Contract R&D has three different common usages and definitions under the SR&ED Program.
Most commonly contract R&D refers to contract expenditures which you make to other firms for SR&ED work performed on your behalf. These are often referred to as subcontract payments.
To be valid for SR&ED purposes, contract expenditures must be made to Canadian firms for work which is entirely carried out in Canada. As a second requirement, contract payments must be made to other firms which are at at length to your firm. That is, contract payments made to associated and otherwise related forms can’t be counted toward SRED expenditures.
Since 2012, only 80% of valid contract invoice amounts (always net of HST) are included in your claim as contract expenditures.
The second definition for contract r&d is related to the above usage. If you have contract employees who carry out SR&ED work for your firm, this work also counts as valid R&D work, as long as the staff member s are Canadians with a valid SIN.
The third and final common usage of contract R&D with respect to SR&ED are contract payments made to you to perform SRED work on behalf of other firms. This is a complex area of SR&ED but in general these payments must be enumerated and then subtracted from any related SRED expenditures for the same project work. Contract payments are project specific. This means that contract payments will only reduce sred expenditures down to zero for specific projects. Here is a simplified example of this principle. Say you have three sred projects, A,B and C. You receive contract payments from a Canadian firm for Project C only. If your contract payments exceed your SRED expenditures for Project C, the excess contract payments do not reduce your SRED expenditures for Projects A and B.
Learn more about subcontracts and other SRED expenditure types here.