Date: June 17, 2026
Category: Policy & Budget Updates

Why This Area Gets Challenged

Contractors can be a major part of an SR&ED claim, especially where a company brings in outside engineering, software development, testing, formulation, design, or technical support. But contractor costs are also one of the areas where claims can get reduced if the support is weak.

The basic rule is straightforward: where an arm’s-length contractor performs eligible SR&ED work in Canada on behalf of the claimant, only 80% of the eligible contract amount is generally included for SR&ED investment tax credit purposes.

For example, if a company pays an eligible Canadian contractor $100,000 for qualifying SR&ED work, the claimable amount is generally $80,000.

But the 80% rule is only part of the story. The bigger issue is proving that the contractor was actually performing SR&ED work, not simply delivering a finished product, routine engineering service, software feature, manufacturing job, or general consulting service.

A common mistake is treating the contractor as a black box. The company may have an invoice, payment record, and statement of work, but little evidence of the technical problem addressed, the uncertainty investigated, the work performed, or how that work tied to the claimant’s SR&ED project.

That is where the risk comes in.

What Support Should Look Like

To support contractor costs, the file should show what work was performed, where it was performed, who performed it, and how it related to the claimed SR&ED uncertainty. The claimant does not need the contractor to file a separate T661 narrative, but should have enough information to explain and support the work if CRA asks.

Good support may include contractor invoices, statements of work, technical emails, test notes, design iterations, meeting notes, reports, source control records, prototypes, photos, change requests, or other records showing the actual work performed. The strongest files connect the contractor’s work directly to the claimant’s technical narrative and financial schedules.

There are also important limitations. Work performed outside Canada generally does not qualify as Canadian SR&ED contract work, even if the claimant is Canadian or the work is managed from Canada. Non-arm’s-length contractor arrangements are also more complicated and should not be treated the same way as standard arm’s-length contractor costs. Related-party arrangements may require separate analysis and proper forms, rather than assuming the regular 80% treatment applies.

The key question is not just whether the contractor was paid. The key question is whether the contractor’s work can be tied to an eligible SR&ED project and supported with enough technical and financial detail.

Contractors can absolutely strengthen an SR&ED claim, especially when they bring specialized knowledge or help perform testing, development, or analysis that the company could not complete internally. But the documentation needs to show more than an outsourced deliverable. It needs to show the contractor’s role in the actual investigation.

The practical takeaway is simple: contractor invoices are not enough. If a contractor is part of the SR&ED claim, the company should collect the technical support while the work is happening, not months later when the claim is being prepared.

Using contractors in your SR&ED work? Carnegie Capital Group can help companies assess whether contractor costs are supportable, identify documentation gaps, and strengthen claims before review becomes an issue.