The SR&ED (Scientific Research and Experimental Development) program offers significant tax credits for Canadian companies doing R&D. Can you claim it for work done by an offshore team? For the offshore team's own work, generally no — but how you split the work between your Canadian staff and the outside team decides what stays claimable. Here is what to know before you start. This is general information, not tax advice.
SR&ED Eligibility for Offshore Work
SR&ED expenditures generally have to be for work performed in Canada. CRA's Pool of Deductible SR&ED Expenditures Policy states that expenditures for SR&ED performed outside Canada cannot be included, except under the special rule for salary or wages.
That special rule is narrow. Salary or wages of your own employees who are Canadian residents, for SR&ED they perform outside Canada solely in support of SR&ED carried on in Canada, can be included up to 10% of the salary or wages for SR&ED carried on in Canada (CRA SR&ED Salary or Wages Policy). It covers employees, not contractors.
So payments to an offshore development company such as NKKTech for work our engineers perform in Vietnam are generally not SR&ED-eligible. What can remain eligible is the SR&ED your Canadian team performs in Canada — defining the technological uncertainty, forming and testing hypotheses, and directing the experimental work — subject to CRA's usual rules.
Documentation Requirements
Maintain contemporaneous records: technical uncertainty descriptions, hypotheses tested, iterations performed, and results achieved. Keep all Slack/email communications showing Canadian-based direction of the R&D work. Document which specific technical problems were solved through systematic investigation.
Structuring the Work So Your Claim Holds Up
Keep the SR&ED itself — the technological uncertainty, the hypotheses, the experimental design and the analysis of results — with your Canadian employees, and document it as it happens. Use an offshore team for work you were not going to claim anyway, such as implementation of settled designs, integration and testing. Do not count the offshore team's fees in your claim. Talk to an SR&ED adviser before the engagement starts: how you split the work is easier to get right at the beginning than to explain afterwards.
Sources: CRA, Pool of Deductible SR&ED Expenditures Policy and SR&ED Salary or Wages Policy (canada.ca).
Next step
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