SR&ED for Engineering Firms
SR&ED for engineering firms: who claims when a client pays?
For consulting engineers, product design houses, test labs and R&D service firms. The work can qualify. The harder question is whether the credit is yours or your client's.
By Harminder Singh · Updated October 20, 2026 · CRA policy reviewed October 20, 2026
SR&ED for engineering firms: the short answer
The same SR&ED can't earn two credits. When you do SR&ED for a client, on its behalf, and it pays you, the client counts 80% of the payment as qualified spending and you cut your own claim by what you were paid. That's how the CRA's contract policy avoids paying out the credit twice.
So for most client work, the credit is the client's. Yours is the development you fund yourself, and the client work where the deal puts the risk and the results with you. Telling the two apart is most of what an engineering firm's SR&ED claim comes down to.
Plenty of firms like yours claim. Professional, scientific and technical firms were 7,240 of the 18,880 SR&ED claimants in tax year 2021, and engineering services firms spent $1.26 billion on in-house R&D in 2024. That second figure is all business R&D, not SR&ED claims.
Which side of the line is your project on?
Most engineering firms have projects in all three groups. Sort them before you count a single hour.
Your own development
A new test method, an analysis tool, a product or a process your firm builds for itself, on its own money. No client is paying for the result.
Who claims: You claim it, like any other company would.
SR&ED you do for a client
The client asks you to do the development, pays you for it, and owns what comes out. This is the usual engineering services contract.
Who claims: The client counts 80% of what it paid you as qualified spending. You can include your costs, but you cut your claim by the client's payment, which usually leaves nothing.
The grey zone
A fixed price where you absorb any overrun, you keep the IP, or you're really selling the client a product rather than your time.
Who claims: It depends on the contract's substance. The CRA weighs four criteria, and none of them decides it alone.
Where the money and the credit go
Arm's-length client (the usual case)
Client
Counts 80% of what it paid, $80,000, as qualified spending.
Your firm
Cuts its qualified spending on the project by the payment, up to its costs on that project.
Credit: Goes to the client. Your firm's claim on this project usually ends up near zero.
Related client (e.g. your parent company)
Client
Counts nothing. Its payment is allowable but not qualified for the credit.
Your firm
Keeps its qualified spending, because a related client's payment isn't a contract payment.
Credit: Stays with your firm, which may be able to transfer it to the client on Form T1146.
How the CRA decides if you worked "on behalf of" a client
It reads the whole contract and looks at the facts, not the label. The CRA's contract policy says "on behalf of" normally describes work where the client "typically maintains ownership of the SR&ED work performed." A clause calling a payment a contract payment, or saying it isn't one, may not be the last word.
Its Assistance and Contract Payments Policy is blunt about how hard this is: "There is no unique test or jurisprudence that will determine if an amount paid is a contract payment." Instead it lists four criteria and says none of them is conclusive on its own.
Criterion 1
Did the contract require specific SR&ED?
The CRA gives this as an example of a clause that points to work done on the client's behalf: "The contractor shall design, integrate, test, and verify performance." It also asks whether you had specifications to meet. The question is not whether SR&ED happened. It's whether it happened because the contract required it.
Criterion 2
Who carried the cost risk?
A ceiling price that leaves you paying for any overrun can mean the work was done at your risk, not the client's. But if you still get paid when the work doesn't meet the requirements, the risk sat with the client, ceiling price or not.
Criterion 3
Who owns the results?
If your firm keeps the intellectual property, that suggests the work was not done on the client's behalf, because the results stay with you. A client that only gets a conditional right to use the results points the same way. Crown contracts are an exception: there, the IP usually stays with the contractor by federal policy, so who owns it carries less weight.
Criterion 4
Is it a service or a sale of goods?
The CRA uses this as a tie-breaker when the other three don't settle it. A contract for services leans toward work on the client's behalf. A sale of goods doesn't prove the opposite.
Our read: if you're writing a new contract, decide which side should claim and make the clauses say the same thing. A contract that says the client claims, while your firm keeps the IP and eats any overrun, invites the CRA to look past the words.
How SR&ED contract payments reduce your claim
A contract payment reduces your qualified SR&ED spending on that project, and only that project. The reduction is the lesser of two amounts: what the client paid, is due to pay or can reasonably be expected to pay you, and your total costs on the project for the year. If the payment is bigger, the rest carries forward and reduces that same project's spending in later years. It never touches your other projects.
Count every payment you've received, are entitled to receive, or can reasonably expect to receive by your filing-due date. It starts reducing the project's qualified spending in the year the SR&ED began, and any excess carries into later years.
Illustrative example: the same project, two outcomes
Made-up numbers to show the mechanics, simplified to one year and one project. Not a client case.
Outcome A, on the client's behalf. A design firm agrees to develop a new fixture concept for a client for $100,000. The client owns the design, and the firm gets paid whether or not it works. The firm spends $80,000 of qualified costs. The reduction is the lesser of $100,000 and $80,000, so the firm's qualified spending on the project drops to zero. The client counts 80% of the $100,000, or $80,000, as qualified spending, assuming all of it is SR&ED done in Canada.
Outcome B, at the firm's risk. Same project, but the firm sells a finished fixture for a fixed price, absorbs any overrun and keeps the IP to sell the design again. On those facts, the payment may not be a contract payment at all. If the CRA agrees, the firm keeps its $80,000 of qualified spending, and the client would likely have no SR&ED contract expenditure for it.
Outcome B isn't automatic. It's a judgment on the four criteria, and the contract has to back it up.
Contracts that mix SR&ED and normal engineering
Only the SR&ED part counts, and you need a reasonable way to split it. Most engineering contracts are mixed: a few weeks of real development wrapped in drawings, documentation and project management. The CRA accepts the client's split method if it gives a reasonable estimate, and gives fair market value as one way to do it.
In the CRA's own example, a company pays an outside firm $300,000 to develop a custom product. It estimates $125,000 of that was SR&ED and $175,000 was not. A review of the work and costs supports the split, so the client counts 80% of the $125,000 as qualified spending. The other $175,000 may still be deductible as a normal business or capital cost, but not as SR&ED.
The split held up because a review of the firm's work and costs supported it. If your time sheets put everything on one job code, your client's split rests on guesswork.
Your own side works differently. If the contract doesn't separate what the client pays for SR&ED from what it pays for other work, payments for the non-SR&ED costs tied to the project can also reduce your qualified spending on it. Price the two parts separately in the contract.
A duty you owe a client: the capital notice
If your work on a client's SR&ED included costs of a capital nature, you must tell the client the amount in writing. Capital costs don't qualify for SR&ED, so under the look-through rule the client has to take them out of its contract expenditure. It can only do that if you tell it.
The deadline: without delay if the client asks, and otherwise no later than 90 days after the end of the calendar year in which the expenditure was made. Put it on the project close-out checklist.
Five cases where the usual answer changes
All from the CRA's contract expenditures policy, which the CRA says is under review after the 2026 legislative changes.
Related companies
If you and the client are not at arm's length, for example a parent and its engineering subsidiary, the rules flip. The client's payment is not a contract payment, so you keep your qualified expenditures and can earn the credit. The client earns none on what it paid you. You may be able to transfer some or all of your qualified expenditures to the client, up to the contract amount, on Form T1146. A separate rule: if an outside client pays you and you subcontract part of the work to your own subsidiary, that payment can reduce the subsidiary's qualified spending too.
Support work only
If a client hires you only for support work, such as testing or data collection for its own R&D, you can't claim it, because support work on its own isn't SR&ED. The client can, if the work was in proportion to its needs and directly supported its R&D. The exception is a related company, which can claim support work if that work would be SR&ED had the client done it itself.
Clients that aren't "taxable suppliers"
A payment from a business client counts as a contract payment only if that client is a "taxable supplier", a term defined in the Income Tax Act. If it isn't, the payment doesn't reduce your claim. Payments from Canadian governments, municipalities, other public authorities and tax-exempt bodies are a separate case: they do count as contract payments when they pay for SR&ED done on their behalf. Who is a taxable supplier is a technical question, so check it before you rely on it.
Supplying engineers to a client
If you supply workers to a client the way a placement agency would, the client treats the cost like a contractor expense. It has to show the worker did SR&ED in Canada on its behalf and, if the contract mixes SR&ED with other work, what share of their time went to SR&ED.
Work done partly outside Canada
If part of a contract is done outside Canada, the client has to split the contract price on a reasonable basis. The foreign part earns no credit. In the CRA's example, a $500,000 contract with $350,000 of the work done in Canada gives $280,000 of qualified spending (80% of $350,000).
One warning on related companies. Putting an arm's-length firm in the middle to get around these rules can backfire. In the CRA's example, nobody in the chain ends up with a credit.
What engineering-firm work can qualify
The same two-part test as everyone else: uncertainty that known engineering could not resolve, worked through by experiment or analysis. Failed work can still qualify. This is our read of where the line usually falls for firms like yours.
Can qualify
- Developing a test method, model or analysis approach because the known ones gave answers you couldn't trust for this case
- A design where you could not predict how it would behave, so you built prototypes or test rigs and changed the design based on what the tests showed
- Your own tools or products, where the firm carries the cost and keeps the results
- Work for a client where the substance of the deal puts the risk and the results with you
Usually does not
- Design to a code or standard, using known methods
- Routine analysis, drafting and permit or stamped drawings
- Quality control and routine testing, which the CRA excludes by name
- Site inspections, commissioning and troubleshooting that follow known steps
The "can qualify" list still runs through the client question above. A new test method you develop for a client, on its behalf, qualifies as SR&ED. The credit is just likely to be the client's, not yours.
Records to keep while the work happens
Two sets: one that proves the work was SR&ED, and one that proves whose SR&ED it was. Most firms have the first by accident and the second not at all.
The contract, with the clauses that answer the four criteria: what work it requires, the specifications, who owns the IP, how you're paid, and what happens if the work fails
A project code for each client job, so time and costs for SR&ED and non-SR&ED work don't mix
Test plans, results and design changes, dated when they happen, showing what you didn't know and how you found out
Your split of any contract that mixes SR&ED and normal engineering, with the method you used (for example, fair market value)
A per-project ledger of what each client paid you, since contract payments reduce your claim project by project
Copies of the written notices you send clients about capital costs (see below)
When a claim isn't worth it for your firm
For firms paid mostly to develop on clients' behalf, the claim can come out near zero after contract payments. The value you add is then on the other side: clean records that make your clients' claims hold up, which is a fair reason for them to pick you.
Firms that also build their own tools, methods or products are in a different spot. That work is usually where an engineering firm's own claim lives, and it's easy to miss because nobody invoices for it.
How Glauq works with engineering firms
For an engineering firm, the first question is who gets to claim the work. Glauq reads each contract against the CRA's four criteria, sorts every project into one of the three groups above, and builds the claim from the records your team already keeps. An engineer checks every project against the CRA's test before anything is filed.
Illustrative example: three projects, sorted by who can claim them
The contract
Agreement 24-031: fixture concept
Fixed fee, paid on delivery whether or not the fixture meets the target. “The contractor shall design, integrate, test, and verify performance.” The client owns all results.Before any narrative is written: who is this work for?
The four criteria
- Required specific SR&ED?
- Yes: design, test and verify
- Cost risk
- Paid even if the fixture underperforms
- Owns the results
- The client
- Service or goods
- Service
None of the four decides it alone. The contract as a whole does.
Sorted
- Agreement 24-031
- SR&ED for a client. The client claims; your claim is cut by its payment
- Test-rig controller
- Your own development. You claim it
- Agreement 24-044
- Grey zone: you keep the IP, but the client carries the cost risk
Every project lands in one of the three groups, with the reason written down.
The claim
- In
- Test-rig controller: test logs and project-coded time
- Out
- Agreement 24-031: done on the client's behalf; its payment cancels your costs on it
- Open
- Agreement 24-044: you keep the IP, the client pays any overrun. The engineer decides before filing
The engineer makes the call on anything still open, then checks every project against the CRA's test.
What your team does
- Shares the contracts and the project files
- Keeps its usual records: drawings, calcs, test results, time by project code
- Answers the engineer's questions on scope, risk and IP when asked
Your engineers stay on client work.
What Glauq does
- Sorts every project into your own development, SR&ED for a client, or the grey zone
- Reads each contract against the CRA's four criteria
- Flags the cases where the rules change: related companies, support work only, clients that aren't taxable suppliers
- Drafts T661 lines 242, 244 and 246 for the projects you can claim
- Has an engineer check every project against the CRA's test before anything is filed
- Files with your T2 and handles any CRA questions until the refund lands
Go deeper
SR&ED contract expenditures: the 80% rule
The same rules from your client's side: what they can claim when they pay you.
Read moreSR&ED eligible activities: the CRA's test
The two-part test, the support-work categories, and what is excluded.
Read moreSR&ED for manufacturers
Where the line falls for machines, automation, tooling and electrical work.
Read moreThe T661 form, part by part
How to write up the technical side of a claim.
Read moreSR&ED by industry
How the same test plays out for software, manufacturing and engineering.
Read moreThe SR&ED guide for 2026
Rates, deadlines and the claim process in one place.
Read moreFrequently asked questions
Can an engineering firm claim SR&ED on work done for clients?
Usually only one side gets the credit. If you did SR&ED on the client's behalf and they paid you, the client counts 80% of the payment as qualified spending and you reduce your claim by what they paid. You may keep it when the contract, read as a whole, shows the work wasn't done on the client's behalf (for example, you carried the cost risk and kept the IP), or when the client is related to you.
What does "on behalf of" mean for SR&ED?
The CRA says it normally means the client typically keeps ownership of the SR&ED work. It decides this from the contract read as a whole and all the facts, not from the label. Its policy states there is no unique test that settles whether a payment is a contract payment.
Do contract payments reduce my firm's SR&ED claim?
Yes. A contract payment for SR&ED reduces your qualified expenditures, project by project. The reduction is the lesser of what the client paid, is due to pay or can reasonably be expected to pay, and your costs on that project. Any excess carries forward to later years of the same project. It doesn't touch your other projects.
Can we split one contract into SR&ED and normal engineering?
Yes, but the split works differently on each side. For the client, only the SR&ED part counts, and the CRA accepts any reasonable split, such as fair market value. For your firm, if the contract doesn't separate what the client pays for SR&ED from what it pays for other work, payments for the non-SR&ED costs tied to that project can also reduce your qualified spending on it. Price the two parts separately.
Does my firm have any SR&ED duties to clients who claim?
Yes, the capital notice. If your work for a client included costs of a capital nature, you must tell the client the amount in writing. Do it without delay if they ask, and otherwise no later than 90 days after the end of the calendar year.