Proxy vs. Traditional: Which SR&ED Overhead Method Should You Use?

SR&ED can feel complicated, but the choice between proxy and traditional is actually a practical one. This guide explains both methods in plain language, shows how the math works, and gives you a simple way to decide. It’s written for founders, finance leads, and engineers who just want to file a clean SR&ED claim and get their SR&ED funding right.

The quick idea

• Traditional method: you track and claim actual SR&ED overhead and other expenditures; directly attributable costs tied to the R&D work.

OR

• Proxy method: instead of itemizing overhead, you add a notional amount called the Prescribed Proxy Amount (PPA). The PPA is a fixed percentage (55%) of eligible direct SR&ED salary and wages performed in Canada. It replaces overhead in the calculation.

Both routes end up on T661 and feed into the investment tax credit (ITC). You must pick one method for the year.

Why two methods exist

Projects come in different shapes. Some are lab- or facility-heavy (big overhead). Others are people-heavy (software, algorithm tuning, field tests with small kit). The program gives you two paths so you can either (a) prove your real overhead or (b) take a standardized add-on without a receipt hunt.

What the proxy actually does

With proxy, you skip claiming overhead line by line. Instead you compute:

• PPA = 55% × eligible direct SR&ED salary & wages (in Canada)

That PPA is added to your pool of allowable SR&ED expenditures for ITC purposes. No itemization of overhead costs.

Plain-English takeaway: if your true, supportable overhead is less than ~55% of your eligible SR&ED salaries, proxy will usually yield a bigger number with less audit exposure and less admin.

When proxy tends to win

• Software / AI / ML / data science projects

• Mechanical or hardware R&D that’s labour-dominant (prototyping, bench tests, field trials)

• Startups in shared or lean spaces with modest facility costs

• Teams who prefer simplicity and want to reduce the chance of overhead disputes

  
  

When traditional can outperform

• Facility-intensive R&D (wet labs, clean rooms, heavy equipment)

• High utility loads (specialized HVAC, power-hungry rigs)

• Large dedicated workspaces with rent and maintenance clearly attributable to SR&ED

• You can document overhead cleanly and are comfortable defending it

The 10-minute decision rule

1. Add up eligible SR&ED salary & wages (directly engaged, performed in Canada).

2. Compute PPA = 55% × that salary total.

3. Estimate real overhead you could defend under traditional.

4. Compare:

   
   

   • If real overhead < PPA, proxy is the sensible default.

   • If real overhead > PPA and well-documented, traditional might be worth the work.

Keep in mind interactions with government assistance (e.g., IRAP) and specified employee limits—these can shift the base and therefore the PPA.

Two quick examples

Example A — Software team

• Direct SR&ED salaries: $400,000

• Realistic overhead you can tie to SR&ED: $120,000

• PPA = 55% × $400,000 = $220,000

• Proxy wins (larger notional overhead, simpler file).

Example B — Lab-heavy project

• Direct SR&ED salaries: $300,000

• Realistic overhead you can document: $210,000 (special utilities, lab rent, maintenance)

• PPA = 55% × $300,000 = $165,000

• Traditional wins (your real overhead beats the proxy).

Common pitfalls (that hurt SR&ED funding)

• Double counting overhead: if you choose proxy, don’t also slip in traditional overhead.

• Loose “support” time: for traditional, support work must be directly in support and commensurate with the R&D needs.

• Non-Canadian costs: salaries or contractor work done outside Canada aren’t eligible for Canadian SR&ED ITCs.

• Assistance blind spots: most government assistance reduces SR&ED on a dollar-for-dollar basis. Ensure to model it before choosing a method.

• Waiting on evidence: contemporaneous records (tickets, commits, test plans, photos) make reviews calmer and claims stronger.

• Missing the clock: corporations generally have 18 months after fiscal year-end to file SR&ED forms. Don’t cut it close.

TL;DR (for searchers and skimmers)

Is the proxy rate really fixed at 55%?

Yes. The Prescribed Proxy Amount (PPA) is a fixed percentage applied to eligible direct SR&ED salaries and wages in Canada.

Can I mix proxy and traditional in the same year?

No. You pick one method for the entire tax year.

Does proxy affect salaries, materials, and contractors?

No. It only replaces the overhead and other expenditures bucket. Direct salaries, materials for SR&ED, and Canadian SR&ED contractors are still claimed.

Is proxy “safer” in an audit?

It’s often simpler to defend because you avoid subjective overhead allocations. That said, your salary base and evidence still need to stand up.

Do grants kill my SR&ED claim?

Not usually. They interact with SR&ED and reduce some eligible amounts. Model the impact before you choose the method.

Final thought

There’s no prize for picking the “fancier” method. Choose the one that gives you the cleanest, best-supported number with the least friction. For many SR&ED consultants and finance teams, that’s proxy. For lab-intensive programs with strong documentation, traditional can deliver a bigger SR&ED tax credit. Either way, build your SR&ED claim around evidence first and the method second.

This article is general information for SR&ED claimants and doesn’t replace professional advice or the CRA’s published guidance.