SR&ED: the 35% refundable R&D tax credit most Northwestern Ontario businesses miss

Canada's federal R&D tax incentive gives Canadian-controlled private corporations up to 35% back on qualifying work — including custom software. Budget 2025 doubled the eligible expenditure limit to $6 million and restored capital costs.

The Scientific Research and Experimental Development (SR&ED) tax incentive is Canada's primary federal R&D program, administered by the Canada Revenue Agency. A Canadian-controlled private corporation (CCPC) receives a 35% refundable investment tax credit on eligible R&D expenditures up to a $6 million annual expenditure limit — meaning cash back even when no income tax is owed. Other Canadian corporations receive a 15% non-refundable credit that reduces tax payable. The program covers basic research, applied research, and experimental development, including custom software built to overcome a genuine technological uncertainty. SR&ED is claimed on your annual corporate tax return using Form T661, filed within 18 months of your fiscal year end. Budget 2025 (Bill C-15, royal assent March 26, 2026) doubled the expenditure limit from $3 million to $6 million and restored capital expenditures as eligible — changes that apply retroactively to tax years beginning on or after December 16, 2024. Confirm eligibility and filing requirements with a qualified SR&ED practitioner before relying on any figures here.

The two credit tiers

The credit structure has two tracks depending on corporate structure. CCPCs receive the enhanced 35% refundable rate on eligible expenditures up to the $6 million annual limit — a maximum of $2.1 million in refundable credits before remaining expenditures qualify for the basic rate. Expenditures above the limit receive the basic 15% non-refundable credit, which offsets tax payable but does not result in a cash refund. Other Canadian corporations access the 15% non-refundable credit only. The $6 million expenditure limit phases out based on taxable capital employed in Canada: the full limit applies below $15 million in taxable capital, and it reduces to nil at $75 million. A CCPC with taxable capital above $75 million accesses only the basic 15% non-refundable rate.

What changed under Budget 2025 (Bill C-15)

• Expenditure limit doubled from $3 million to $6 million — raising the maximum refundable credit for a qualifying CCPC from $1.05 million to $2.1 million per year.
• Taxable capital phase-out thresholds raised: the full limit now applies below $15 million in taxable capital (previously $10 million), and reaches nil at $75 million (previously $50 million) — keeping more mid-sized companies at the enhanced rate.
• Capital expenditures restored as eligible: equipment and other qualifying property used 90% or more for SR&ED activity can again be included. The ITC on capital expenditures is up to 40% refundable, compared to 100% refundability for current expenditures.
• Enhanced 35% refundable credit extended to eligible Canadian public corporations (ECPCs), with an expenditure limit calculated on an average gross revenue basis.
• All changes apply to tax years beginning on or after December 16, 2024 — retroactively covering fiscal years already in progress when Bill C-15 received royal assent on March 26, 2026.

Does custom software qualify?

Software development qualifies for SR&ED when the work involves technological uncertainty — when the solution is not available through standard practice or existing knowledge, and you are conducting systematic investigation to resolve a genuine technical problem. Eligible activities include developing novel algorithms, building systems that push beyond known architectural limits, creating machine learning models for new domains, and solving integration challenges that cannot be resolved with documented approaches. What does not qualify: routine coding using established frameworks, standard web application development, porting applications using documented migration tools, or customizing off-the-shelf software without technical unknowns. The test is not your industry — it is whether you faced a technological uncertainty and conducted documented, systematic experimentation to resolve it. A Northwestern Ontario mining company building a custom sensor-integration system, a forestry business developing a predictive-maintenance model, or a clinic writing a clinical-workflow tool that required solving technical unknowns are the kinds of projects worth examining closely. Confirm what activities qualify with a qualified SR&ED practitioner.

Eligible expenses

• Employee wages and salaries for staff directly performing SR&ED work and their direct supervisors.
• Materials consumed or transformed during the R&D work.
• Arm's-length contractor payments at 80% of the amount paid.
• Overhead: either a 55% proxy applied to eligible direct labour, or actual overhead tracked to eligible projects.
• Capital expenditures (restored under Bill C-15): qualifying equipment used 90% or more for SR&ED activity.

How to claim, and the new pre-claim option

SR&ED is claimed annually on Form T661, filed with your corporate tax return (T2). The filing deadline is within 18 months of your fiscal year end — a hard cutoff, not a target. As of April 1, 2026, the CRA introduced an optional pre-claim approval process for eligible small and medium-sized businesses: submit a project description before work begins and receive a formal determination of eligibility within eight weeks through My Business Account. A pre-claim approval is valid for up to three years, and for future claims with approved projects that require an expenditure review, CRA processing time is reduced from 180 days to 90 days. Receiving pre-claim approval does not guarantee that a future claim will be accepted in full — it addresses whether the described work is eligible, not the amount or supporting documentation.

Can SR&ED stack with other Northern Ontario programs?

SR&ED is a federal tax incentive and is structurally separate from the grant and contribution programs listed in the funding radar on this site — including NOHFC Invest North Innovation, NRC IRAP, and FedNor RAII. It can complement them by covering different cost categories or applying to the same project at different stages. Each program has its own rules about how other government assistance affects eligible costs, contribution amounts, or credit rates. If you are considering SR&ED alongside another program, confirm the interaction rules with a qualified practitioner and with each program directly before committing to a project structure.

Is the 35% refundable rate available to all Canadian businesses?

No. The 35% refundable rate is available to Canadian-controlled private corporations (CCPCs) within the annual expenditure limit and taxable capital thresholds described above. Other corporate structures access SR&ED on different terms: eligible Canadian public corporations gained access to a refundable credit under Bill C-15, with an expenditure limit tied to average gross revenue; sole proprietors and partnerships can claim SR&ED investment tax credits, but at the basic 15% non-refundable rate. Confirm which rate applies to your corporate structure with a tax adviser.

What is the pre-claim approval and should we use it?

The optional pre-claim approval process, launched April 1, 2026, lets eligible SMEs submit a project description to the CRA before work begins and receive a formal determination of eligibility within eight weeks through My Business Account. Approval is valid for up to three years and halves CRA processing time for expenditure reviews of future claims containing approved projects (from 180 to 90 days). It is suited to a business starting a multi-year R&D project where eligibility is uncertain. It does not apply retroactively to work already completed. Contact the CRA or your SR&ED practitioner to assess whether it fits your situation.

Sources: Canada Revenue Agency — SR&ED Tax Incentive Program: canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program.html | SR&ED credit rates, expenditure limit, and program overview: GRANTS_DATA in src/data.js, verified 2026-07-10 against the CRA sourceUrl above | Bill C-15 changes — expenditure limit ($3M to $6M), capital expenditures restored, ECPC extension, taxable capital thresholds ($15M–$75M), effective date (tax years from December 16, 2024), royal assent March 26, 2026: Welch LLP, "2026 Changes in SR&ED: Largest Expansion in Decades" — welchllp.com/insights/knowledge/2026-changes-in-sred-largest-expansion-in-decades/ | CRA pre-claim approval process (April 1, 2026 launch; 8-week determination; 3-year validity; 90-day processing for approved projects): CRA Tax Tip — canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2026/innovate-confidence-cra-sred-tax-incentive-program-pre-claim-approval-process.html | SR&ED eligible software activities, excluded work, and expense categories (wages, materials, 80% contractor, 55% overhead proxy): GrantOps — grantops.ai/en/blog/what-is-sred-guide/. This post is general information only and does not constitute tax or legal advice. Confirm all figures, rates, and eligibility with the CRA or a qualified SR&ED practitioner before filing.