contract payments policy (the 80% rule)
- T4088, the guide to Form T661
- SR&ED news, self-assessment tool and pre-claim approval
Rules and rates change. This post reflects the CRA's guidance as of November 2026. Always confirm the current rules with the CRA or a qualified advisor before relying on them.