February 10, 2026

How Custom Software Qualifies for SR&ED Tax Credits

What SR&ED Actually Is

SR&ED is not a grant. It is a tax incentive that reimburses a percentage of your qualifying R&D expenditures — salaries, materials, and arm's-length subcontractor costs. The federal program alone provides an investment tax credit (ITC) that is refundable for CCPCs. Most provinces layer additional credits on top. In Quebec, the combined effective rate can exceed 55% for qualifying work.

The key word is “qualifying.” Not all software development qualifies. The CRA requires that the work involve systematic investigation or search, carried out in a field of technology, through experiment or analysis. Routine development — applying known solutions to well-understood problems — does not qualify. The work must involve genuine technological uncertainty.

How Software Projects Qualify

The CRA evaluates SR&ED claims against three criteria:

• 1. Technological uncertainty. Was there a question about how to achieve the desired result that could not be answered by standard practice or publicly available knowledge? This doesn't mean the project was hard. It means the solution was not known in advance and required experimentation.
• 2. Systematic investigation. Did you follow a methodical approach? Document hypotheses, test results, and iterations? The CRA wants to see that you approached the problem like an engineer, not a hobbyist.
• 3. Technological advancement. Did the work produce new knowledge or capabilities beyond what was previously known? This is relative to your company's technology base, not the entire industry.

In practice, custom software projects often qualify when they involve novel data processing approaches, performance optimization beyond known limits, integration of systems that don't natively communicate, or the development of predictive models with uncertain accuracy thresholds. CRA SR&ED program →

Arm's-Length Subcontractor Rules

If you hire an external consultancy (like us) to do the R&D work, the costs are still eligible — but the rules differ. For arm's-length subcontractors, you can claim 80%of the subcontractor cost as a qualifying SR&ED expenditure. The subcontractor does not claim SR&ED on the same work — the credit belongs to the entity that contracted and directed the R&D.

This means if you pay $50,000 for a custom software build that qualifies, you can include $40,000 in your SR&ED claim. At the 35% federal ITC rate for CCPCs, that's a $14,000 refundable tax crediton the federal side alone — before provincial credits.

Documentation Matters

The most common reason SR&ED claims are denied or reduced is inadequate documentation. The CRA wants contemporaneous records — notes, commit logs, design documents, and test results that were created during the project, not reconstructed after the fact. Good documentation includes:

• • A description of the technological uncertainty at the outset
• • Hypotheses that were tested and the results of each experiment
• • What was tried, what failed, what was learned
• • How the final approach differs from what was initially anticipated
• • Technical specifications and architecture decisions

At iaminter.net, we build SR&ED-ready documentation into every qualifying engagement. Our delivery includes project narratives, technical decision logs, and time-allocation breakdowns that map directly to what your accountant or SR&ED preparer needs. We wrote a full guide on this — download the SR&ED whitepaper.

SR&ED + Capitalization

Here is where it gets interesting. Custom software that qualifies for SR&ED credits can also be capitalized as an intangible asset on your balance sheet. The two are not mutually exclusive. You claim the SR&ED credit to recover a portion of the development cost, and you capitalize the net cost (after credits) as an asset that is amortized over its useful life. The result: lower effective cost, better financials, and a tangible asset your company owns.