At a glance
- Certain SR&ED (scientific research and experimental development) capital property and lease expenditures incurred after Dec. 15, 2024, may once again qualify for deductions and investment tax credits (ITCs).
- Businesses investing in SR&ED assets should consider these rules alongside other available tax incentives and funding programs.
- Eligibility and interaction rules vary by program, making it important to evaluate potential benefits on an asset-by-asset basis.
Investing capital in SR&ED assets
For the first time in more than a decade, businesses investing in research and development can once again claim certain capital expenditures under Canada’s SR&ED program. The reinstatement applies to qualifying depreciable property acquired after Dec. 15, 2024, and creates new opportunities for organizations investing in areas such as pilot facilities, automation and testing infrastructure.
The timing is especially important because governments across Canada have also introduced or expanded other capital incentives including provincial manufacturing and processing (M&P) investment tax credits, grant funding and interest-free loans, as well as federal accelerated capital cost allowance (CCA) deductions. When reviewed together, these measures can reduce the after-tax cost of innovation and productive-capacity investments.
How do the restored SR&ED capital and lease expenditures rules work?
The restored framework recognizes two main categories of owned Capital property: All-or-substantially-all (ASA) property and shared-use equipment (SUE). Certain lease expenditures may also qualify under separate rules. The distinctions affect the eligible amount, the investment tax credit base, the timing of the benefit and the documentation required to support the claim.
ASA treatment generally applies where the taxpayer intends to use at least 90% of the property’s operating time over its expected useful life in the prosecution of SR&ED in Canada, or to consume at least 90% of the property’s value in the prosecution of SR&ED in Canada. The determination of whether this 90% test is met is based on the purpose for which the asset was acquired and its expected lifecycle use, not its use during a single taxation year.
If the capital property is determined to be ASA SR&ED property, the expenditure may be deducted through the SR&ED expenditure pool rather than through the normal CCA regime. The economic result resembles a first-year writeoff that arises under the SR&ED expenditure rules, as well as investment tax credit (ITC) at the corporation’s respective rate of benefit.
SUE recognizes that some equipment supports both SR&ED and commercial operations. It generally applies when equipment is used primarily for SR&ED but does not satisfy the ASA threshold. Eligibility relies principally on actual operating use during prescribed periods. Idle time is not included in the calculation because it is not considered operating time.
The maximum qualified expenditure base for SUE is generally 50% of its cost. For owned SUE equipment, 25% may be recognized as first-term SUE and a further 25% as second-term SUE if the statutory conditions continue to be met.
When can leased property qualify for SR&ED?
Certain lease expenditures incurred after Dec. 15, 2024, may qualify for SR&ED treatment. The lease rules have ASA and SUE definitions however it is important to review the legal relationship established by a lease contractual agreement, as determining whether a lease cost is a capital lease or a current lease expenditure has key SR&ED eligibility distinctions.
Under both the proxy method and the traditional method, 50% of a qualifying current lease expenditure may generally be included where leased premises, facilities or equipment are used primarily, but not ASA, for SR&ED carried on in Canada.
Primarily generally requires more than 50% SR&ED use. Under the traditional method, non-ASA lease costs will be considered as overhead and other expenditures to the extent they are directly attributable to SR&ED carried on in Canada. While building leases are excluded under both methods, general purpose office equipment, land or other premises require a separate review under the traditional method and could be eligible. For all lease expenditures, the determination of whether a lease is ASA or SUE is based on actual operating use during the entire taxation year.
Claims for SR&ED leases should be supported by the signed agreement, invoices and proof of payment, equipment descriptions, operating or booking logs, and calculations demonstrating the percentage of actual SR&ED use.
| Feature | ASA property | SUE | Leased property |
|---|---|---|---|
| Property interest | Owned depreciable property. | Owned depreciable equipment with mixed SR&ED and non-SR&ED use. | Premises, facilities or equipment used under a lease. |
| Core test | Generally, 90% or more intended operating time over expected useful life, or substantially all value consumed in SR&ED. | Primarily used for SR&ED, but below ASA; tested over prescribed actual-use periods. | ASA lease: generally, 90% or more actual use. Primarily used lease: more than 50% actual use. |
| Benefit base | Potentially the full eligible capital expenditure. | Up to 25% of capital cost in each of two terms, for a maximum 50% qualified-expenditure base. | ASA: potentially 100% of qualifying lease cost. Proxy primarily used (SUE) rule - 50% of qualifying lease cost. |
| Timing / method | Claimed when the qualifying asset becomes available for use, after Dec. 15, 2024. | First-term and second-term SUE amounts arise over prescribed periods. | Based on qualifying lease costs incurred for the relevant period; treatment differs under traditional and proxy methods. |
| Primary evidence | Purpose of acquisition, intended lifecycle use and available-for-use support. | Actual use logs and allocation between SR&ED and non-SR&ED use. | Lease agreement, invoices, payment records and actual-use logs for the taxation year. |
| Important limitation | Subject to property exclusions and possible recapture. | SUE is not a deduction through the SR&ED pool; recapture rules may apply. | Building leases (rent) are generally excluded; land and premises require separate analysis. |
Documentation for SR&ED capital and lease claims
Because of the difference in tax attributes related to how equipment is used, and whether it is purchased or leased, documentation should be top of mind before an asset is commissioned or a lease period begins. For ASA property, records should clearly demonstrate why the asset was acquired and how the 90% threshold was expected to be met over its useful life. For SUE and all leases, the records should support actual utilization during the relevant periods.
The following are important documents for each category of use. All claims should also have technical project records, evidence that work was carried on in Canada, and a documented review of exclusions, assistance and recapture exposure.
ASA support
Capital authorization requests, project charters, engineering specifications, procurement records, expected-use analyses, budgets, commissioning records and available-for-use evidence.SUE support
Machine logs, laboratory booking systems, production schedules, ERP or MES reports, test records, utilization studies and calculations connecting operating time to identified SR&ED projects.Lease support
Signed lease agreements, invoices, payment records, property descriptions, actual-use logs and calculations supporting ASA or primarily used treatment.What costs are eligible capital costs
When referring to what comprises eligible depreciable property, the term capital cost of property generally means the full cost to the claimant of acquiring the property and includes:
- Purchase price
- Legal, accounting, engineering, installation, and other fees that relate to the buying or construction of the property (not including the part that applies to land)
- Customs and excise duties, transportation, and other acquisition costs, and when they are significant, storage costs
- Cost of any additions or improvements made to the property after it was acquired, provided these costs were not claimed as a current expense
- For property manufactured internally by a claimant for its own SR&ED use, it includes actual material and labour costs, as well as overhead costs reasonably attributable to the property
Planning for SR&ED capital and lease expenditures
The restored treatment of capital assets used in SR&ED may increase the SR&ED expenditure pool and ITCs. However, the details and supporting documentation are important when determining the available tax benefits.
SR&ED opportunities may arise for manufacturers and businesses in other industries. Many provinces have increased opportunities for them to claim additional tax incentives. We describe these in our article Investment tax credits and incentives for manufacturers.
For further information about the Productivity Mega Deduction, see Productivity Mega Deduction: Business benefits and practical applications.
How BDO can help
The restored SR&ED capital and lease expenditure rules add another consideration when businesses plan investments in assets used for research and development. Other available tax incentives and funding programs may also need to be considered when evaluating the potential benefits of an investment.
Our tax professionals can help you assess eligible capital and lease expenditures, consider their interaction with other incentives, and support the preparation of your SR&ED claim. Contact your BDO advisor to discuss how the restored rules may apply to your planned or recent capital investments.
The information in this publication is current as of October 8, 2026.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.