qualifying work2

Deductions from SRED

Certain payments that a company receives are subsidy payments under the SRED program.  Therefore, these payments must be deducted from SRED expenditures under the principle that the government doesn’t want to subsidize the same activity twice (or more!).

There is something important to keep in mind when multiple subsidies might be available.  It is always in a company’s best financial interest to take all subsidies available even though they may reduce the SR&ED subsidy.  Why?  Subsidy payments are deducted from SRED expenditures, not directly from SRED credits. This means that subsidy payments reduce, or grind SRED subsidies, but they don’t reduce SRED on a dollar-for-dollar basis.  Say a company gets $100 of IRAP subsidy which must be deducted from SRED.  The IRAP reduces the SRED expenditures by $100.  But this reduces a CCPC’s SRED credits by only the percentage amount that a company earns for qualifying expenditures.  So, in our example, a $100 IRAP subsidy will reduce an Ontario CCPC’s SRED credits, not by $100, but by $43.  So, the company is ahead overall by $57 by taking advantage of both credits.

There are two types of subsidies to consider which grind SRED credits.  Government subsidies and non-government subsidies.  Most of the subsidies which grind SRED are government programs.  Here we will describe the most common government subsidies: IRAP, CEWS and believe it or not, provincial SRED credits themselves.  There are other government subsidies which grind SRED credits, but they are smaller, regional programs, for example Quebec’s e-business credits.


IRAP is a long-time federal government program (it pre-dates SRED) which incents companies to carry out high technology research.  IRAP typically pays for a percentage of technical staff salaries, agreed to in a business plan jointly developed between the company and its government IRAP advisor.  IRAP will also occasionally fund marketing or business development (BD) staff, typically where the high-tech company is trying to penetrate a new foreign market.  This type of IRAP subsidy brings up an important consideration regarding all subsidies and SRED.  Only subsidy payments that directly overlap SRED expenditures must be deducted from SRED.  This can be clearly seen with IRAP BD funding.   SRED never funds marketing or BD activities.  So, there can be no overlap between IRAP BD funding and SRED funding for a given project.  It is critical for companies to carefully match up different subsidies to SRED so that they deduct only overlapping subsidies.  Otherwise, the company will be reducing its SRED receipts by an unnecessarily large, incorrect amount.


CEWS is the federal government $77B (and counting) pandemic program to incentivize companies not to lay off staff.  CEWS was introduced in March 2020, and it runs until at least September 2021.  CEWS pays a subsidy amount up to $3800 per staff member to all employees for a given period (roughly a month) that the company qualifies for the incentive.

It was unclear for several months of the pandemic whether CEWS would be considered a government subsidy with respect to SRED.  In June, the CRA confirmed that CEWS was a subsidy and indeed it would claw back SRED funding.  The government re-confirmed this position in January 2021 and is now making CEWS deductions a point of emphasis for all SRED reviews.

CEWS is a mammoth program vs SRED.  $77B spread over 16 months vs $3B annually.  Because of this size difference, it is critical to apply the principle of overlap to only deduct the required amount of CEWS subsidy from your SRED claim.  If you have more than approximately 10 SRED practitioners in your company, the only practical way to arrive at the legally correct minimum CEWS deduction, is to engage the service of a consultant with specialized CEWS-SRED software.

Provincial SRED credits

Just as an interesting side note, provincial SRED credits are themselves considered to be government subsidies with respect to SRED.  This seems circular, but it’s the rules.  If you’ve ever filed a SRED claim, your federal ITC credits were automatically ground down by the provincial SRED credits that you received.

Non-government subsidies – Subcontracts

There is one more subsidy which is important to be aware of due to its potential impact on your SRED claim.  That is subcontract payments.  The official term for this type of subsidy is “subcontract payment in respect of SRED”.

What happens here is that you may engage the services of a subcontractor to carry out some specialized technical work in support of your SRED project.  Possibly unbeknownst to you, that subcontractor files his own SRED claim for all, or part of the work performed for you.  This is a big no-no called double dipping.  The government does not want to pay twice for the same piece of SRED work.

The subcontract payments in respect of sred must bed deducted from the subcontractor’s SRED claim.  He may still be able to claim partial expenses for the work due to proxy considerations or if he undercharged for the work performed.