SR&ED contract payments: who is doing work for whom?

When a company pays another business to help with an SR&ED project, the invoice alone does not answer who can claim the work. The important question is whether the work was performed for the payer, on the payer's behalf, or as the contractor's own SR&ED.

That distinction affects both sides of the arrangement. A payer may have an SR&ED contract expenditure. A contractor that receives a contract payment may need to reduce its qualified expenditures for investment tax credit purposes. The same work should not create two investment tax credit claims.

At a glance, September 23, 2026

• A contract can support a payer's claim when SR&ED is performed in Canada on the payer's behalf.
• The contract and the surrounding facts matter. An invoice label does not decide the treatment.
• An arm's-length contract and a non-arm's-length contract have different investment tax credit consequences.
• Separate the SR&ED portion from routine delivery before building the financial claim.

Start with the relationship, then the work

The CRA describes an "on behalf of" arrangement as one where the payer asks a contractor to perform SR&ED under the contract. It examines the contract as a whole and the facts around it. Its current contract-expenditure policy points to the payer's request, control of the work, rights to the results, and the allocation of risk as useful considerations.

Take a hypothetical software company that hires an engineering firm to investigate a data-synchronization failure. The company sets the technical objective, receives the experimental results, and owns the resulting implementation. The engineering firm runs tests and reports on the failures. Those facts may support a finding that the firm performed SR&ED on the company's behalf.

Change the facts and the answer can change. If the firm is independently developing a reusable product, keeps the resulting intellectual property, and merely licenses a finished feature to several customers, its work may not have been performed on the first customer's behalf. The name on the statement of work is less useful than the actual obligations and rights.

Keep payer and performer records separate

For the payer, a contract expenditure may be allowed when the contractor performs SR&ED in Canada on the payer's behalf and the work relates to the payer's business. CRA's current allowable-expenditures guidance says that arm's-length and non-arm's-length contracts need to be separated.

For an arm's-length SR&ED-only contract, CRA's published policy says 80% of the related expenditure may be a qualified expenditure for investment tax credit purposes, subject to the statutory requirements. The same policy says the work must have been performed in Canada in the year by a taxable supplier and be related to the claimant's business. The Income Tax Act, section 37 is the controlling source for the deduction rules; administrative guidance is useful for how CRA applies the facts.

The performer needs a separate review. Where an arm's-length contractor receives a contract payment for SR&ED carried out on the payer's behalf, CRA says that payment reduces the performer's qualified SR&ED expenditures for investment tax credit purposes. That is the mechanism that avoids duplicating the credit. It does not mean every contractor invoice is a contract payment or that the contractor's entire SR&ED pool disappears.

Non-arm's-length arrangements need extra care. CRA says the payer's contract expenditure may be deductible, but it is not a qualified expenditure for the payer's investment tax credit calculation. Related-party files should preserve ownership, control, payment, and any transfer analysis instead of assuming that a familiar corporate group can use the arm's-length result.

Split mixed contracts before the claim is prepared

Many real agreements cover more than an experiment. A contractor may investigate a technical uncertainty, then build routine production features, train staff, and provide ordinary support. The SR&ED portion needs to be identified rather than treating the full contract price as eligible.

CRA's policy accepts a reasonable method of separating SR&ED and non-SR&ED work, including one based on fair market value, when it reasonably approximates the SR&ED expenditure. The supporting file should connect each allocation to the scope, acceptance criteria, work records, and invoices.

Useful records often include:

• the signed statement of work and amendments;
• technical specifications, experimental plans, and decision records;
• deliverables that distinguish tests from ordinary implementation;
• invoices and payment records tied to the period of work;
• intellectual-property and confidentiality clauses; and
• a concise explanation of who bore the technical and commercial risk.

An agreement that simply says "R&D services" leaves too much reconstruction for the review. The strongest file lets a reviewer see what was asked, what was done, and which part of the price relates to the eligible investigation.

Do not confuse a prepaid amount or a third-party payment with a contract result

Payment timing matters. CRA's contract policy explains that a payment for SR&ED work that has been contracted but not yet performed is a prepaid expense. It is not treated as made or incurred for that year under the prepaid-expense rule. A deposit does not become an SR&ED expenditure merely because the contract's purpose is research.

Third-party payments are another category. A payment to an approved university, college, research institute, or similar entity can follow rules that differ from a contract for SR&ED performed on behalf of the payer. The key practical distinction is control: in a contract, the payer generally controls the work and obtains rights to it; a third-party arrangement is structured differently. CRA's third-party payment policy should be read before assigning either label.

Build the claim from the actual arrangement

Before the financial review, ask four plain questions. Who asked for the experimental work? What did the contractor have to do? Who controlled and could use the results? Which work was actually performed during the claim year?

Those answers will not resolve every file, especially where the contract is thin or a related company is involved. They do create a defensible starting record. The SR&ED support-work guide can help separate work that directly supports an investigation from ordinary delivery. Keep the contract analysis beside the technical narrative and the expenditure schedule, so each part of the claim tells the same story.

Frequently asked questions

Can both the payer and contractor claim the same SR&ED work?

The rules are designed to prevent duplicate investment tax credit treatment. A contract payment received by an arm's-length performer can reduce the performer's qualified expenditures when the SR&ED was performed on the payer's behalf. The treatment depends on the contract and facts.

Does a fixed-price contract prevent an SR&ED contract claim?

No single pricing term decides the result. A fixed price can be relevant to which party carried risk, but CRA reviews the agreement as a whole and the surrounding facts.

Is all contractor work eligible if the project includes SR&ED?

No. Separate experimental work from routine implementation, maintenance, training, and other non-SR&ED work. Keep a reasonable allocation method and the records that support it.

What if the contractor is related to the claimant?

Related-party contracts have different investment tax credit consequences. Preserve the relationship and transfer analysis, then obtain tax advice for the claimant's facts.

Sources reviewed September 23, 2026.