SR&ED Claim With Your T2: Filing It Yourself and Refund Timing

Is SR&ED worth claiming for a software startup?

Often, yes. Most Canadian-controlled private corporations (CCPCs) earn a 35% federal investment tax credit on qualified SR&ED spending up to $6 million a year, and 100% of the credit on current costs comes back in cash even when the startup has no tax to pay (CRA). The claim pays only for work that meets the CRA's test, not for all development.

The claim stops being simple when:

• the corporation may not be a CCPC, for example a Canadian subsidiary of a US parent, or after foreign investors join;
• founders are paid by dividend, or the team includes contractors outside Canada;
• the startup also received IRAP or other government funding;
• the claim year is close to its 18-month deadline, which cannot be extended.

Gather before you start: payroll by person, time records by project, contractor invoices and contracts, repository history and design notes, and the T2 for the year.

Which software development work qualifies for SR&ED?

Software work qualifies when the team could not know, from existing technology, whether or how a technical result could be achieved, and worked through that uncertainty by testing ideas in a planned way. The CRA's test has three parts: an advancement, uncertainty and a systematic investigation (CRA).

A systematic investigation means defining the problem, forming a hypothesis, testing it by experiment or analysis, and drawing conclusions. Success does not matter: work that fails can still qualify (CRA guidelines). Working systematically is not enough by itself, and cost targets alone do not create uncertainty.

A startup unsure about a planned project can apply for the CRA's optional pre-claim approval, ideally before the work starts, if its gross business income is under $25 million (CRA). A claim is still required afterwards.

How much is the refundable SR&ED tax credit for a CCPC?

Most CCPCs get 35% on qualified spending up to the expenditure limit, fully refundable on current costs and 40% refundable on capital costs. Other corporations get 15%, non-refundable, except eligible Canadian public corporations, which now also get the enhanced rate (CRA).

The cash refund on current costs up to the limit does not depend on profit: it applies to a CCPC whether or not its prior-year taxable income kept it a qualifying corporation (section 127.1). A credit not used or refunded can be carried back 3 years or forward 20 years.

The expenditure limit starts shrinking once the group's taxable capital passes $15 million; see SR&ED and small business limits after a large round. Losing CCPC status generally ends the refundable credit; see losing CCPC status to foreign investors. Whether IRAP cuts the claim, and whether the refund is taxable, is covered in IRAP and other government funding.

Which costs count: salaries, contractors, materials, overhead, equipment?

Salaries of employees directly doing SR&ED in Canada are the core of a software claim, counted by the share of time spent on SR&ED. Wages must be paid by year-end or within 180 days after it (CRA).

The proxy amount earns the credit but is not a deduction, and it cannot exceed the corporation's eligible overhead-type expenses for the year. Founders paid by dividend add nothing to the salary base; see founder salary in a startup claiming SR&ED.

Can you file an SR&ED claim yourself with the T2?

Yes. The CRA publishes steps to "prepare your claim yourself", and no law requires a consultant (CRA). The claim is Form T661 plus Schedule 31, filed with the original T2 or an amended T2 for the year (CRA).

The claim has two halves:

1. The technical part. T661 project descriptions on lines 242, 244 and 246, limited to 350, 700 and 350 words (T4088). These come from the people who did the work; the CRA suggests involving senior technical and financial staff.
2. The cost part. The T661 expenditure lines, the proxy calculation, Schedule 31 and the T2 itself, built from payroll and the books.

The corporation is responsible for everything in the claim, whoever prepares it (CRA). For T2 deadlines and filing basics, see filing your corporate return.

What do you disclose if a consultant takes a percentage?

Part 9 of Form T661 asks whether a paid claim preparer helped, who they are, how they bill (contingency percentage, hourly or flat fee), the rate and the total fee paid or expected (T4088). If no one was paid to help, tick box 2 instead. Employees preparing it as part of their job are not claim preparers.

Missing or false preparer information carries a $1,000 penalty per claim, for which the corporation and the preparer are jointly liable (section 162). Read the fee agreement before signing: what the percentage applies to, whether it is due on the claim or on the refund, and who answers a CRA review.

What is the SR&ED claim filing deadline, and is a late claim accepted?

The SR&ED reporting deadline is 12 months after the T2 due date, which for most corporations is 18 months after year-end (section 37; CRA). A late claim is not accepted: the spending is treated as not SR&ED and the credit for that year is lost (section 127).

The T2 is due six months after year-end. Missing information also falls under the deadline: the CRA accepts nothing after it, and the related costs and credit are lost (CRA). A startup that skipped a year can still add the claim by amended T2 if that year's deadline has not passed.

How long does an SR&ED refund take?

For refundable claims, the CRA's service standard is 60 days if the claim is accepted as filed, and 90 or 180 days if it is selected for review (CRA). The clock starts when the CRA has both the complete claim and the T2.

What slows it: a review, a CRA request for missing details, a project without pre-claim approval, or a T2 not yet filed, since processing waits for the return.

What records does the CRA ask for in a review?

A review asks the corporation to show what work was done, who did it, when, and how each cost was calculated, sometimes in an on-site or virtual meeting (CRA). Records kept during the work carry more weight than ones rebuilt later.

Do provinces add their own credit to SR&ED?

Yes, several provinces add a credit on top of the federal one, each with its own rules. Ontario and British Columbia credits are claimed with the T2; Quebec runs its own research credits through Revenu Québec.

A provincial credit counts as government assistance, which can reduce the federal claim (section 127). Check each province where the work was done.

Example

These examples are illustrative and use Canadian dollars.

A SaaS team in Ontario

A CCPC pays its developers C$400,000. Time records show 75% of their time on eligible work: C$300,000. The proxy amount adds 55%, C$165,000, assuming its other expenses are large enough that the proxy cap does not apply, for qualified spending of C$465,000. At 35%, the federal credit is about C$162,750, all refundable because the corporation is a CCPC within the expenditure limit. Any provincial credit is extra and reduces this figure.

The deadline for a December year-end

A corporation's year ends December 31, 2025. Its T2 is due June 30, 2026. The SR&ED claim for that year must reach the CRA by June 30, 2027. On July 1, 2027, the credit for that year is gone.

A contingency fee

A consultant charges 25% of a C$160,000 credit: C$40,000. The corporation reports the consultant, the contingency billing code, the 25% rate and the C$40,000 fee in Part 9 of the T661.

Different for you?

• IRAP or other grants paid for some of the work: see IRAP and other government funding.
• Founders are paid by dividend: see founder salary in a startup claiming SR&ED.
• You raised a large round: see SR&ED and small business limits after a large round.
• US investors or a US parent: see losing CCPC status to foreign investors.
• The company is a US corporation: see the research credit against payroll tax.
• Missed years, a deadline close, or the T2 and Schedule 31 to prepare: get corporate tax help.