Payment Timing in SR&ED: A Closer Look at Unpaid Expenditures and the 180-Day Rule

When claiming your Scientific Research and Experimental Development (SR&ED) tax credits, timing matters—especially if you have SR&ED eligible expenses that were not paid right away. One of the often overlooked criterion to be aware of is the rule surrounding the timing of payments. In this article we discuss how expenditures which were unpaid before the end of your fiscal year may still be included for your SR&ED claim for that year.

Expenses Must Be Paid Within 180 Days to Qualify for ITCs

Only expenses that are incurred within your fiscal year and paid within 180 days of your Fiscal Year End can be included in your current year SR&ED claim.

If you’ve incurred SR&ED expenses during your tax year—but haven’t paid them within 180 days of the year-end—you cannot include them in that year’s Investment Tax Credit (ITC) calculation.

Instead, the CRA considers these expenses to be incurred only when they are actually paid. Section 4 of the Total Qualified SR&ED Expenditures for Investment Tax Credit Purposes Policy states:

For the purposes of calculating total qualified SR&ED expenditures for investment tax credit (ITC) purposes, as well as the refundable ITC calculation, a claimant’s expenditure for SR&ED of a current nature (other than unpaid salary or wages and other remuneration—see below) that is unpaid on the day that is 180 days after the end of the tax year in which the expenditure is otherwise incurred is deemed:

• not to have been incurred in the year; and
• to be incurred at the time it is paid.¹

This means that all non-salary SR&ED expenses, like subcontractor fees or materials, must be paid within six months (180 days) of your year-end to count toward your ITC in that year. If they’re paid later, you can still claim them—but not until the year of payment.  This rule applies to most current SR&ED expenditures except unpaid salaries and wages, which have their own stricter rules (more on that below).

Deductibility vs. ITC Eligibility of Unpaid SR&ED Expenditures

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 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 of deductible SR&ED expenditures:

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).²

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.

Unpaid SR&ED Expenditures and the Pool of Deductible SR&ED Expenditures

For tax deduction purposes unpaid SR&ED expenditures are still included in the pool of deductible SR&ED expenditures in the tax year that they are incurred. The CRA offers the following example:

4.1.1 Example – Unpaid amount, SR&ED contract expenditures

Corporation A has a tax year-end of December 31, 2013, and incurs an SR&ED contract expenditure of $100,000 in the year payable to Corporation B, an arm’s length corporation. Corporation A still has not paid the expenditure 180 days after the end of the 2013 tax year. The expenditure is paid in September 2014.³

In this example the corporation should complete the following steps on their 2013 and 2014 claims:

On their 2013 SR&ED claim they must:

• Line 340 – Report the $100,000 full contract amount as an incurred SR&ED expense.
• Line 529 – Enter 20% of the contract expenditure ($20,000) as a reduction to qualified expenditures since only 80% of contract expenditures made after 2012 qualify for investment tax credits.
• Line 520 – Report the unpaid $80,000 as “not paid within 180 days” (required to preserve future eligibility).⁴

On their 2014 SR&ED claim they must:

• Line 500 – Enter 80% of the amount paid ($80,000) to be included in calculating the total qualified SR&ED expenditures for ITC purposes.⁵

This example shows why tracking and properly reporting unpaid amounts—even in the year you can’t claim them yet—is essential to preserve future eligibility. 

Unpaid Salaries and Wages Rules

Under CRA’s SR&ED Salary or Wages Policy, accrued salary or wages can be claimed for SR&ED purposes if paid within 180 days after the tax year-end. If not paid within that period, the expense is considered incurred in the year it is actually paid:

Accrued salary or wages are used to calculate the portion that is directly attributable to or directly engaged in SR&ED. If the remuneration remains unpaid 180 days after the end of the tax year in which the expense was incurred, the expense is deemed not to have been incurred in the year but rather in the year in which the amount is paid. In applying these rules, the CRA considers a payment made on the 180th day to have been made within the time limit. These rules apply to both arm’s length and non-arm’s length transactions.⁶

Some specific unpaid expenditures, like reasonable vacation pay and deferred salary under certain arrangements, may still be claimed in the original year but are excluded from the salary base used to calculate the Prescribed Proxy Amount (PPA). Similarly, if prior-year unpaid expenditures are deemed paid in a later year, they are excluded from the PPA calculation when using the proxy method. Unlike non-salary expenses which may still be included in the pool of deductible SR&ED expenditures in the original tax year, unpaid salary or wages are excluded entirely—both from ITC eligibility and from the deductible expenditure pool—unless paid within the 180-day window.⁷

Remember: Report Unpaid Expenditures on Form T661

To preserve your ability to claim these unpaid SR&ED expenditures later (once they’re paid), you must:

A) Report them on Form T661: If you want to claim unpaid SR&ED expenditures later, you must report them on Form T661 in the year they were incurred. This is critical—even though they are not yet eligible for the ITC, you still have to identify them to preserve the right to claim them later. 

A claimant must identify, on line 315 of Form T661, Scientific Research and Experimental Development (SR&ED) Expenditures Claim, for a particular tax year, an expense in respect of unpaid salary or wages that was not paid within 180 days of the tax year end, in order for the expense to be deductible as an SR&ED expenditure in the year in which it will actually be paid. In the year the expenditure is paid, it has to be reported on line 310 of Form T661.⁸

B) Do so within 18 months of the tax year-end (for corporations): Form T661 must include the unpaid amount within 18 months of the end of the tax year when the expense was incurred. If you fail to do this, you lose the ability to claim the ITC, even if the expense is paid later. 

Unpaid amounts that are not identified on the Form T661 within the 18-month reporting deadline will not be included in calculating total qualified SR&ED expenditures for ITC purposes, even if they are paid in a subsequent year.⁹

For more information about SR&ED filing rules see our articles “Can you apply for the SR&ED credit past the filing deadline?” and “Filing Late – Will it Impact SR&ED?“