There is no single SR&ED rate. The credit is not a percentage of what you spent. It is a percentage of a separately calculated figure. Two Ontario credits sit on top of the federal credit and change it.
Every rate here applies to a corporate tax year that begins in 2026. The basic federal rate is 15%. Canadian-controlled private corporations earn an enhanced 35% up to their expenditure limit, for tax years beginning after 15 December 2024. Ontario adds an 8% refundable innovation tax credit and a 3.5% non-refundable research and development credit. Both Ontario rates apply to taxation years commencing after 31 May 2016.
Those four rates do not add together. The SR&ED tax credit calculation runs in a fixed order, and every step changes the one below it. So how you assemble the inputs during SR&ED claim preparation moves the number as much as the spending does.
Federal SR&ED Rates and Limits for a Tax Year Beginning in 2026
Two federal rates apply, with one ceiling between them. The ceiling itself moves with the size of the company. Most owner-managed companies costing out a claim are Canadian-controlled private corporations, so the enhanced rate is the one that will apply.
Who Earns 35% and Who Earns 15%
The Canada Revenue Agency applies the enhanced 35% rate to Canadian-controlled private corporations, on qualified expenditures up to the expenditure limit. That rate is for tax years beginning after 15 December 2024. Eligible Canadian public corporations also reach it for those years. The test is Canadian residence, trading on a designated stock exchange, and no non-resident control.
The basic rate is 15% for a tax year beginning in 2026. It covers corporations outside the enhanced rate, and also sole proprietors, partners and trust beneficiaries. The limit is $6 million of qualified expenditures for tax years beginning after 15 December 2024. Anything above it earns 15%.
What Shrinks the $6 Million Limit
The limit grinds down on the previous year’s taxable capital employed in Canada. It starts to reduce at $15 million and reaches nil at $75 million. That band applies to tax years beginning after 15 December 2024.
So taxable capital sets the federal limit. Prior-year taxable income still decides two other things: whether the credit comes back as cash, and the size of the Ontario innovation tax credit limit.
A private company may instead elect a revenue-based limit. It reduces as average annual revenue over the previous three years rises across the same band. The limit belongs to an associated group, not to each company in it. The group files an allocation agreement on Schedule T2SCH49. Without that agreement, the limit is nil, which quietly zeroes real claims.
What Goes Into the Claim, and at What Percentage
From here on, the work itself is assumed to qualify. If that is still your open question, settle whether your work qualifies as SR&ED first, then come back to the arithmetic.
Not every input counts at full value. The haircuts are where a claim quietly loses money. These percentages apply to a tax year beginning in 2026.
| Input | What Counts | What Reaches the Credit Base |
| Salaries and wages | Employees directly engaged in the work in Canada, including vacation, statutory holiday and sick pay and taxable benefits with a real cost. Employer CPP, EI and insurance premiums are excluded. | 100% |
| Specified employees (owners and 10% shareholders) | Salary claimable for the work, excluding bonuses and profit-based pay. | Capped at 5 times the 2026 maximum pensionable earnings of $74,600, so $373,000 for 2026 |
| Overhead, proxy method | A formula amount instead of tracked overhead, based on the salaries of employees directly engaged in the work. | 55% of that salary base since 2014, and it cannot take the claim past what the business actually spent |
| Overhead, traditional method | Overhead tracked line by line, each amount directly related to the work and incremental to it. | Actual qualifying amounts, which also enter the deduction pool |
| Materials | Materials consumed, and materials transformed into something that still has value. | 100% of laid-down cost, in the year consumed or transformed |
| Arm’s-length SR&ED contracts | Work performed on the company’s behalf by an unrelated contractor, with any capital element stripped out. | 80%, for expenditures after 2012 |
| Non-arm’s-length SR&ED contracts | Work performed by a related party. Still an allowable deductible expenditure. | No credit, though the deduction stands |
| Third-party payments | Payments to approved recipients such as Canadian universities, colleges and approved research institutes, where the company can exploit the results. | 80%, for payments after 2012 |
| Capital equipment | Depreciable property acquired after 15 December 2024, used all or substantially all of its operating time for the work. Land, most buildings and inventory are excluded. | In full where it meets that test, or one quarter of capital cost per term as shared-use equipment where use is primarily for the work |
| Government and non-government assistance | Grants, subsidies, forgivable loans, contributions, and both Ontario credits. | Subtracted from the base, dollar for dollar |
Two Pools, Not One
The money you spend goes into a pool of deductible SR&ED expenditures. That pool reduces taxable income now or in a later year. The credit percentage is applied to something else: a differently calculated figure called the qualified expenditure pool. The two are not the same number.
Two things explain the gap. The proxy overhead amount sits in the credit figure and is never deducted. Contract payments go into the deduction at full value, and only part of them reaches the credit. That is why 35% of what you spent is the wrong arithmetic.
Salaries and Materials: Full Value, With Caps
Salaries and wages of employees doing the work count in full. Materials count at laid-down cost, in the year they are used. Employer-paid CPP, EI and insurance premiums are not salary for this purpose. They can still come in as overhead under the traditional method.
Here is the catch for owner-managers. An owner or a 10% shareholder is a specified employee. The SR&ED salary claimed for that person is capped at 5 times the year’s maximum pensionable earnings. For 2026 that is 5 times $74,600, or $373,000.
Contract Work: 80% at Arm’s Length, No Credit When Related
An arm’s-length contractor who performed the work brings 80% of the payment into the credit. That has been the figure for expenditures after 2012. A contractor you do not deal with at arm’s length is different: the payment stays deductible, and it earns no credit at all.
Timing bites too. A current expenditure still unpaid 180 days after year end drops out of that year’s claim.
Proxy or Traditional: Two Ways to Claim Overhead
Under the proxy method you take 55% of the salary base, the figure since 2014. You track no overhead at all. That base is the salaries of employees directly engaged in the work. It excludes bonuses, profit-based pay, taxable benefits and prior-year unpaid amounts. Contractor payments are outside it.
Specified employees come in differently. Multiply that person’s salary by the share of time spent on the work, to a maximum of 75%. Then cap the result at 2.5 times the year’s maximum pensionable earnings, which is 2.5 times $74,600, or $186,500, for 2026.
Here is the catch. The proxy amount cannot carry the claim past what the business actually spent in the year. That bites hardest on a company whose spending is almost all SR&ED salary.
The traditional method puts overhead in line by line. Each amount must be directly related to the work and incremental to it, meaning it would not have been incurred without the work. Most claimants take the proxy, because the formula usually beats what they could substantiate. The traditional method earns its keep with heavy real overhead relative to salary. It also earns it where the spending is mostly supervision and support rather than hands-on work.
How the Ontario Credits Stack, and Why the Rates Do Not Add
One claim feeds three credits. Ontario applies its rates to the Ontario share of the expenditures your federal claim is built on. Change one input and all three numbers move.
Both Ontario credits need a permanent establishment in Ontario and SR&ED carried on in Ontario. Both also ride on the federal claim, so Form T661 has to be filed. The innovation credit tests that permanent establishment at the corporate level for the year, and it also requires each expenditure to be attributable to it.
The 8% Ontario Innovation Tax Credit
The rate is 8% and the credit is refundable, for taxation years commencing after 31 May 2016. It applies to the lesser of your qualified Ontario expenditures and your annual expenditure limit of $3 million, for those same years. This credit’s base is not reduced by the other two credits.
The Ontario limit phases out on two measures, not one. The first is prior-year federal taxable income, from $500,000 to nil at $800,000. The second is prior-year taxable capital, from $25 million to nil at $50 million, counting associated corporations.
The federal limit moves on taxable capital alone. So a profitable Ontario company can hold its full federal limit and still lose this credit outright.
The 3.5% Ontario Research and Development Tax Credit
The rate is 3.5% and the credit is non-refundable, for taxation years commencing after 31 May 2016. It reduces Ontario corporate income tax payable. Unused amounts carry back 3 years and forward 20 years.
This credit’s base is not the innovation credit’s base. The innovation credit counts as government assistance here, so the eligible expenditures are the Ontario figure net of it. So have both Ontario schedules prepared from the same set of figures rather than separately.
This credit lowers tax rather than paying cash, so a loss-year company carries it forward. It still counts against the federal base in the meantime. The benefit and the cost can land in different years, which is worth modelling before you choose a method.
Why Grants and Ontario Credits Shrink the Federal Base
Government assistance reduces the federal qualified expenditure figure dollar for dollar. That covers grants, subsidies, forgivable loans and contributions. It also covers both Ontario credits, which count as government assistance federally.
Assistance counts when it is received, receivable, or reasonably expected. That is why the Ontario credits hit the same year’s federal base rather than next year’s.
So the rates do not add. 35 plus 8 plus 3.5 is not the answer. Any combined figure comes out of the chain rather than out of addition. If you took federal funding, the same subtraction applies, and how government funding changes an SR&ED claim is worth settling before you size this step.
An SR&ED Tax Credit Calculation, Step by Step
Here is the chain on a single set of numbers. Change any input and every line below it moves.
The company is an Ontario CCPC with a tax year of 1 January to 31 December 2026. It has no associated corporations, and all of its work is carried on in Ontario. It uses the proxy method, took no grants, bought no capital, and has no specified employees. All of its contract work is at arm’s length and was paid within 180 days of year end.
Prior-year taxable capital is $2,000,000 and taxable income $120,000. Both the federal and Ontario limits therefore survive in full. Total business spending for the year comfortably exceeds the SR&ED figures, so the proxy ceiling does not bind.
Your own figures will differ, and what follows is the method rather than the answer. Real files run the same chain. One of them, a retail products manufacturer’s claim, began with a company that did not know its work qualified at all.
Step 1: The Inputs and the Two Pools
The inputs are $400,000 of salaries for employees directly engaged in the work, $100,000 to an arm’s-length Canadian contractor, and $25,000 of materials. Actual spending is $525,000. The deduction pool is those three amounts added up, $525,000, with no proxy amount in it.
The credit base is built differently. Salaries and materials go in at full value. The contract goes in at 80% of $100,000, which is $80,000. The proxy amount goes in at 55% of the $400,000 salary base, which is $220,000. The total is $725,000.
The $200,000 gap has two causes and only two. The proxy amount sits only in the credit figure. The contract haircut applies only there.
Step 2: Each Ontario Credit on Its Own Base
Each Ontario credit is worked out on its own figure. The innovation credit applies to your full Ontario SR&ED figure, which in this example is the $725,000 from Step 1, because no outside assistance came in. 8% of $725,000 is $58,000, and that is refundable cash. The figure is well under the $3 million Ontario limit, and this credit’s base is not reduced by the other two credits.
The research and development credit applies to what is left after the innovation credit comes off. $725,000 less $58,000 leaves $667,000. 3.5% of $667,000 is $23,345, which is non-refundable.
Step 3: The Federal Credit and the Cash Position
Both Ontario credits are government assistance federally, so both come off the federal base. $725,000 less $58,000 less $23,345 leaves $643,655. That is far below the $6 million expenditure limit for a tax year beginning in 2026, so all of it earns the enhanced rate. 35% of $643,655 is $225,279.25.
All of that credit sits on current expenditures and the proxy amount, and this corporation is a qualifying corporation. So the unclaimed balance is fully refundable. Any part applied against tax reduces the refund by the same amount, because the credit is used before it is refunded.
Cash for the year is up to $225,279.25 federally plus $58,000 from Ontario. That is up to $283,279.25 on $525,000 of actual SR&ED spending. The $23,345 research and development credit is not cash in a year with no Ontario tax payable, and it carries forward.
On this set of numbers the three credits total $306,624.25. Of that, $283,279.25 is cash in the year.
When There Is No Tax to Pay: What Arrives as Cash
These thresholds and percentages are for a tax year beginning in 2026. For a pre-revenue company, refundability rather than the headline rate decides whether the credit is money this year. There is also a timing choice most owners never consider. You can deduct the whole pool now, or carry part of it forward to a year with income to shelter.
What a Qualifying CCPC Actually Receives
A qualifying corporation is a CCPC whose previous-year taxable income was no more than its qualifying income limit. For a company with taxable capital of $15 million or less, that limit is $500,000.
For such a company, the enhanced-rate credit on current expenditures and on the proxy amount is 100% refundable. It comes back as cash even with no tax payable. Here is the catch: the credit on capital expenditures is earned at the same 35% but is only 40% refundable. Same rate, different cash. Every other corporation earns 15% with no refund.
Where the Rest of the Credit Goes
Above the expenditure limit the rate is 15%, and for a qualifying corporation 40% of that portion is refundable. A corporation that is not a qualifying corporation gets no refund of the basic-rate portion. Unused credit carries back 3 years and forward 20 years. The amount available to carry back is whatever is left after reducing the current year’s Part I tax to nil.
So a loss-year company is choosing between a refund now and a deduction later. Taking the refund puts cash in the business this year. It also shrinks the pool that would have sheltered income once revenue arrives. Carrying the pool forward does the reverse.
Is the SR&ED Credit Taxable?
In the following tax year, the credit you claimed or were refunded is applied first against your pool of deductible SR&ED expenditures. Only the portion the pool cannot absorb is included in income that year. So the answer turns on what you did with the pool.
A company that deducted its whole SR&ED pool in the claim year has nothing left for the credit to reduce. The credit lands in income the next year. A company that carried the pool forward absorbs the credit against the pool and has no income inclusion. In the worked example, the $225,279.25 earned for 2026 meets the 2027 pool first.
The Forms and the Filing Clock
Form T661 is the prescribed form that computes your pool of deductible SR&ED expenditures. Schedule T2SCH31 computes the investment tax credit for a corporation. Ontario runs on two more. Schedule 566 claims the innovation tax credit, and Schedule 508 claims the research and development credit. The amounts carry to lines 468 and 416 of Schedule 5.
The prescribed forms must be filed within 18 months of the end of the tax year in which the expenditure was incurred.
The paperwork itself is still settling in 2026. Form T661 and Schedule 31 were reissued this year to carry the new rules. Work from the current version of the form rather than an older copy of the guide. Separately, if you are an eligible Canadian public corporation, or a private company choosing the revenue-based limit, the schedule that splits the expenditure limit across your group is still being issued. Build that into your filing timeline rather than your year end.
Before You Build the Claim, Get the Base Right
The arithmetic is deterministic. Almost every dollar of difference between two claims on the same spending comes from decisions made before the arithmetic starts. Those decisions are proxy or traditional, how a contractor is engaged, whether a grant was taken, and whether the group allocation agreement was filed.
Stratos Consultants has filed more than 2,500 SR&ED projects across 15+ years. Our SR&ED tax credit services are priced on contingency, so you pay only if the claim is successful.
If you would rather see your own numbers before you commit to preparing a claim, book a consultation. We will work through your inputs, your limits and your cash position.
Frequently Asked Questions
Yes, at the basic 15% rate for a tax year beginning in 2026. The enhanced 35% rate is for Canadian-controlled private corporations and eligible Canadian public corporations. So an unincorporated business earns less than half as much on the same spending. The input rules on salaries, materials and contracts work the same way either way.
Only an eligible Canadian public corporation can, and that is a narrower class than a public company generally. The access applies to tax years beginning after 15 December 2024. The test, in plain terms: resident in Canada, publicly traded on a designated stock exchange, and not controlled directly or indirectly by non-residents. A Canadian-listed company under non-resident control does not meet it.
A current expenditure still unpaid 180 days after the year end drops out of that year’s claim. For a 31 December 2026 year end, the cutoff falls at the end of June 2027. The amount is not lost for good, because it can come into the claim for the year it is eventually paid. But it stops being part of the 2026 credit you were counting on.
$240,000, which is 8% of the $3 million annual expenditure limit, for taxation years commencing after 31 May 2016. That ceiling assumes your limit has not been reduced. Prior-year federal taxable income above $500,000, or prior-year taxable capital above $25 million, starts grinding the limit down. The maximum credit falls with it, counting associated corporations.
Maybe not. The Ontario limit reduces once prior-year federal taxable income passes $500,000, and is gone at $800,000. The federal expenditure limit moves only on taxable capital. So a profitable company can keep its full federal limit and lose the Ontario one in the same year. Check the Ontario limit against last year’s taxable income before you count the 8% as cash.
No. The salary base is the salaries and wages of employees directly engaged in the work. Bonuses, profit-based pay, taxable benefits and prior-year unpaid amounts are excluded. Contractor payments sit outside it and reach the credit through the 80% arm’s-length contract rule instead. A company that outsources most of its development work gets a smaller proxy amount than its total spending suggests.
The federal changes apply to tax years that begin after 15 December 2024. So the test is the start date of your year, not the year end. A company with a 30 June year end began its 2026 year on 1 July 2025. That is after the date, so the current rules apply to the whole year. Check your start date rather than assuming a split.