Computer, Software, Server Costs and SR&ED
Updated to Reflect New Policies (2022)*** Some of the policies referenced were updated 2021-08-13. This article has been updated and is accurate as of 2022. *** |
One question we frequently get asked is:
“Can I claim costs for IT (e.g. computer, printer, software, servers etc.) as eligible SR&ED expenses?”
Unfortunately, the short answer is no, as IT costs are considered to be capital expenditure, as discussed below.
Common IT Costs
| Item | Eligible? | Reasoning |
|---|---|---|
| Desktop Computer | No | Capital Expenditure |
| Laptop Computer | No | Capital Expenditure |
| Hosted Server Costs | No | Lease Expenditure |
| Computer Parts | Sometimes | Yes - Material Expenditure, if used for prototype No - Capital Expenditure, if supporting R&D work |
| Internal Server Costs | No | Capital Expenditure |
| Printer | No | Capital Expenditure |
| Data | No | Capital Expenditure or Lease Expenditure depending on agreement |
| Software License | No | Capital Expenditure or Lease Expenditure depending on agreement |
| Ink | Sometimes | Yes - Material Expenditure, if used for prototype or in experimentation No - Capital Expenditure, if supporting R&D work |
| CDs/DVDs | No | Capital Expenditure |
Capital vs. current expenditures
CRA classifies expenses for items purchased to support the business as current expenditures (e.g. cost of items for immediate use, like raw materials) or capital expenditures (e.g. cost of items that you use in your business for more than one year, such as computers, printers, software, servers etc.) These are treated differently for SR&ED purposes.
In general, capital expenditures are considered to be physical items – such as a computer, lab equipment, etc. – but in the Materials for SR&ED Policy it is explained:
To claim the cost of a material, the expenditure must be an expenditure of a current nature. Generally, expenditures such as for the purchase of equipment, data, or a software license, are not expenditures of a current nature. They are rather expenditures of a capital nature.1
Under this definition computers and software are considered capital expenditures and are not SR&ED eligible expenditures. Data also falls into this category and is not an SR&ED eligible expenditure. Computers and software depreciate in value which also categorizes them as capital expenditures that do not qualify for SR&ED investment tax incentives after December 31, 2013.
The CRA’s SR&ED Capital Expenditures Policy states that:
Scientific research and experimental development (SR&ED) capital expenditures made after December 31, 2013 do not qualify for SR&ED tax incentives.2
Costs classified by CRA as ‘current expenditures’ may, however, be eligible for SR&ED tax credits.
Server Costs
What about off-site server costs? Off-site server storage is purchased on a lease basis with data being stored on the servers for the duration of the contract. According to the changes to the SR&ED Lease Expenditure Policy made in 2014:
Scientific research and experimental development (SR&ED) lease expenditures made after December 31, 2013, no longer qualify for SR&ED tax incentives.3
A more detailed explanation can be found in our article: Are Rent/Building Lease Expenditures SR&ED Eligible?
Conclusions
Since 2014, computer, printer, software, and server costs are no longer eligible for SR&ED tax credits as they are defined as capital (or lease) expenditures. Not all is lost however, as the CRA does permit deduction of IT capital expenditures in the form of Capital Cost Allowance input tax credits claimed over a several-year period.