Technical SR&ED
Claiming SR&ED for Shareholders & Specified Employees
Nov 12, 2025
Owner-managers and key insiders often do heavy technical lifting in startups. The SR&ED rules let you claim their salaries, but they add a few guardrails that do not apply to regular employees. This guide walks through what you can claim, the main limits, and how the proxy vs traditional method changes the math.
Quick refresher: what SR&ED gives you and how to file
Canada’s SR&ED program core benefit is that it allows you to earn an investment tax credit (ITC) on on qualified expenditures, which can reduce tax or be refunded in cash in some cases (qualifying CCPC). Most companies that file SR&ED do so for the sake of the refundable aspect of the tax credit. As a side note, these ITCs can also carry back 3 years and forward 20.
To access the incentives you must file Form T661 plus Schedule T2SCH31 (corporations) or Form T2038(IND) (individuals) by the SR&ED reporting deadline, plus provincial forms which vary province to province. Corporations get 18 months from year-end, individuals get 17.5 months. If you do not report an expenditure on T661 by that deadline, you cannot receive SR&ED incentives for that expenditure — full stop.
Who is a “specified employee” (and why it matters)
A specified employee is someone who does not deal at arm’s length with the employer, or is a specified shareholder (directly or indirectly owning 10% or more of any class of the employer’s shares, or of a related corporation). Individuals related to a specified shareholder (for example, a sibling or spouse) can also be specified employees.
Specified employees can still have their salary or wages claimed for SR&ED, but special limits apply (see below). The calculation starts the same way as for other staff: claim the portion of paid salary tied to time directly engaged in SR&ED work in Canada (pro tip: the program treats “all or substantially all” at 90%+ which means "round up to 100%").
Note: we are talking about salary or wages (including taxable benefits). Dividends are not salary or wages and are not claimed on lines 300–309 of the T661. This is critically important to being able to access SR&ED refund on specified employee compensation!
The big two limits unique to specified employees (Line 305 and Line 309)
1) No bonuses or profit-based pay
Do not include bonuses or remuneration based on profits for specified employees. This applies for work in Canada (Line 305) and for outside-Canada claims (Line 309).
2) Five-times-YMPE cap (prorated and shareable across associated companies)
For specified employees, the maximum claimable salary or wages is capped at five times the Year’s Maximum Pensionable Earnings (YMPE), prorated by the days in the year the person was a specified employee. If they also perform SR&ED for an associated corporation, you must allocate the cap between companies using Form T1174. The same cap applies to outside-Canada claims on Line 309.
Work performed outside Canada (Lines 307 and 309)
You can claim permissible salary or wages for SR&ED performed outside Canada by your employees (not contractors) if several conditions are met. The amount is the lesser of:
A) the actual eligible salary for the outside-Canada work, and
B) 10% of salary or wages for SR&ED performed in Canada (Line 306). There is a worked example in the Guide.
For specified employees, you first compute the permissible outside-Canada salary the same way, then apply the bonus/profit exclusion and the five-times-YMPE cap noted above.
Also note a global cap here: under the proxy method, total Lines 307 + 309 cannot exceed 10% of Line 306. Under the traditional method, that 10% is measured against Line 306 plus certain “undertake, supervise, or support” salaries claimed on Line 360.
The 180-day rule for unpaid wages (Lines 310 and 315)
Salary or wages incurred but not paid within 180 days after year-end are deemed not incurred in that year and cannot be included on Lines 300–309 or 360. Once paid, you pick them up in a later year on Line 310. This matters for owner-managers who accrue but delay payment — this is worth noting since this is a scenario we encounter fairly frequently and allows for some flexibility in cashflow planning and runway.
Proxy vs Traditional method: what changes for specified employees
In preparing you SR&ED claim, you are obligated to choose either the proxy or traditional method to account for the overhead costs associated with your SR&ED project.
Proxy method: you do not itemize overhead on Line 360. Instead you compute the Prescribed Proxy Amount (PPA) as 55% of the “salary base” (Part 5). The PPA is itself eligible for ITC, subject to an overall cap test so that PPA plus other deductions do not exceed total business expenditures. The mechanics is that this is a gross-up to the base pool of salary expense — essentially multiply it by 1.55.
Traditional method: you itemize overhead and other expenditures that are directly related and incremental to SR&ED on Line 360. This is more onerous but in some scenarios can lead to a larger refund
Special salary-base rules for specified employees (Part 5, Section A)
When you use the proxy method, the portion of a specified employee’s salary that can enter the salary base is subject to two extra caps in Part 5:
you can include at most 75% of their time as directly engaged in SR&ED, and
a separate amount cap of 2.5 × YMPE, prorated by days employed (illustrated in Table 7). The salary-base total for specified employees then flows to Line 816, and Line 818 becomes the overall salary base used to compute the PPA.
Practical takeaway: A specified employee’s Line 305 amount for SR&ED in Canada does not have a 75% time cap, but when you are on the proxy method, the portion of that person’s pay that feeds the PPA does. Keep both lenses in view when you model benefits.
Contractors, management companies, and “how you pay yourself”
If your personal HoldCo invoices the OpCo for R&D effort, the cost usually sits in contract expenditures rather than salary and wages. For ITC purposes, only 80% of arm’s-length contract costs and third-party payments are counted as qualified expenditures (different rules apply to non-arm’s-length).
Common pitfalls for shareholders and specified employees
Missing the 180-day payment rule. Accrued but unpaid wages do not count until paid.
Including bonuses or profit-based pay. Excluded for specified employees.
Exceeding the five-times-YMPE cap or failing to allocate between associated corporations using T1174.
Over-claiming work performed outside Canada. Respect the 10% of Line 306 ceiling and the extra specified-employee limits.
For proxy users, forgetting the salary-base caps for specified employees (75% time and 2.5 × YMPE).
Owner-operator example (outline)
Suppose a founder-engineer earns a T4 salary of $160,000 and spends 60% of their time directly engaged in SR&ED in Canada.
Line 305 starts from $160,000 × 60% = $96,000, subject to the five-times-YMPE cap and the no-bonus rule.
If using the proxy method, the portion of this founder’s pay that can enter the salary base for the PPA calculation is also constrained by the 75% time limit and the 2.5 × YMPE cap in Part 5, then the PPA is 55% of salary base (subject to overall cap).
If this was a BC based claim, with a 10% provincial refund rate, then the founder-engineer would see the following
Expense pool after proxy=($96,000*1.55)=$148,800
Provincial refund=($148,800*10%)=$14,880
Federal refund=($148,800-$14,880)*35%=$46,872
Total refund ($14,880+$46,872)=$61,752
This $61,752 works out to a 64% refund rate on the eligible portion of your SR&ED related salary. Decent!
What to track to stay compliant (and maximize the claim)
Time allocation for insiders by project, with support for “directly engaged” activities. The Guide includes examples of what counts and how ASA works.
Payroll proof of payment within 180 days after year-end.
Outside-Canada work details (tasks, Canadian residency at time of expense, relationship to a Canadian project, and confirmation that the pay was not taxed in another country) when claiming Lines 307 or 309.
T1174 where a specified employee splits time across associated corporations.
Final thoughts
Specified employees and shareholders can generate strong SR&ED claims, but you must apply the unique caps (five-times-YMPE, no bonuses, and, under proxy, the 75% and 2.5 × YMPE limits) and respect the 10% ceiling for outside-Canada work. With good time records and the right method choice, the benefit is both defensible and optimized.