Key takeaway: The SR&ED proxy method lets you skip itemizing overhead entirely and instead claim a flat 55% of your eligible SR&ED salary base as a notional expenditure. On a $500,000 salary base, that's an extra $275,000 in qualified expenditures before you've tracked a single overhead receipt. Pick the traditional method instead and you claim your real overhead, line by line, with the paperwork to defend each one. You make the election on the T661 itself, and the calculation runs in Part 5 of the form.
Most founders never hear the word "overhead" and "SR&ED" in the same sentence until an accountant asks which method they're using. There are exactly two answers, and they produce very different amounts of paperwork for very different amounts of money. This sits inside the broader T661 filing process — Part 3 is where you make the election, Part 5 is where the proxy math actually happens — and it's one of the levers covered in our complete SR&ED guide.
What the SR&ED proxy method actually is
The proxy method trades your real overhead costs for a formula. Instead of tallying rent, utilities, and the office supplies tied to your SR&ED work, you calculate a single notional figure, the prescribed proxy amount (PPA), and claim that instead. The CRA's Prescribed Proxy Amount Policy is explicit about the trade: once you elect the proxy method, you can't treat any of your actual SR&ED overhead as a qualified expenditure. The PPA stands in for all of it. Your actual overhead is still a normal deductible business expense. It just doesn't touch your SR&ED claim anymore.
That swap is the entire point of the method. Instead of building a case for why the office internet bill was partly an SR&ED cost, you run one calculation off your payroll and move on.
For a startup where engineering salaries already dominate the SR&ED spend, that trade can be worth real money with almost no extra work. The 55% multiplier applies whether or not you ever tracked a single overhead receipt against a specific project. The PPA is also a different lever from the credit rate itself. This method changes how much you're allowed to claim as a qualified expenditure, not the percentage (15% basic, 35% enhanced) applied once that expenditure figure is set.
Proxy vs. traditional: the two ways to claim overhead
You have two options, and the CRA lets you elect either one when you file. Traditional method: identify your real SR&ED overhead and other expenditures, item by item, and include them directly in your pool of deductible SR&ED expenditures. Proxy method: skip the itemization and claim the PPA, 55% of your salary base, instead.
Neither is inherently better on paper. A company with genuinely high SR&ED-attributable overhead (dedicated lab space, heavy equipment costs) can sometimes claim more under the traditional method than the flat 55% would produce. A software team whose SR&ED cost is almost entirely engineering salaries usually has thin actual overhead to itemize. That's exactly the case the proxy method was built for. And that's our read of the trade-off, not something the CRA states as a recommendation; the policy itself just lays out both paths and leaves the arithmetic to you.
How the 55% prescribed proxy amount is calculated
The PPA is 55% of your salary base, full stop. No sliding scale for company size, no tiers. That rate has been fixed since 2014; before that it was 60% for 2013 and 65% for 2012 and earlier. The number has only moved in one direction, and not for over a decade.
The math itself is one line: PPA = 55% × salary base. A team with $500,000 in eligible SR&ED salaries generates a $275,000 PPA. That amount doesn't get deducted from your income the way real overhead would. The policy is specific that the PPA exists only to inflate your qualified expenditures for the investment tax credit calculation, not your income tax deduction. It shows up in Part 5 of Form T661, and only if you checked the proxy-method box in Part 3.
What counts in your salary base — and what quietly doesn't
Your salary base is the SR&ED-directly-engaged salaries and wages you're already tracking for the credit itself, with a few categories stripped out. Per the same CRA policy, none of the following count toward the salary base, for any employee:
- Taxable benefits — even though these can appear elsewhere in payroll, they're excluded here.
- Bonuses and profit-based remuneration — a founder who pays discretionary bonuses in December shouldn't expect those dollars to boost the PPA.
- Prior-year unpaid amounts paid in the current year — the retroactive top-up doesn't retroactively inflate this year's base.
- Employer benefit contributions — never included in the salary base, regardless of employee type.
If your payroll runs heavy on bonuses or deferred comp, your salary base, and therefore your PPA, will be smaller than your total payroll spend suggests. Base the estimate on regular salary and wages only.
A worked example: same team, two different numbers
The gap between the two methods can be six figures wide even with identical headcount, because one produces a flat formula result and the other produces whatever your real costs happen to be. Picture two companies, each with $600,000 in eligible SR&ED salaries for the year and neither one a specified-employee-heavy cap table. Company A elects the proxy method. Company B elects traditional.
Company A's math takes one line: $600,000 × 55% = $330,000 in additional qualified expenditures, no receipts required, no argument to build. Company B spends a few weeks with a spreadsheet: rent allocated by square footage to the engineering floor, a portion of the AWS bill tied to non-production dev environments, a slice of the office manager's salary. They land at $210,000 in substantiated overhead. Company B claimed less than the proxy formula would have given them, and they now own the burden of defending every line of that $210,000 if the CRA asks.
That's not a universal outcome. A hardware company running a dedicated test lab could easily clear $330,000 in real overhead and come out ahead on the traditional method. The point isn't that proxy always wins. It's that the two numbers are rarely close enough to guess, and the only way to know which one is bigger for your company is to actually run both calculations before you make the election on that year's T661. Getting this right is one of the more overlooked levers in maximizing what a claim is actually worth.
The specified-employee restriction that catches founders
Founders and other significant shareholders usually fall into a category the CRA calls "specified employees," and the rules get tighter for that group. For everyone else, the salary base is straightforward: eligible SR&ED wages, minus the exclusions above. For a specified employee, the policy caps it two ways, and whichever cap comes in lower wins.
Only 75% of a specified employee's time can count toward the salary base, even if they spent more of the year on SR&ED than that. On top of that, the dollar amount can't exceed 2.5 times the Year's Maximum Pensionable Earnings (YMPE) for the calendar year, prorated for days actually employed. Both caps apply before the 55% multiplier touches the number, so a founder who's genuinely SR&ED-focused full time still has their contribution to the salary base trimmed at the 75% mark. Whether a given employee counts as "specified" depends on ownership and relationship tests defined elsewhere in CRA policy, and it's worth confirming with your accountant rather than assuming either way.
The overall cap that can shrink your PPA further
Even after the salary-base math, one more ceiling can apply: the overall cap on the PPA, designed so your total SR&ED-related deductions never exceed what you actually spent as a business that year. Most companies never hit it. The CRA's own rule of thumb, from the same policy: the cap generally won't restrict your PPA if you've deducted more than $55 of non-SR&ED business expenses for every $100 of eligible salary in your salary base.
Diversified businesses, running production, marketing, and R&D side by side, rarely bump into it. It's a backstop for the edge case where a company's total deductible expenses are so thin that the notional 55% overhead figure would outstrip what the business actually spent. If that's not your situation, the cap is background noise. If your non-payroll spending is unusually low relative to salary, it's worth having your accountant run the calculation before you count on the full 55%.
Where founders get the calculation wrong
Take "SR&ED payroll" straight off a P&L line and multiply by 55%, and the number you get is almost always too high. The policy's salary base is narrower than total payroll spend. Bonuses, profit-based pay, taxable benefits, and employer contributions all have to come back out first, and skipping that step is the single most common way founders overestimate their own PPA before an accountant catches it.
Running the comparison for the first time in month 17 is another one. The election happens on the T661 itself, for that tax year, so the moment you file is the moment the choice takes effect for those expenditures. That's a bad time to discover you'd have come out ahead the other way.
Defaulting to whatever a previous accountant used is the quieter mistake, because nothing forces you to notice it's gone stale. The two figures move independently. Headcount growth pushes the proxy number up automatically, while real overhead often grows more slowly than salaries for software companies. A method that made sense two years ago isn't guaranteed to make sense this year, and if you're also claiming a provincial credit on the same expenditures, this interacts with the federal math covered in how the grind rule cuts your credit.
Why this election reaches past your federal credit
The PPA doesn't stop at the federal number. Most provincial R&D credits are calculated as a percentage of the same federal qualified SR&ED expenditures that the PPA feeds into, so a larger proxy amount can lift your provincial number too. The relationship runs both directions, though: claiming that provincial credit then reduces your federal pool right back through what's known as the grind. If you're stacking a provincial credit on top of this claim, the proxy-vs-traditional decision isn't purely a federal question, and it's worth reading alongside how the grind rule actually cuts your federal number before you file.
Proxy vs. traditional: which one actually maximizes your claim
There's no universal answer, and anyone who gives you one without seeing your books is guessing. The honest version: run both numbers before you file, because the gap between them is usually bigger than founders expect. If your real SR&ED overhead (lab equipment, dedicated facility costs, specialized software licensing tied directly to the R&D) genuinely exceeds 55% of your eligible salaries, the traditional method wins, and the itemization burden is worth it. If your SR&ED cost structure is mostly payroll with modest overhead, which describes most software companies, the flat 55% typically beats what you'd substantiate item by item. You also skip an entire category of audit exposure: there's nothing to itemize, so there's nothing to defend.
Who should skip the proxy method entirely: companies with real, well-documented SR&ED-specific facilities or equipment costs that clearly exceed 55% of salary. Think a hardware startup running a dedicated test lab, or a biotech with wet-lab space allocated by square footage. For those companies, itemizing is more work but leaves real money on the table if skipped. Everyone else should at least run the comparison before assuming the flat rate wins by default.
This is the kind of calculation that's easy to get wrong by defaulting to whichever method your accountant used last year without re-checking it. It's also the kind of decision that benefits from data collected continuously rather than reconstructed at filing time — knowing your actual overhead spend against SR&ED projects requires records from throughout the year, not a scramble in month 17. Glauq tracks the underlying salary and expenditure data inside the tools your team already uses, all year, so the proxy-vs-traditional comparison is a real calculation rather than a guess — and a qualified, independent SR&ED expert reviews the method election before it goes on your T661, the same as every other line on the form.
Frequently asked questions
What's the SR&ED proxy method? It's one of two ways to calculate the overhead and other expenditures portion of your SR&ED claim. Instead of itemizing actual overhead costs, you claim a notional amount — the prescribed proxy amount (PPA) — calculated as 55% of your eligible salary base. You elect it on Form T661; the alternative is the traditional method, where you claim real overhead expenditures directly.
How is the 55% prescribed proxy amount calculated? PPA equals 55% multiplied by your salary base, which is the total eligible salary and wages of employees directly engaged in SR&ED, with bonuses, profit-based pay, taxable benefits, and employer benefit contributions excluded. The calculation happens in Part 5 of Form T661, and only applies if you've elected the proxy method.
Has the 55% rate always been 55%? No. Per the CRA's policy, the rate was 65% for 2012 and earlier years and 60% for 2013, dropping to 55% starting in 2014, where it's stayed since. It's a flat federal percentage, not something that varies by company size or industry.
Does the proxy method affect my income tax deduction, or just the credit? Just the credit calculation. The PPA is a notional amount used only to determine your qualified SR&ED expenditures for the investment tax credit. Your actual overhead and other expenditures remain ordinary deductible business expenses on your income tax return regardless of which method you elect — the policy draws that line explicitly.
Are there extra restrictions if I'm a specified employee, like a founder? Yes. A specified employee's contribution to the salary base is capped at whichever is lower: 75% of their time, or 2.5 times the Year's Maximum Pensionable Earnings for the year, prorated for days employed. Both caps apply before the 55% multiplier, so founders with heavy SR&ED involvement often see their own salary contribute less to the PPA than a non-specified employee's equivalent salary would. Confirm your specified-employee status with your accountant — the definition turns on ownership and relationship tests outside this policy.
Should I use the proxy method or the traditional method? It depends on whether your real SR&ED overhead exceeds 55% of your eligible salaries. If it does, traditional wins on paper — with the tradeoff of having to substantiate every line. If your overhead is modest relative to payroll, which is typical for software teams, the proxy method usually claims more with far less documentation risk. This is our practical read of the tradeoff, not CRA guidance; run the actual numbers before you elect either one.
The proxy-vs-traditional decision is one line on your T661, but it can move your claim by six figures either way. Estimate what your claim could be worth or check your eligibility to see how it plays out for your team.