Updated Checked by the Tax-Services.ca editorial team How we check
Accounting for intellectual property development in a Canadian startup has two tracks that don’t have to match. Your financial statements follow an accounting standard. Your tax return follows the Income Tax Act, and for research work the big prize sits there: most Canadian-controlled private corporations earn a 35% investment tax credit on qualifying SR&ED spending, up to a limit of $6 million a year for tax years beginning after December 15, 2024.
Why does intellectual property need two sets of answers?
Because the two tracks ask different questions. The accounting side asks when a cost becomes an asset on the balance sheet and when it is expensed. That depends on the framework you report under, usually ASPE for private companies or IFRS for some others. We didn’t verify the detailed capitalization tests in either standard for this page, so have your accountant confirm how they apply to your project before you record software or patents as assets.
The tax side asks whether the work qualifies as scientific research and experimental development, and if so, what you can deduct and claim as a credit. A cost can be an expense in your books and still earn a credit. The reverse happens too. Keep a schedule that ties the two together so nobody has to rebuild it at filing time.
Picture Priya, who runs a three-person software startup in Waterloo. Her bookkeeper capitalizes part of the platform build. Her tax preparer treats most of the same salaries as SR&ED costs. Neither is wrong, and both numbers can sit in the same file as long as someone writes down why they differ.
What does the SR&ED credit pay back?
The CRA sets two rates. The basic rate is 15% of qualified expenditures. Most CCPCs earn the higher 35% rate, but only up to the expenditure limit. Go above it and the excess earns the basic 15%. The CRA’s own wording on the higher rate is short.
Most Canadian-controlled private corporations (CCPCs), whether stand-alone or associated, may earn a refundable ITC at the enhanced rate of 35% on qualified SR&ED expenditures, up to the expenditure limit.
Get an investment tax credit (ITC), SR&ED tax incentives, canada.ca
| Item | CRA figure |
|---|---|
| Basic credit rate | 15% |
| Higher rate for most CCPCs | 35% up to the limit |
| Expenditure limit, tax years beginning before Dec 16, 2024 | $3 million |
| Expenditure limit, tax years beginning after Dec 15, 2024 | $6 million |
| Refund on current spending at 35% | 100% within the limit |
| Carry back or forward | 3 years back, 20 years forward |
The refund is what makes this matter to a startup that has no profit to tax. A company can earn the credit, use it first against tax payable, and get refunded for what remains.
What does $200,000 of qualifying spending look like?
Suppose your company spends $200,000 on qualifying current expenditures in a year and sits under the limit. At 35% the credit is $70,000. Now compare that with a company that happens to be profitable. Our corporate tax calculator puts tax on $200,000 of taxable income in Ontario at $23,392 for a calendar 2026 year. That Ontario rate is a blend, so treat it as an estimate. Ignoring the fact that the spending itself reduces income, a $70,000 credit would first cancel tax like that and the rest would come back as a refund.
What if you blow past the limit? Say a larger CCPC has $7 million of qualifying spending and a $6 million limit. The first $6 million earns 35%, which is $2,100,000. The extra $1 million earns the basic 15%, which is $150,000. That’s $2,250,000 in all. The example is ours, it ignores any reduction to the limit and assumes every dollar qualifies, so it shows the mechanics rather than a claim.
Two cautions. Government assistance and contract payments you receive reduce the amount you can claim, and we haven’t listed every adjustment. And a claim is only as good as the records behind it. The CRA expects you to report any funding you received.
Where do salaries and records come in?
For a small team, payroll is usually the largest cost of building the thing. Work out what a developer really costs with the payroll remittance calculator. On $3,000 every two weeks in Ontario the employer share of CPP and EI adds about $228 a period on top of pay. Whether each person’s time counts for SR&ED is a separate question, and it needs time records that show what they worked on. Write down the technical problem, what you tried and what failed, as you go. Reconstructing it two years later doesn’t work well.
A simple habit helps: a short weekly note from each developer, two or three lines, saved where the bookkeeper can find it. It costs nothing and it’s the difference between a claim you can defend and one you can only hope about.
Tax on the owners is a separate layer. If you pay yourself from a profitable company, see what happens to a payout in the dividend tax calculator.
Mistakes that cost startups
Claiming ordinary product work as research is the big one. Routine software work doesn’t become SR&ED because it was hard. Next, missing the filing window, which has its own rules on the CRA site. Third, forgetting that an impairment or a write-off in your books is a different event from anything on the return. And then the quiet one: paying an outside developer and not sorting out who owns the code. The CRA pages we read don’t answer that, so it belongs in the contract.
Where the numbers come from
The credit rates, limits, refundability and carryover come from the Canada Revenue Agency SR&ED investment tax credit page. Corporate and payroll figures come from our calculators, which use 2026 data. Nobody in government has reviewed this page, and it doesn’t replace advice from an accountant who knows your project.
Frequently asked questions
What is the SR&ED credit rate for a startup?
Most Canadian-controlled private corporations earn 35% on qualified spending up to the expenditure limit. Above the limit the basic 15% applies.
What is the expenditure limit now?
$6 million for tax years beginning after December 15, 2024. Earlier years had a $3 million limit.
Can a startup with no profit get cash back?
Yes. Current spending at the 35% rate is refundable, up to the limit, after the credit is first used against tax payable.
Do my books and my tax return treat development costs the same way?
Not necessarily. Accounting standards and tax rules ask different questions, so keep a schedule that links them.
Does unused credit disappear?
No. The CRA allows a carryback of up to 3 years and a carryforward of up to 20 years.
- Property and tax in Canada: buying, owning and selling
How property tax and transfer tax apply when you buy, own, rent out or sell a home in Canada, with the calculators for each step