Updated Checked by the Tax-Services.ca editorial team How we check
Product-market fit spending is the money you burn finding out whether anyone wants what you’re building, and Canadian tax treats its parts differently. Building and testing new technology may qualify for SR&ED, the federal research incentive. Market research and sales promotion are excluded from it by name. So the way you split and label these costs in your books decides what you can claim later.
Which product-market fit costs go where?
Don’t lump it all under “R&D”. Give each kind of spend its own account from day one. A rough working split looks like this.
| Cost | Likely home in your books | SR&ED? |
|---|---|---|
| Engineers working on technical unknowns | Development wages | Possibly, if the work qualifies |
| Customer interviews and surveys | Market research | No, excluded by the CRA |
| Ads, launch campaigns | Marketing | No, sales promotion is excluded |
| Routine testing, quality control | Operations | No, excluded |
| Laptops, servers | Capital property, claimed over years | Not as such |
The table isn’t a ruling. The CRA decides on the facts of each project, and the rules for any specific cost you might have aren’t confirmed here, so treat it as a filing plan, not a promise.
What counts as SR&ED work?
The CRA describes three kinds of eligible work: basic research, applied research, and experimental development. The last one is what most start-ups mean. It’s work aimed at generating technological knowledge to develop or improve materials, devices, products or processes. Support work, like programming, testing and design that directly serves that effort, can be included too.
Here’s the catch for a start-up. A new app isn’t eligible because it’s new. The test is simple: were you trying to solve a technological uncertainty through systematic work? Building a standard app with known tools generally isn’t that. Also out: hiring experts to apply existing knowledge, style changes and routine data collection.
Data collection is only eligible when you do it for SR&ED purposes. Gathering customer feedback for the business doesn’t qualify.
Current expense or capital cost?
The CRA says you can deduct reasonable current expenses you incur to earn income, but you can’t deduct the cost of capital property in the year you buy it. Instead you claim capital cost allowance over several years. So wages for an experiment and a $4,000 laptop are treated differently, even if both come out of the same funding round.
The CRA also says start-up costs may be considered when working out operating expenses. It doesn’t set out which ones, so check the T4002 guide or ask your accountant about yours.
What is a deduction worth to a young company?
Take a $200,000 round spent as follows: $120,000 on development wages, $50,000 on marketing and $30,000 on customer research. The percentage calculator makes that 60%, 25% and 15%. Only the first slice can ever be a candidate for SR&ED.
Now the tax side. If your Ontario company earns $140,000 of taxable income before a $40,000 deductible spend, the corporate tax calculator shows tax of $16,374 against $11,696 on $100,000. That’s about $4,678 less, a few hundred bucks short of five grand. The rate used, 11.696%, is a blend for calendar 2026 because Ontario changed its small business rate in July, so it’s an estimate.
Many early companies have no taxable income at all, so a deduction may just add to a loss. How losses carry forward isn’t covered on this page, so ask before you plan around it.
How do you know when you’ve found fit?
The books won’t tell you, but they can help you see it. Watch three plain numbers month to month: how many customers came back, how much each one paid you, and what it cost you to win them. If the cost keeps falling while repeat buying rises, something is working.
Take Omar in Winnipeg, who sells inventory software to small shops. He spends $6,000 over a quarter on customer calls and a pilot, and ends up with eight paying shops. That’s $750 per shop, a figure he can only get because the calls were booked to their own account. Mixed into “general costs”, it would have been invisible.
What mistakes cost start-ups money?
Poor records top the list. If you want to claim SR&ED later, you’ll need to show what problem you tried to solve and how, which is much easier when you wrote it down at the time. Time sheets by project help. So does a note when an experiment fails.
Next is judging results too late. Use the ROI calculator on each experiment: what you spent, what it returned, and over how many years. It ignores taxes and fees, and early experiments often return nothing, which is normal. The point is to know.
Last, keep everything. The CRA says records should be kept for six years from the end of the last tax year they relate to, as its page on how long to keep records sets out.
How we checked the figures
The eligible and excluded work lists come from the CRA‘s SR&ED eligibility page. The current versus capital rule comes from the CRA’s business expenses pages. The tax comparison uses this site’s corporate tax calculator with 2026 data. The enhanced SR&ED rate for a Canadian-controlled private corporation is 35% on up to $6 million of qualified spending, so read the CRA’s SR&ED pages before you plan a claim. This site is independent of the CRA and any government.
Frequently asked questions
Is market research eligible for SR&ED?
No. The CRA lists market research and sales promotion as excluded work.
Does a new product automatically qualify for SR&ED?
No. The work must be a systematic search that tries to resolve a technological uncertainty, not just build something new.
Can I deduct a laptop bought for the project?
It's capital property, so you claim capital cost allowance over several years rather than deducting it at once.
Are start-up costs deductible?
The CRA says they may be considered when working out operating expenses. Check guide T4002 or ask your accountant for your case.
What records should I keep?
Project notes, time sheets, invoices and results, for six years from the end of the last tax year they relate to.
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