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Qualifying current R&D expenditures

Qualifying Canadian current expenditures include the following:
• Salaries and wages of employees directly engaged in R&D—salaries and wages of

specified employees (those individuals who directly or indirectly own greater than 10% of

the shares of any class of the capital stock of the company, or who do not deal at arm’s

length with the taxpayer) are limited to five times the year’s maximum CPP pensionable

earnings and exclude remuneration based on profits or bonuses

• Salaries and wages of Canadian-resident employees carrying on R&D activities outside

Canada—these salaries and wages (limited to 10% of the total R&D salary and wages

carried on in Canada in the year) are eligible provided the R&D activities are directly

undertaken by the taxpayer and done solely in support of R&D carried on by the taxpayer

in Canada

• Cost of materials consumed or transformed in R&D

• Capital expenditures used in R&D incurred before 2014

• Lease costs of machinery and equipment used in R&D incurred before 2014

• Eligible expenditures incurred by contractors performing R&D directly on behalf of the

taxpayer (restricted for ITC purposes to only 80% of contractor R&D expenditures and

excluding any R&D contractor expenditures that are considered R&D capital expenditures

(also see note (2), for expenditures incurred on or after January 1, 2013)

• Contracts for services that are directly related to SR&ED activities

• Payroll burden (not included if proxy election made)

• Eligible expenditures incurred by certain third parties where the taxpayer may exploit

the results of the R&D (to be restricted for ITC purposes to only 80% of the third party

payments for expenditures incurred after January 1, 2013).

Proxy election for overhead expenses

The proxy election adds 60% of qualifying R&D salaries and wages (excluding bonuses,

taxable benefits and stock option benefits) to the expenditures eligible for federal ITCs (but

not to the R&D pool itself). This “notional overhead” amount replaces non-SR&ED service

contracts, payroll burden, administration and other overhead costs that are often difficult to

support. Other less significant costs that are so replaced include utilities, office and other

types of supplies. Once the election is made, it is irrevocable for that taxation year.

The R&D proxy amount decreased to 55% (from 60%) on January 1, 2014. For taxation years

that straddle this date, the proxy amount will be calculated proportionately based on the

number of days in each calendar year that are within the taxation year.

The salary of specified employees (as discussed above) is limited in a number of ways when

calculating the amount of salaries and wages eligible for the proxy election. Only 75% of such

employees’ salaries can be included as eligible salaries, and the maximum per employee is

2.5 times the year’s maximum CPP pensionable earnings. Remuneration based on profits

and bonuses are excluded from the proxy computation for both specified and non-specified

employees.

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