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Gaining Knowledge Through SR&ED: Contractors, Universities and Employees

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Innovation, Research and Development Third-Party

Third-Party Contractors, Universities and Employees:
How collaboration and innovation fit together.

Labour costs within the SR&ED program can be classified into three different areas: Employees, Subcontractors and Third-Party Payments.

Salary costs account for the majority of all SR&ED expenditures in Canada, followed by Subcontractors and lastly Third-Party Payments.


Defining Criteria

Subcontractors can either be individuals or corporations who are engaged to perform a service for the company. If their activities meet the requirements of the program (systematic investigation, technological advancement etc.), then an SR&ED tax credit can be claimed based on the costs incurred, assuming that you are at arm’s length with the corporation.

The contracted company must be a taxable Canadian supplier, which essentially means that they have a base of operations in Canada. In addition, only one company in the partnership can claim SR&ED on the eligible activities, so ensure that any agreements specifically state which party can claim the tax credit.

SR&ED Impact

Only the SR&ED-related portion of a contract is eligible for the tax credit. All arm’s length subcontract expenses are recorded on Line 340 of the T661 1 and contribute to the earned tax credit. Additionally, in the case of mixed arrangements, such as when a contractor is performing both R&D tasks and business development activities, it is essential that all invoices or statements of work split the SR&ED work. If the invoice or statement of work only shows ‘Consulting Services’ with no additional information, the CRA may attempt to throw out the entirety of the contract, so work with your contractor to ensure that the necessary level of detail is present.

For a company in Ontario, subcontractors contribute to a net refundable tax credit of 41.5%.

Third-Party Payments

Defining Criteria

Third-party payments (TPPs) are similar to subcontractor arrangements, however, TPPs must be with an accredited research institution or organization.2 The list generally includes universities and research centres, but each organization will know whether they are recognized by the government or not; discuss this with your liaison directly.

The benefits of working with a third party, as opposed to a subcontractor, is that they will often have access to specialized tools and analysis techniques which are not available to most companies. In addition, partnering with a third party is often cheaper, as some of the work will be performed by graduate students and post-docs who are very knowledgeable, but are not paid as well as their commercial counterparts.

There are a number of government programs that will contribute financially to match your contribution to a research project with 1:1 or 2:1 funding support. These include the NSERC’s Engage Grants,3 or the Collaborative Research and Development Grants.4 Working relationships with third parties may also lead to new employment opportunities with recent graduates who are experienced with your company-specific research project.

SR&ED Impact

Third-Party Payments earn the same refund rate as subcontractors, but there are a few additional details that must be taken into account. First of all, an additional tax form, the T1263,5 must be included with your regular T661 write-up.

The T1263 (the TPP form) explains the nature of the relationship between the company claiming SR&ED and the third party. A summary of the related work must also be provided as part of the T1263, which can duplicate portions of the T661 narrative. The TPP form should clearly outline what aspects the accredited research institution was working on.

A second important element to consider is that any direct government assistance provided to your company will reduce your SR&ED credits. If a grant was directly received by your company as part of a research agreement, this will have to be reported on the T661 (Line 431, 515).6 On the other hand, if the money was provided directly to the university, then it may be unrelated. Be sure to check the details of any contract agreement before filing your taxes.

For a company in Ontario (with a 10% refundable provincial tax credit), third party payments will earn a net refundable tax credit of 41.5%.


Defining Criteria

The most important criteria to claim a person as an employee is that they receive a T4 form at the end of the year.7 All source deductions for individuals must be in your accounting records and as such, they will be filing a personal Canadian tax form at the end of the fiscal year. If these requirements are not met, then salaries or wages for the employees cannot be claimed. Additionally, to be claimed for the SR&ED project, the employee must have a technical background and experience within the field of research. Recent graduates usually cannot be claimed for SR&ED activities, as they spend a considerable amount of time learning/training, which is not normally an SR&ED-eligible activity.

Timesheets, project records and other documentation are essential to help justify the amount of time each employee spends on SR&ED.

SR&ED Impact

The percentage of an employee’s time spent working on SR&ED projects will be added directly to the eligible expenditures. If an employee spends 90% of their time or more working on SR&ED projects, the CRA considers this to be all or substantially all of their time, and 100% of their salary can be claimed on Line 305 of the T661.8 If the proxy method is used to calculate overhead costs, an allowance of 55% of the salary costs will be added to your expenditure pool.

For a company in Ontario, you will earn a refundable tax credit of 68.5% for salaried employees.


As shown, salaries earn the highest effective refund rate, but there are benefits to the other arrangements, particularly the third-party payments, that many companies may not be aware of.

In all three categories, it is absolutely essential that associated documentation be kept which explains the SR&ED-eligible activities. A bit of time every week or month spent preparing this information can save a great deal of trouble down the road.


This article is for informative purposes only and does not constitute financial advice. We recommend discussing all options with your accountant/tax professional.


Do you have any suggestions or insights into contract agreements? Have you worked with a contractor or third-party and claimed SR&ED before?

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Show 8 footnotes

  1. Government of Canada. (November 10, 2015.) T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim. (Accessed: September 1, 2017.) Retrieved from:
  2. Government of Canada. (December 18, 2014.) Third-Party Payments Policy: Appendix A – List of approved entities. (Accessed: September 1, 2017.) Retrieved from:
  3. Natural Sciences and Engineering Research Council of Canada. (October 7, 2016.) Engage Grants. (Accessed: September 1, 2017.) Retrieved from:
  4. Natural Sciences and Engineering Research Council of Canada. (November 16, 2016.) Collaborative Research and Development Grants
    (including DND/NSERC Research Partnership Grants). (Accessed: September 1, 2017.) Retrieved from:
  5. Government of Canada. (July 6, 2022.) T1263 Third-party payments for scientific research and experimental development (SR&ED). (Accessed: April 5, 2023.) Retrieved from:
  6. Government of Canada. (November 10, 2015.) T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim. (Accessed: September 1, 2017.) Retrieved from:
  7. Government of Canada. (January 23, 2023.) T4 Statement of Remuneration Paid (slip). (Accessed: April 5, 2023.) Retrieved from:
  8. Government of Canada. (November 10, 2015.) T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim. (Accessed: September 1, 2017.) Retrieved from:

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