The narrative decides whether a claim is eligible. The allocation decides what it is worth, and whether it survives a review. Five errors account for most of the money lost, and none of them look like errors at the time.
12 June 2026 · 9 minute read
The narrative decides whether a claim is eligible. The allocation decides what it is worth, and whether it survives a review. In practice the second half is where most of the money is quietly lost, because an allocation error rarely looks like an error. It looks like a reasonable number that nobody can reconstruct eighteen months later.
These are the five patterns that come up most often, what each one costs, and the fix.
YMPE for 2026 is $74,600, so the two specified-employee limits move every year. For 2025 they were $356,500 and $178,250.
Someone is asked in June how much of the previous year a developer spent on the eligible project. The answer is sixty percent. It is a sincere answer, and it may even be close. But it was produced by recollection, and a reviewer can tell: there is one number for a twelve-month period, it is a round number, and the same round numbers appear across several employees.
What this costs is not usually the whole claim. It is the credibility of every other number in it. Once a reviewer decides the labour allocation was estimated after the fact, the materials and contractor lines get the same scrutiny, and the burden shifts to you to prove each one.
The fix. Any defensible allocation method has three properties: it is written down before the year ends, it is applied the same way to everyone, and it produces numbers that are not all round. Fifteen minutes a week per technical employee, recorded against a project code, is enough. It does not need to be a formal timekeeping system.
This is the most common technical error, and it goes in both directions.
Under the proxy method, only salary for time directly engaged in SR&ED goes into the salary base. That means hands-on work: experimentation, analysis, design, testing, and the support work commensurate with the needs of the SR&ED. It does not mean general administration, and it does not mean the overhead the proxy is already paying you for.
Under the traditional method, the wider category of directly attributable applies, which can reach administrative and support staff whose work would not exist without the SR&ED, provided it is both directly related and incremental.
Claims go wrong when a proxy claimant loads administrative time into the salary base, or when a traditional claimant leaves genuinely attributable support costs out because they assumed the proxy rules applied. The first inflates the claim and invites adjustment. The second understates it, and nobody ever tells you about the money you did not ask for.
A specified employee is, broadly, an employee who does not deal at arm's length with the company or who owns 10% or more of any class of shares. In an owner-operated company, that is usually the person doing the most technical work, which is exactly why this matters.
Two separate limits apply, and they are often confused with each other:
Applying only the first limit and running the full salary through the proxy base overstates the overhead. Applying only the second and capping the expenditure at $186,500 understates the claim. Both happen, and the second happens more often than you would expect.
The fix. Where the technical work is genuinely being performed by an owner, the compensation structure is a planning decision made before the year ends, not an allocation decision made after it. Salary is claimable within the caps. A profit-based bonus is not.
An arm's length contract payment for SR&ED performed on your behalf enters the qualified expenditure pool at 80% of the eligible amount. Three things go wrong here.
The 80% is applied to the wrong base. It applies to the portion of the contract that is genuinely SR&ED performed on your behalf, not to the invoice total. A contract that also covers routine production, tooling, or commercial delivery has to be split, and the split has to be supportable.
The relationship was not tested. Non-arm's length contracts follow different rules entirely. A contractor who is also a shareholder, a related company, or a person connected through common control is not automatically arm's length because an invoice was issued.
The work was not on your behalf. If the contractor retained the intellectual property, bore the risk, and sold you a result rather than performing work you directed, it may be a purchase, not a contract for SR&ED performed on your behalf. The contract wording matters, and it is usually written by someone who has never read the SR&ED policy.
| Situation | Common assumption | Actual treatment |
|---|---|---|
| Arm's length contractor, SR&ED work | Claim the invoice | 80% of the eligible portion, in the qualified expenditure pool |
| Non-arm's length contractor | Same as arm's length | Different rules; generally traced to the performer's own costs |
| Contractor keeps the IP and sells a result | Contract expenditure | May not be SR&ED performed on your behalf at all |
| Contractor salary under the proxy method | Adds to the proxy base | Contract payments do not enter the salary base |
Materials consumed in SR&ED are claimable. Materials transformed into something that is then sold are treated differently, and the value recovered generally reduces the claim. A pilot batch that fails and is discarded is not the same as a pilot batch that meets specification and ships to a customer, even though the experimental work behind both was identical.
This is the single most common source of adjustment in food, natural health product, chemical, and materials manufacturing, because in those sectors the experimental run and the saleable run are often the same run. It is also where claims are most often understated, because companies write off the whole category rather than separating the consumed portion from the transformed portion.
The fix. Batch records already exist in these industries for regulatory reasons. Tag the experimental batches at the time they run, record what was discarded and what was released, and the allocation writes itself.
Employee remuneration that is not paid within 180 days of the end of the tax year in which it was incurred is treated as not having been incurred. An accrued bonus to a technical employee, still unpaid at day 181, does not simply move to a later year within the claim. It falls out.
This has nothing to do with how the time was allocated. It is a payment deadline, and it is missed every year by companies that accrue compensation at year end and settle it when cash allows.
None of this requires a timekeeping system, new software, or more staff. It requires a decision, made once, about how time and cost will be recorded, and then fifteen minutes a week. The claim that results is not larger because it was inflated. It is larger because nothing eligible was left out, and it holds because every number in it can be traced back to something that was written down at the time.
A claim is reviewed on its numbers as often as on its science. If your allocation method has never been written down, or the same percentages have been used for three years, it is worth a look before the return goes in.
Book a meeting Check your eligibilityGeneral information current at the date of writing, not advice on a specific claim. Program rules, forms, and administrative practice change; we confirm the current position for every file.
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