Key Takeaway
A 15-person Canadian SaaS CCPC with 5 engineers at 40% qualifying time can recover roughly $149,000 in combined federal and Ontario SR&ED credits—a number that typically grows 20–30% when qualifying work is documented continuously instead of reconstructed at year-end.
Most Canadian software companies that file SR&ED claims are leaving money on the table. Not because their work doesn’t qualify, but because they’re working from a rough number someone gave them at a conference, not from an actual calculation.
The math behind an SR&ED credit isn’t complicated. This post walks through it: the rates, the eligible expenditure categories, and a worked example for a 15-person SaaS company with a realistic engineering headcount. By the end, you’ll have a defensible estimate for your own situation.
What are the SR&ED credit rates for software companies?
SR&ED credits come in two flavours depending on your company’s tax status.
Canadian-Controlled Private Corporations (CCPCs) get the most favourable treatment. A CCPC is, broadly, a private company incorporated in Canada that isn’t controlled by public companies or non-residents. Most founder-led software startups qualify.
For CCPCs with taxable income below the small business limit, the federal credit rate is 35% refundable on the first $3 million of qualifying SR&ED expenditures per year. Refundable means CRA writes you a cheque even if you have no tax owing. This is the rate that makes SR&ED worth the effort for early-stage companies.
Above the $3 million threshold, the rate drops to 15% non-refundable. The non-refundable portion can only offset taxes you owe—it won’t generate a cash refund. For most software companies under $25M ARR, the $3 million cap is rarely a constraint.
Non-CCPCs (public companies, subsidiaries of foreign corporations, companies with significant non-resident ownership) get 15% non-refundable across the board. Still meaningful, but a different financial proposition.
Provincial credits layer on top of the federal rate. Ontario offers 8–10% depending on CCPC status, British Columbia offers 10%, Quebec offers 14–30% depending on wage type. The SR&ED provincial credits guide covers the current rates by province. This post focuses on the federal calculation—the provincial layer is additive.
What expenditures qualify for SR&ED credits?
Four categories of spending qualify at the federal level.
SR&ED wages
Employee wages for time spent on qualifying SR&ED work. This is the largest category for most software companies.
Not every engineering hour qualifies. CRA distinguishes between work that constitutes “scientific research or experimental development” and routine development, maintenance, or feature work against known approaches. The percentage of each engineer’s time that qualifies is the key input. You need time tracking or a defensible allocation methodology to support whatever percentage you claim.
A company claiming 70% of total engineering payroll as SR&ED-qualifying will face scrutiny. A company claiming 30–50% with well-documented allocation methodology is on solid ground.
Wages include salary plus directly associated employer costs: CPP contributions, EI premiums, and similar. Bonuses paid for reasons unrelated to SR&ED performance don’t count.
Materials consumed
Materials used directly in SR&ED work. For pure software companies, this category is typically small or zero. It applies when engineers are consuming physical materials in experiments. Cloud compute costs consumed in running SR&ED experiments are a gray area under current CRA guidance—worth discussing with a tax advisor if it’s a significant portion of your spend.
Third-party contracts
Payments to arm’s-length third parties (contractors, vendors) for SR&ED work performed on your behalf. Only 80% of eligible contractor payments count toward your SR&ED expenditure pool. Non-arm’s-length payments have different rules and caps.
Contract SR&ED work is more complex to document than employee wages. CRA requires evidence that the work performed by the contractor met SR&ED eligibility criteria, not just that you paid someone to do technical work.
Overhead
SR&ED overhead covers costs associated with SR&ED work that aren’t wages, materials, or contracts: occupancy, utilities, management overhead, support staff.
Companies choose between two methods:
Traditional method: Calculate actual overhead costs attributable to SR&ED activities. More accurate, but significantly more administrative work.
Proxy method (55% election): Overhead is calculated as 55% of qualifying SR&ED wages. Most software companies elect this. It’s simpler, requires no separate cost tracking, and for companies whose primary SR&ED cost is engineer time, it produces a reasonable result.
The worked example below uses the proxy method.
How do you calculate SR&ED credits for a software company?
Here’s a worked example for a realistic scenario.
Company profile:
- 15 employees total
- 5 engineers (average fully-loaded salary: $120,000 including employer costs)
- CCPC status confirmed
- Active SR&ED projects involving novel approaches to data processing and algorithm development
- Qualifying time: 40% of engineering time
Step 1: Calculate qualifying SR&ED wages
5 engineers × $120,000 × 40% qualifying = $240,000 in SR&ED wages
Step 2: Calculate overhead using the proxy method
$240,000 × 55% = $132,000 in proxy overhead
Step 3: Total qualified SR&ED expenditures
$240,000 + $132,000 = $372,000
(This is well under the $3M CCPC threshold, so the full 35% refundable rate applies.)
Step 4: Calculate the federal credit
$372,000 × 35% = $130,200 federal SR&ED credit
Add an Ontario provincial credit at 8%:
$240,000 × 8% = $19,200 provincial credit (Ontario’s credit applies to wages, not total expenditures)
Total estimated credit: ~$149,400
That’s a meaningful number for a 15-person company. It’s also not the upper bound.
If the qualifying time allocation is closer to 50%, the federal credit alone grows to $162,750. Add any contractors doing SR&ED work (at 80% of their fees), and the expenditure pool grows further. The range for a company at this size, with a strong SR&ED program, runs from roughly $80,000 to $200,000+ annually in combined federal and provincial credits.
Why do most software companies under-claim SR&ED?
The calculation above assumes 40% qualifying time. That number matters more than most founders realize.
For a company doing genuine software R&D—not just feature development against known patterns, but work involving systematic investigation of technological uncertainty—40% is often conservative. CRA’s own guidance acknowledges that significant portions of software development can qualify when the underlying technical challenges meet the SR&ED eligibility criteria.
The problem is how qualifying time gets tracked. Most companies operate reactively: an accountant or consultant asks engineers at year-end to estimate how much of their time went to qualifying work. Engineers guess. The guess is conservative because engineers don’t know the specific eligibility criteria, don’t want to get their company in trouble, and weren’t thinking about SR&ED when they were doing the work.
That conservative guess becomes the number on the T661. The credit is filed. The company receives less than it was owed.
The alternative is continuous documentation: capturing qualifying work at the time it happens, flagged in the tools engineers already use. The same engineer who would estimate “maybe 25% of my time” at year-end often has records showing 38–42% when the work is tracked throughout the year.
A 10-percentage-point difference in qualifying allocation, for the example company, changes the federal credit from $130,200 to $162,750. That gap isn’t between legitimate and illegitimate claims. It’s between documented and undocumented qualifying work.
What does this calculation leave out?
The example above is a federal estimate using the proxy method. Several factors can change the actual credit.
Associated corporations. If your CCPC is associated with other CCPCs, the $3M expenditure limit is shared across the group. Complex corporate structures need to factor this in.
Taxable capital thresholds. The enhanced 35% refundable credit applies to CCPCs with taxable capital below certain thresholds. Above $10M in taxable capital, the enhanced rate phases out. Most early-stage software companies are well below this, but worth verifying.
Provincial variations. Ontario, BC, Quebec, Alberta, and other provinces each have distinct programs with their own rates, eligible expenditure rules, and caps. Some are refundable; others aren’t. The provincial calculation is worth doing separately with current rates.
Filing timing. SR&ED claims must be filed within 18 months of your corporation’s tax year-end. Missing this deadline forfeits the claim entirely. The SR&ED filing deadline guide covers the specific dates for your year-end.
T661 technical requirements. The credit calculation is the easier part of SR&ED. CRA also requires a detailed technical narrative for each qualifying project, submitted on the T661 form. A claim with accurate financial calculations but weak technical narratives is still an audit risk.
Software vs. consultants: who does the SR&ED calculation?
Traditional SR&ED consultants charge 15–30% of your total credit. On a $150,000 credit, that’s $22,500 to $45,000 in fees.
What they provide for that fee varies widely. Some consultants conduct thorough technical interviews, produce solid narratives, and deliver defensible claims. Others do a superficial reconstruction from project management tickets and produce documentation that looks complete but won’t survive a detailed review.
The SR&ED software vs. consultants comparison covers this tradeoff in more depth. The short version: consultants charge a percentage for a one-time, year-end documentation effort. Software-based approaches build documentation continuously throughout the year, with lower fees and better documentation quality.
Calculate your estimate
The example above uses specific numbers. Yours are different.
Your qualifying percentage depends on what your engineers are actually working on and how well that work is documented. Your wages depend on headcount and compensation. Your provincial credit depends on where your company is incorporated.
The SR&ED calculator at chronoinnovation.com/chrono-rd/sred-calculator lets you plug in your own numbers: headcount, salary ranges, estimated qualifying percentages, province, and CCPC status. It produces a federal and provincial credit estimate in under two minutes. Free, no account required.
If the number you get is larger than what you’ve been claiming, pay attention. The credits don’t roll over. What you don’t claim this year is gone.
Frequently asked questions about SR&ED credit calculations
How do I know if my company qualifies as a CCPC for SR&ED?
A Canadian-Controlled Private Corporation is a private company incorporated in Canada that isn’t controlled by public companies or non-residents. Most founder-led startups qualify. If you’re unsure, your accountant can confirm CCPC status based on your shareholder structure. It’s binary—either you qualify for the 35% refundable rate or you don’t.
Can I claim SR&ED credits for contractor work?
Yes, but only 80% of eligible arm’s-length contractor payments count toward your SR&ED expenditure pool. The contractor’s work must meet SR&ED eligibility criteria, and you need documentation showing what they did and why it constitutes experimental development. Non-arm’s-length contractor payments (related parties) have stricter rules.
What happens if CRA audits my SR&ED claim?
CRA reviews a significant portion of SR&ED claims, especially from first-time filers. An audit typically involves a technical review officer asking detailed questions about the qualifying projects. Strong documentation—written at the time the work was done, not reconstructed afterward—is the best protection. Companies with continuous time tracking and project documentation fare significantly better in reviews than those relying on year-end estimates.
Chrono R&D connects to your development tools, captures qualifying SR&ED work throughout the year, and produces CRA-ready documentation. Continuous capture typically recovers a higher qualifying percentage than year-end reconstruction. See how it works or get in touch if you want to talk through your situation.