SR&ED Specified Employee definition

SR&ED Specified Employee definition – A specified employee is a CRA designation for an owner of a business. A person who owns 10% of a business, or greater, is a specified employee.

People employed in the business who are not dealing at arm’s length with a specified employee are themselves considered to be specified employees.

The CRA considers direct relatives to not be dealing at arms length with each other.  These relatives include married spouses, common law spouses, parents, siblings and children. Spouses of children and grandchildren are generally thought to be non-arm’s length but this is a grey area.  Cousins, nephews and uncles are not considered by the CRA to be direct relatives so these individuals are not considered to be specified employees if they are employed by the business and hold no ownership stake.

Other individuals can be considered to not be dealing at arm’s length with a specified employee.  The most common mechanism for this to occur are people named as beneficiaries in the will of a business owner.  If these beneficiaries are employed in the company, and they are nominated in a will to inherit 10% or greater of the company’s shares, then they are considered specified employees despite no current ownership.

Specified employees have both greater scrutiny and also restrictions placed on their employment income included in an SR&ED claim.

Specified employees are individually named on the T661 form in a SRED filing.  Their total employment income for the year is listed, as well as the percentage of their income claimed as a SRED expense.  This is the default extra scrutiny placed on specified employee wages.

There are a few restrictions placed on specified employee wages claimed in a SRED filing.

First, no specified employee can claim more than 75% of his salary for a fiscal year.  It is considered that business owners have other time constraints in the day to day demands of running a business therefore claiming greater than 75% of their time on SRED is unreasonable.  This 75% restriction used to be only a guideline, but it is now in the Income Tax Act as a rule.

Second, specified employees can not claim bonuses as part of their employment income eligible as a SRED expense.  For regular arms-length employees, bonuses are added to their annual pay to make up their notional SRED wage claiming rate.   For example, an employee with a salary of $100K per year has a calculated SRED wage claiming rate of $100K/2000 hours worked per year or $50 per hour. The same employee who is given a $20,000 Christmas bonus of $20,000 has a claiming rate of $60 per hour.  A specified employee under the same set of circumstances can only claim $50 per hour as his SRED rate.

This bonus restriction also leads to other scrutiny of specified employee compensation.  The CRA wants to ensure that the wage used for specified employees is composed of regular recurring wages not bonus or profit amounts. Therefore it is good practice to ensure that specified employees are paid as part of the same regular payroll system as all other employees.  At a minimum, you want to ensure that owners are paid consistent amounts on a regularly recurring schedule, weekly, biweekly or monthly.  Failure to do this could result in all or a portion of the owner’s wages to be excluded as valid SRED expenses by the CRA.

Here’s the third, and last, restriction placed on specified employees’ wage expenses.  There are two caps placed on the maximum amount that can be claimed for SRED for a specified employee’s wages.  The maximum amount that can be claimed for a specified employee for a fiscal year is 5 times the YMPE.  The YMPE is the wage amount used to calculate CPP pensionable earnings. It is widely published by the government.  Typically the YMPE goes up by inflation each year.  The YMPE for 2019 was $57,400.  So the maximum that an owner can claim as a SRED expense for 2019 is $287,000.  Remember this is the SRED expense which is calculated by taking total salary and multiplying by the SRED expense percentage (max 75% for owners).  Specified employee salary amounts are further constrained when calculating the proxy amount.  Remember that proxy is an expense which is added to SRED claims to account for overhead expenses.  Proxy is calculated as 55% of the SRED salary base.  When adding up the salary base for the proxy calculation, owner salary amounts are restricted to 2.5 times that year’s YMPE amount.  So let’s say a regular (very well paid) employee has a salary of $600K and his SRED claiming percentage is 60%. That employee will contribute the following to the overall SRED expenses claimed:


Salary expense = $600K x 0.6 = $360K

Proxy expense = $360K x 0.55 = $198K

Total SRED expense = $360K + $198K = $558K


Now let’s claim for the same staff member if he is a specified employee:


Salary expense pre-YMPE limit = $600K x 0.6 = $360K

5 x YMPE salary limit = 5 x $57,500 = $287,000

Salary base max for proxy calculation, 2.5 times YMPE = $143,750

Proxy expense = $143,750 x 0.55 = $79,062

Total SRED expense = $287K + $79K = $366K