What is the Pool of Deductible SR&ED Expenditures?
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When preparing your Scientific Research and Experimental Development (SR&ED) claim it is important to understand how the Pool of Deductible SR&ED Expenditures works. This pool directly affects both your tax deductions and your ability to claim Investment Tax Credits (ITCs). Filing an SR&ED claim without a clear grasp of this concept could lead to missed opportunities—or costly errors.
In this post, we’ll break down what the pool is, what can be included, and how to use it strategically when filing your SR&ED claim with the Canada Revenue Agency (CRA).
What is the Pool of Deductible SR&ED Expenditures?
Businesses that conduct SR&ED can claim related expenses to reduce their taxable income. These expenditures are known as the pool of deductible SR&ED expenditures (PDS) and are calculated in Section C of the T661 – Scientific Research and Experimental Development (SR&ED) Expenditures Claim. The CRA says the following regarding the of pool:
The pool of deductible SR&ED expenditures is determined in Section C of Part 3 of Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim. […] The pool concept allows a claimant the option of deducting the entire amount of SR&ED expenditures available for the year or any portion thereof after certain adjustments (see section 3.1 and section 3.2). Any unclaimed balance may be carried forward to be claimed (deducted in calculating the claimant’s income from business) in future years (see section 7.0).1
Think of the PDS as your SR&ED “budget ledger”—it captures all relevant costs that may earn your company federal and provincial tax incentives. This “pool” functions as a cumulative total of eligible SR&ED expenses. Each year, the balance is updated by adding new qualifying expenditures and subtracting any amounts already claimed. Claimants are able to deduct all or part of the available SR&ED expenditures in a given year and any unused portion can be carried forward and claimed in future years, providing businesses with strategic options for managing their tax obligations over time.
What Can Be Included in the Pool of Deductible SR&ED Expenditures?
Only eligible SR&ED expenditures are allowed in the pool. These must directly relate to qualified SR&ED work carried on in Canada. Keep in mind that once an expenditure is used to calculate an ITC, that amount is deemed to have been deducted from the pool.
Expenditures which Increase the Pool
As per the Pool of Deductible SR&ED Expenditures Policy, the pool can include the following expenses:
- the amount of expenditures of a current nature incurred on SR&ED carried on in Canada, including:
- the portion of salary or wages of employees directly engaged in the SR&ED . For more information, refer to the SR&ED Salary or Wages Policy;
- the cost of materials consumed or materials transformed in the prosecution of SR&ED. For more information, refer to the Materials for SR&ED Policy;
- lease costs of equipment used for SR&ED for costs incurred prior to 2014;
- contract expenditures for SR&ED performed on behalf of the claimant. For more information, refer to the Contract Expenditures for SR&ED Performed on Behalf of a Claimant Policy;
- certain payments to corporations and approved entities for SR&ED. For more information, refer to the Third-Party Payments Policy; and
- overhead expenditures when the traditional method is used. For more information, refer to the SR&ED Overhead and Other Expenditures Policy;
- the amount of expenditures of a capital nature incurred on SR&ED carried on in Canada for capital acquired prior to 2014;
- the amount of repayments of government assistance or non-government assistance that had previously reduced the pool of deductible SR&ED expenditures. For more information, refer to the Assistance and Contract Payments Policy. Repayments of assistance are expenditures pursuant to the Income Tax Act;
- the amounts that have been included in income in a previous tax year under paragraph 12(1)(v) of the Act (see section 5.0);
- the pool of deductible SR&ED expenditures transferred on an amalgamation or wind-up (see section 8.0 of the Pool of Deductible SR&ED Expenditures Policy); and
- the amount of SR&ED investment tax credit (ITC) recaptured in the prior year. For more information, refer to the Recapture of SR&ED Investment Tax Credit Policy.2
Expenditures which Decrease the Pool
As per the Pool of Deductible SR&ED Expenditures Policy, the pool is decreased by the following:
- the amount of government assistance or non-government assistance that the claimant has received, is entitled to receive, or can reasonably be expected to receive, for SR&ED expenditures included in the pool. For more information, refer to the Assistance and Contract Payments Policy;
- a “super-allowance benefit amount” for the year or for preceding taxation years in respect of a province. For more information, refer to the Assistance and Contract Payments Policy;
- ITCs applied and / or refunded in a preceding year. For more information, refer to the SR&ED Investment Tax Credit Policy;
- amounts deducted from the pool of deductible SR&ED expenditures in previous years; and
- amounts the claimant has deducted with respect to insolvency in preceding years, to the extent these amounts did not exceed the balance of the pool of deductible SR&ED expenditures in the year in which the amount was claimed.3
For tax deduction purposes unpaid SR&ED expenditures are still included in the pool in the tax year that they are incurred. Please our article “Payment Timing in SR&ED: A Closer Look at Unpaid Expenditures and the 180-Day Rule” for more information about claiming SR&ED eligible expenses that were not paid right away.
Deducting vs. Carrying Forward the Pool of Deductible SR&ED Expenditures
Once you’ve established your Pool of Deductible SR&ED Expenditures, you have the choice to either:
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Deduct it from current-year income, reducing your tax burden; or,
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Carry it forward indefinitely to offset income in future years.
This choice can have major tax planning implications.
Deducting the Pool
The pool allows businesses to deduct eligible SR&ED expenses from their income. By doing this, they can reduce the amount of corporate income tax they owe for the year.
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Example: If your business made $500,000 in profit and you have $100,000 in SR&ED expenses in the pool, deducting them could reduce your taxable income to $400,000.
When calculating your income or loss for tax purposes, you cannot claim more SR&ED expenditures than you have in your pool at the end of the year.
Carrying Forward the Pool
Alternatively, you may choose to carry these deductions forward to offset taxable income in a future year. A positive balance in the pool of deductible SR&ED expenditures does not expire. It may be carried forward indefinitely and deducted in a subsequent tax year against any business income. The CRAs “Pool of Deductible SR&ED Expenditures Policy” states:
The CRA treats the pool of deductible SR&ED expenditures as a running balance; only the total balance carried forward is identified. The year to which each expenditure amount relates is not recorded or tracked. Since amounts in the pool can be carried forward indefinitely, it is not necessary to know the year to which an expenditure relates.4
If your business isn’t profitable or paying taxes in the current year, it may be wise to carry forward the deduction instead of using it immediately. We have discussed how to carry the pool forward in our post “Can you carry forward the Pool of Deductible SR&ED Expenditures?“.
Important: Restrictions
There are some restrictions on the carry forward of the pool after a loss restriction event and in the case of a partnership claiming SR&ED tax credits:
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Corporations or trusts that have gone through a loss restriction event, such as a change in ownership or control, may not be allowed to deduct all of their SR&ED pool. There are special rules for figuring out how much they can still claim. We have discussed what happens to the pool if there is a change in a company’s control in our article “Carryover amounts for SR&ED after a Change in Company Control“.
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Partnerships don’t have the option to carry forward SR&ED expenses. They must deduct the full amount of their SR&ED pool in the same year the expenses were incurred when calculating the partnership’s net income for tax purposes. The CRAs states:
A partnership cannot carry forward an amount in the pool of deductible SR&ED expenditures to a subsequent year. Therefore, the pool of deductible SR&ED expenditures at the end of the year of the partnership must be fully deducted in calculating the partnership’s net income for tax purposes in the year. For more information on partnerships, refer to the SR&ED Claims for Partnerships Policy.5
Important: A Negative Pool Balance
A negative balance in the pool at the end of a tax year must be brought into net income for tax purposes, in the year. The CRA states the following:
The pool of deductible SR&ED expenditures at the beginning of a tax year cannot be a negative amount. When a claimant is required to report an amount in income due to a negative pool balance at the end of the tax year, the amount is also technically added to the pool to remove the negative amount resulting in an opening balance of nil (zero) for the subsequent tax year. Thus no amount would be reported on line 450 of the subsequent tax year Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim.6
In short, if your SR&ED pool goes negative, it gets reset to zero for the next year—but you’ll have to report that shortfall as income first on your tax return.
Conclusion
In summary, the Pool of Deductible SR&ED Expenditures functions as a running total of eligible SR&ED costs—such as wages, materials, and contract payments—that can be deducted in the current year or carried forward indefinitely. Understanding what increases or reduces the pool, as well as managing it effectively can mean the difference between maximizing your tax benefits and leaving money on the table. If you need guidance on calculating your pool, selecting the right accounting method, or filing your claim with confidence, we would love to help.