Canada’s federal Scientific Research and Experimental Development (SR&ED) tax credit program goes far beyond just offsetting developer payroll.
What makes the SR&ED program stand out globally is that the CRA also lets you claim material costs as part of your annual submission.
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-end.
In this article, we’ll break down the differences between SR&ED-eligible material types, how to calculate “material costs” for SR&ED, and key tips to help you maximize your claim and avoid common mistakes.
Materials Consumed
To start, Materials Consumed are physical (non-human) items that become “virtually valueless” during your R&D activities.
More specifically, at least 90 percent of the material must be consumed during SR&ED for you to claim the full original cost as an eligible expense.
Examples of Materials Consumed include:
- Testing materials that were destroyed during “basic research, applied research, or experimental development”
- “Input materials” that were used up or lost more than 90 percent of their value during “experimental production”
- Any extra materials “beyond what’s normally needed to produce a standard output” in commercial production (i.e., “additional input materials,” not resources already part of regular production).
It’s important to note the difference between “overhead and other expenses” that might be used up during SR&ED, but aren’t claimable. These include:
- broken or used lab supplies
- cleaning products
- General utilities like water, electricity, oil, natural gas, etc.
- CDs / DVDs
- Used lubricants such as engine oil
Materials Transformed
Materials are considered transformed when they’re fundamentally changed into “another material or product” during SR&ED. Unlike consumed materials, Materials Transformed must still have value—“to you or another party”—that’s at least 10 percent greater than the initial expenditure.
This category can be trickier to qualify than Materials Consumed because it involves specific rules from the SR&ED During Production Runs Policy, especially for Experimental Production (EP) and Experimental Development (ED).
Experimental Development + Experimental Production (EP+ED)
A common 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 end up selling 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 apply […], to further resolve technological uncertainties, or to assess the SR&ED project,” then the “production output” is considered experimental—and thus eligible for SR&ED—as long as it doesn’t contribute to any simultaneous commercial work.
One CRA example is “yarn converted into fabric during a production run” where the goal isn’t to commercialize the output, but to use it 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 Expenses” in your SR&ED claim. Like 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 most popular approach for larger SR&ED claims. It uses the Prescribed Proxy Amount based on your salary base, set at 55 percent since 2014.
In short, for every $100,000 in eligible salary costs, the CRA lets you “top up” expenses by $55,000—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 percent of your total salary claims.
Traditional Method
The traditional SR&ED filing method is less common, since it skips the PPA and instead requires you to identify and justify every SR&ED overhead and expense yourself.
For large SR&ED projects, this usually means keeping very detailed records and spending many hours on paperwork.
Generally, unless resources are directly used for SR&ED, they’ll likely fall under “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 glassware or plasticware
- 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 themselves don’t count as Materials Consumed or Transformed, but certain resources related to “growing things” may qualify if they make up the “body of a thing at a given moment” during SR&ED.
For example, animal feed, plant fertilizer, and pesticides could all qualify under the right circumstances. Note that any “control groups” used to compare or monitor SR&ED progress with animals or plants are generally not eligible for claims.
At the same time, utility costs—including water, fuel, electricity, and oil—aren’t considered SR&ED materials, but rather “overhead and other expenditures” under the Traditional Method (or already included in the PPA if you use the Proxy Method).
There are exceptions. For example, Endothermic Reactions—where energy becomes part of the process and drives a chemical reaction—have sometimes been accepted as material costs in past SR&ED claims.
Ultimately, your claim’s success depends on clearly explaining your actions and results at every stage of SR&ED, so you can maximize your funding.
A partner for ongoing SR&ED clarity
If you’ve never filed for SR&ED—or even if you have—the CRA’s technical language can make the process confusing and time-consuming.
Just keeping the records and data needed to justify certain expenses as materials or overhead can be a lengthy task that frustrates your finance, product, and operations teams.
At Boast, our technical writers have decades of combined experience filing thousands of successful CRA claims. Many of us are technologists and founders ourselves, so we know firsthand what it takes to drive successful R&D—and how to communicate your innovation in language the CRA will accept.
The result? On average, Boast clients see SR&ED claims that are 20 percent higher, with minimal effort.
Our AI-powered platform automatically gathers all the project, payroll, and financial data our team needs to build a claim that’s not only audit-ready, but also gives your leaders valuable insights. Product and R&D teams can use Claim Insights to better allocate time and resources, while finance teams get more funding to extend your product runway.
This creates a positive cycle of investment, setting your team up for growth and success—without giving up any equity.
See how Boast has helped thousands of businesses across North America access the innovation capital they need to thrive by speaking with 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 are rendered virtually valueless (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 be eligible for SR&ED claims? Yes, production materials can qualify if they were used experimentally (testing, prototypes, samples) to resolve technological uncertainties or demonstrate technological advancements, 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 lets you claim 55% of eligible salary costs as overhead.
- Can living things or utilities be claimed as SR&ED materials? Living things themselves can’t be claimed, but related items like animal feed or fertilizer might qualify. Utilities like water and electricity are usually considered overhead, not materials.
