How to Claim SR&ED Tax Credits for AI Projects

If your company is doing original AI or machine learning work in Canada, the SR&ED (Scientific Research and Experimental Development) program can return a significant portion of your R&D spending as cash refunds or tax credits. But knowing your work qualifies is only the first step — you still need to file the claim correctly, choose the right calculation method, and prepare documentation that will survive a CRA review.

This guide focuses on the claiming process itself: how to calculate your claim, which forms to file, whether to use a consultant, and how to prepare for a potential audit. For guidance on which AI activities qualify, see our companion guide on qualifying activities.

Step 1: Identify Your Qualifying Expenditures

SR&ED claims are built on qualifying expenditures — the money you spent on eligible R&D activities. For AI companies, the main categories are:

• •Salaries and wages — the portion of each employee's compensation attributable to qualifying SR&ED work. If a developer spends 70% of their time on eligible R&D, you claim 70% of their salary.
• •Materials consumed — cloud computing costs (AWS, GCP, Azure) for model training runs, datasets purchased for R&D purposes, and other materials directly consumed in the research
• •Subcontractor payments — payments to third parties performing qualifying R&D on your behalf, claimable at 80% of the invoiced amount
• •Overhead — captured through the proxy method (see below) or traditional method allocation

Step 2: Choose Your Calculation Method

The CRA offers two methods for calculating your SR&ED expenditures. Most AI companies use the proxy method for its simplicity.

Proxy Method (Simpler)

The proxy method adds a flat 55% overhead factor to your qualifying salary expenditures. This replaces the need to track individual overhead items like rent, utilities, and equipment depreciation.

For example, if your AI team's qualifying salaries total $400,000:

Traditional Method (More Complex, Potentially Higher)

The traditional method lets you claim actual overhead costs — rent for R&D space, equipment depreciation, utilities, and other directly attributable expenses. This can yield a higher claim if your overhead is above 55% of salaries, but requires detailed record-keeping and allocation formulas.

Most small to mid-size AI companies choose the proxy method because:

• •It requires less bookkeeping
• •It is less likely to be challenged during an audit
• •For remote-first teams with low physical overhead, 55% is often generous

Step 3: Calculate Your Tax Credit

The federal investment tax credit (ITC) rate depends on your corporate structure:

CCPC = Canadian-Controlled Private Corporation. The enhanced 35% rate phases out as prior-year taxable income exceeds $800,000 or taxable capital exceeds $10 million. Consult a tax professional for your specific situation.

Using the $670,000 example above, a qualifying CCPC would receive:

• •Federal ITC: $670,000 × 35% = $234,500
• •Ontario ORDTC (8%): $670,000 × 8% = $53,600
• •Total: approximately $288,100 in refundable credits

This is a simplified illustration. Actual amounts vary based on CCPC status, taxable income thresholds, provincial rates, and the proportion of time spent on qualifying work. This is not tax advice.

Step 4: File Form T661

Form T661 is the primary SR&ED claim form. It is filed alongside your corporate tax return (T2). The form has several sections:

• •Part 2 — Project information: a technical narrative for each SR&ED project describing the uncertainty, the work performed, and the results
• •Part 3 — Expenditure calculations: the dollar amounts for salaries, materials, subcontractors, and overhead
• •Schedule T2SCH31 — Investment tax credit calculation: applies the appropriate ITC rate to your qualifying expenditures

The technical narrative in Part 2 is the most critical section for AI claims. For each project, you must clearly describe:

• •What technological uncertainty existed at the start of the project
• •What systematic investigation you conducted (hypotheses, experiments, analysis)
• •What technological advancement was achieved (including negative results)

Step 5: Meet the Filing Deadline

You must file your SR&ED claim within 18 months after the end of the fiscal year in which the qualifying expenditures were incurred. This is a hard deadline — miss it and you forfeit the entire claim for that year, with no appeal process.

Should You Use an SR&ED Consultant?

You can file SR&ED yourself, but many companies — especially first-time claimants — use specialized SR&ED consulting firms. Here is what to consider:

• •Contingency pricing — most SR&ED consultants charge 15–30% of the refund received, meaning zero upfront cost. You only pay if the claim is successful.
• •Technical writing expertise — good consultants know how to frame AI work in terms the CRA reviewers understand, which significantly improves approval rates
• •Audit representation — if the CRA selects your claim for review, the consultant handles the process on your behalf
• •Watch for red flags — avoid consultants who guarantee specific refund amounts before reviewing your work, or who pressure you to inflate claims

Preparing for a CRA Review

Not all SR&ED claims are reviewed, but AI-related claims — especially large ones from first-time filers — are more likely to be selected. A CRA review typically involves:

• •A financial reviewer who verifies expenditure amounts, salary allocations, and subcontractor documentation
• •A Research and Technology Advisor (RTA) who evaluates the technical merit of your projects — whether they truly involved technological uncertainty and systematic investigation
• •An on-site or virtual meeting where you walk through your projects with the RTA, demonstrating your methodology and results

The best defence in a review is contemporaneous documentation: experiment logs, git commit histories, model training records, and technical design documents created during the project — not written after the fact.

Related Resources

• •Does AI Development Qualify for SR&ED?
• •SR&ED Grant Details
• •5 AI Grants Every Canadian Business Should Know About
• •Official CRA SR&ED Program Page