Canada’s federal Scientific Research and Experimental Development (SR&ED) tax credit program goes beyond just offsetting developer payroll.
A key advantage of the SR&ED program is that the CRA lets you include material costs in your annual claim.
The Materials for SR&ED policy splits eligible costs into Materials Consumed and Materials Transformed—as long as they’re fully paid either during the tax year or within 180 days after your fiscal year ends.
In this article, we’ll break down the differences between SR&ED-eligible material types, how to calculate your “cost of materials” for SR&ED, and key considerations and potential pitfalls to ensure the highest return on your material investments.
Materials Consumed
First, Materials Consumed are physical (non-labor) items that become “virtually worthless” during your research and development work.
To be specific, at least 90 percent of the material must be consumed during SR&ED for the full original cost to count as an eligible expense.
Examples of Materials Consumed include:
- Testing materials that are destroyed during “basic research, applied research, or experimental development”
- “Input materials” that are used up or lose at least 90% of their value during “experimental production.”
- Any extra materials “beyond what’s normally needed for standard output” in commercial production (meaning “additional input materials,” not those already part of regular production).
It’s important to note the difference between “overhead and other expenditures” that might be used during SR&ED, but aren’t eligible to claim. These include:
- broken or used lab supplies
- Cleaning supplies
- General utilities like water, electricity, oil, natural gas, etc.
- CDs / DVDs
- Used lubricants such as engine oil
Materials Transformed
Materials are considered transformed if they’re fundamentally changed into “another material or product” during SR&ED. Unlike consumed materials, Materials Transformed must still retain value—“to you or someone else”—that is at least 10% greater than the initial expenditure.
This category is a bit more complex than Materials Consumed because it involves specific terms from the SR&ED During Production Runs Policy, especially regarding Experimental Production (EP) and Experimental Development (ED).
Experimental Development + Experimental Production (EP+ED)
A frequent question about SR&ED is whether moving to production disqualifies certain activities or costs from your claim.
In general, you CAN claim SR&ED—even if you eventually sell the product—if you used materials experimentally (for example, in testing) during experimental development.
For example, if you’re making samples or prototypes to “show that technological advancements are possible, to further address technological uncertainties, or to evaluate the SR&ED project,” then the “production output” counts as experimental—and is SR&ED-eligible—provided it isn’t used for commercial purposes at the same time.
One CRA example: “yarn converted into fabric during a production run” where the goal isn’t to sell the fabric, but to demonstrate Experimental Production.
Calculating Overhead Expenses for SR&ED
Beyond Materials Consumed and Materials Transformed, you can also claim certain resources as Overhead or “Other Expenditures” toward your total SR&ED claim. Like with salaries, there are two ways to calculate SR&ED material costs: the Traditional Method and the Proxy Method.
Proxy Method
The Proxy Method is the go-to for most companies with larger SR&ED claims. It uses the Prescribed Proxy Amount based on your salary base—a formula set at 55% since 2014.
In short, for every $100,000 in eligible salary expenses, the CRA lets you “top up” with $55,000 in overhead, raising your total eligible expenses to $155,000.
In simple terms, the PPA gives you a “blanket allowance” to expense non-material Overhead equal to 55% of your total salary claims.
Traditional Method
The traditional method is less common and is the default if you don’t use the PPA. Here, you must identify (and justify) all SR&ED overhead and expenses yourself.
For large SR&ED projects, this method usually means detailed record-keeping and many hours of manual work.
Generally, unless a resource is directly used in SR&ED work, it will likely count as “overhead or other expenses,” which the CRA currently lists as:
- Cleaning products
- Discs used in computers
- Test tubes, pipettes, vials, bottles, beakers, flasks, dishes, and other similar glass or plastic items
- Microscopes, incubators, Bunsen burners, measuring devices
- Filter papers
- Acids, solvents, lubricants, soaps, and other similar items used in processing
What about Plants, Animals—even Water?
Most living things aren’t considered Materials Consumed or Transformed, but some resources related to “growing things” may qualify if they make up the “body of a thing at a given moment” in the SR&ED process.
For example, animal feed, plant fertilizer, and pesticides could all qualify under the right circumstances. However, any “control groups” used to compare or monitor SR&ED progress with animals or plants are usually not eligible for the claim.
Similarly, utility costs—including water, fuel, electricity, and oil—aren’t considered SR&ED-ible materials, but are “overhead and other expenditures” under the Traditional Method (or already included in the PPA if you use the Proxy Method).
Of course, there are exceptions. For example, Endothermic Reactions—where energy becomes part of the production process and drives a necessary chemical reaction—have been accepted as material costs in some SR&ED claims.
Ultimately, a successful claim depends on your ability to clearly document your actions and results at every stage of the SR&ED process to maximize your funding.
A partner for ongoing SR&ED clarity
Whether you’re new to SR&ED or a seasoned pro, navigating the technical language in CRA guidance can be confusing and time-consuming.
Keeping the records and data needed to justify your costs as either materials or overhead can be time-consuming and frustrating for your finance, product, and operations teams.
At Boast, our technical writers have decades of combined experience and have filed thousands of successful CRA claims. Many of us are technologists and founders ourselves, so we know what it takes to drive successful R&D—and how to communicate your innovation in a way the CRA will accept.
The result? Boast customers typically see 20% higher SR&ED claims with minimal effort.
Our AI-powered platform automatically gathers all the project, payroll, and financial data needed to build a claim that’s not only audit-ready, but also provides valuable insights for your leadership team. Product and R&D teams can use Claim Insights to better allocate time and resources, while finance teams gain access to more funding to extend your product’s runway.
All of this creates a positive cycle of investment that helps your team grow and succeed—without giving up any equity.
See how Boast has helped thousands of businesses across North America unlock the innovation capital they need to grow—talk to an expert today.
SR&ED Materials FAQ
- What are the two main categories of eligible materials for SR&ED? The CRA recognizes materials as either “Materials Consumed” or “Materials Transformed” during SR&ED work.
- What’s the difference between Materials Consumed and Materials Transformed? Materials Consumed lose almost all their value (at least 90% used up) during SR&ED, while Materials Transformed are fundamentally changed into another material or product, keeping at least 10% of their original value.
- Can production materials qualify for SR&ED claims? Yes, production materials can qualify if they’re used experimentally (for testing, prototypes, or samples) to resolve technological uncertainties or establish technological advancements, as long as this work is separate from commercial work.
- How are overhead and other expenditures calculated for SR&ED claims? There are two methods: the Traditional Method requires detailed record-keeping of all overhead expenses, while the Proxy Method allows you to claim 55% of eligible salary expenses as overhead.
- Can living things or utilities be claimed as SR&ED materials? Living things themselves can’t be claimed, but related materials like animal feed or fertilizers may qualify. Utilities like water and electricity are generally considered overhead, not materials.
