Knowing what counts—and what doesn’t—is the backbone of your SR&ED financial report. Every number you enter in the Cost Worksheet has to be backed by clear, eligible work. If the link between your technical activities and your expenses isn’t solid, CRA won’t accept your claim.
Let’s take a look at the four key categories of eligible expenses – so you can understand what’s included (and flag anything that needs clarification with your accountant).
Open your SR&ED Cost Worksheet so you can make notes as you go.
Keep a running list of questions for your accountant—especially about contractors, capital purchases, or government funding.
The stronger your understanding of eligibility, the smoother the rest of your claim will be. This is where your SR&ED financial story starts—and where it becomes real.
Here are the four main categories of eligible SR&ED expenses and what CRA expects to see (or not see) in each:
1. Net Employee Labour Costs
What It Covers
Wages and salaries of employees directly engaged in SR&ED work—either performing, supervising, or supporting experimental development.
EXAMPLES
Software engineers designing new algorithms
Lab technicians running controlled tests
Project leads supervising R&D teams
POTENTIAL PITFALLS/NOTES
Claiming admin or sales staff
Forgetting to prorate time (only the SR&ED % counts)
For shareholders/related employees, salary caps and 75% claim limit apply
2. Total Contractor Labour Cost
What It Covers
Payments to third parties doing SR&ED work under your direction or control.
(Work must be done in Canada)
EXAMPLES
Specialized testing lab
R&D consultant performing prototype trials
Contract engineer coding a new machine learning model
POTENTIAL PITFALLS/NOTES
Invoices with vague “consulting” descriptions
Claiming subcontractors working outside your supervision
Keep detailed contracts and statements of work linking tasks to SR&ED
3. Total Materials Consumed or Transformed
What It Covers
Physical items used up or fundamentally changed during experimentation or prototype development.
EXAMPLES
Chemicals, metals, or polymers used in testing
Test batches of product formulations
Prototype components that can’t be reused
POTENTIAL PITFALLS/NOTES
Including reusable equipment
Mixing production materials with R&D use
Keep receipts and mark SR&ED project use clearly in records
4. Capital Expenditures
What It Covers
Equipment or assets purchased for SR&ED activities that may still have long-term value. These are tracked, but not always fully claimable.
EXAMPLES
Specialized lab equipment
3D printers for experimental prototyping
Testing rigs or sensors
POTENTIAL PITFALLS/NOTES
Discuss with your accountant—rules for capital costs are complex
Claiming general-purpose office or production assets
Some may qualify under separate tax provisions – have a bigger tax planning discussion (see below)
Official Guidance from CRA
SR&ED eligible work falls into several categories (basic & applied research, experimental development, and some types of support work). They also provide guidance on what type of work is not eligible.
