The Canada Revenue Agency (CRA) has recently released an updated SR&ED Salary or Wages Policy, effective January 28, 2025. Notably, this revision incorporates key changes to income tax laws introduced since the last publication in 2014. In addition, it clarifies existing policies and further promotes consistency across CRA documents. Consequently, if your business claims Scientific Research & Experimental Development (SR&ED) credits, gaining a clear understanding of these updates is essential—both for maximizing your eligible tax credits and for maintaining full compliance with CRA requirements.

What’s New in the 2025 Update?

1. Removal of Outdated Salary Proration Rules

Previously, special rules applied to prorating salary or wages for SR&ED work conducted outside of Canada before February 25, 2008. However, these distinctions have since been removed. As a result, salary allocation for international SR&ED activities has been significantly simplified.

2. Clarifications on Salary or Wages for SR&ED Claims

The updated policy refines definitions and eligibility criteria for SR&ED salary or wages, explicitly stating:

  • Salary must be incurred and paid within 180 days of year-end to be eligible.
  • The employer’s share of benefits (CPP, EI, pensions) is not included in SR&ED wages.
  • Stock options and retiring allowances do not qualify as SR&ED wages.
3. Specified Employee Salary Limits Updated

Specified employees (those who own 10% or more of shares in a company) have salary caps for SR&ED claims. The update reinforces:

  • SR&ED wage claims for specified employees are limited to 5 times the Year’s Maximum Pensionable Earnings (YMPE).
  • Bonuses and profit-sharing do not qualify for SR&ED claims for specified employees.
4. Refinements to Directly Engaged vs. Directly Attributable Wages

The CRA maintains two main ways to claim SR&ED wages:

  • Proxy Method: Covers only wages for employees directly engaged in SR&ED in Canada.
  • Traditional Method: Includes wages for those undertaking, supervising, or supporting SR&ED, along with some administrative salaries if directly related.

The revised policy clarifies what qualifies as direct engagement versus supporting roles, making it easier for businesses to allocate wages correctly.

5. International SR&ED Salary Rules Streamlined
  • Salary for employees conducting SR&ED outside of Canada is limited to 10% of total SR&ED wages in Canada.
  • Only employees who are Canadian residents at the time of payment qualify.
  • Salaries subject to foreign taxes are not eligible.
6. Improved Documentation & Cost Allocation Guidelines

The CRA has expanded guidance on supporting documentation for wage claims, including:

  • Time sheets & supervisor reports
  • Project tracking records
  • Negative time reporting (identifying non-SR&ED work explicitly)
  • Allocation methodologies for mixed SR&ED and non-SR&ED roles

Businesses are encouraged to strengthen their tracking systems to improve claim accuracy and reduce the risk of audits.

What These Changes Mean for Your Business

1. More Clarity, Less Complexity

The removal of outdated proration rules and enhanced definitions simplify salary allocation for SR&ED.

2. Stricter Rules for Specified Employees

If you or key shareholders claim SR&ED wages, be mindful of salary caps and exclusions for bonuses.

3. Stronger Focus on Documentation

To maximize your SR&ED claim, maintain detailed records of employee time, tasks, and project involvement.

4. Better Guidance on International Claims

Companies conducting SR&ED outside Canada must ensure strict adherence to the 10% salary limit and confirm tax treatment in foreign jurisdictions.

Final Thoughts

The 2025 updates to the SR&ED Salary or Wages Policy reinforce the CRA’s commitment to clarity and compliance. While these changes simplify some aspects, they also emphasize stronger documentation and adherence to salary limits.

If you require assistance navigating these recent updates or optimizing your SR&ED claims, reach out to Virtual Heights Accounting. Our team of CPA professionals is well-equipped to guide you through the process. With our support, you can ensure your claim aligns with CRA requirements, thereby maximizing your eligible SR&ED tax credits while also maintaining full compliance.

Need SR&ED guidance? Contact us today!