How U.S. Startups Can Claim SR&ED for Canadian Employees

The SR&ED program is one of the most generous R&D tax credit programs in the world, and many U.S. startups are surprised to learn they can access it — if they hire Canadian talent the right way.

If you are a U.S.-based founder paying Canadian employees or contractors, you might be able to claim SR&ED for their work. But there is one big catch: the claim must be made through a Canadian taxpayer, not the U.S. parent company.

1. Why U.S. companies cannot claim SR&ED directly

The SR&ED program is administered through the Canadian tax system. To access the credit, the claimant must:

• Be subject to Canadian income tax, and
• File a T2 Corporation Income Tax Return with a T661 SR&ED schedule.

A U.S. corporation without a Canadian permanent establishment is not a Canadian taxpayer, so it cannot claim directly — even if the work is done in Canada by Canadian residents.

2. How U.S. startups can structure to claim SR&ED

To claim SR&ED for Canadian employees, you need a Canadian entity that meets the program’s requirements. The two most common structures are:

a) Canadian subsidiary

• The U.S. company incorporates a wholly owned Canadian corporation (e.g., BC Ltd., Ontario Inc.).
• The Canadian company hires the Canadian employees directly.
• The subsidiary owns a defined part of the R&D work and files its own SR&ED claim.
• If it is a Canadian-Controlled Private Corporation (CCPC), it may qualify for refundable credits up to 35% on eligible salaries.

b) Canadian branch

• The U.S. company registers as an extra-provincial corporation in a Canadian province and files Canadian tax returns for its Canadian operations.
• The branch hires Canadian employees and can claim SR&ED for that work.
• Less common for early-stage companies, as it may have more complex tax implications.

3. Payroll requirements for eligibility

To include Canadian employees in an SR&ED claim:

• They must be on Canadian payroll, with CRA remittances for CPP, EI, and income tax.
• Their compensation must be reported on a T4 slip issued by the Canadian entity.
• Payments to Canadian residents as U.S. W-2 employees or 1099 contractors do not qualify.

4. Example scenarios

Qualifies

A Delaware C-Corp creates a wholly owned Canadian subsidiary in Ontario. The subsidiary hires two engineers in Toronto, pays them through a Canadian payroll service with CRA remittances, and documents their R&D work in real time. The subsidiary files a T2 return and claims SR&ED for their salaries.

Does not qualify

A Delaware C-Corp hires a Canadian resident as a remote contractor, paying them via USD wire transfer and issuing a 1099. The work is done in Canada, but there is no Canadian payroll, no T4, and no Canadian tax filing. No SR&ED claim is possible.

5. If you are a U.S. startup and want to claim SR&ED, here is what you should do

1. Incorporate in Canada
   • Either create a wholly owned Canadian subsidiary or register as an extra-provincial corporation.
   • Subsidiary is the simpler choice for most startups.
2. Hire through the Canadian entity
   • Put your Canadian employees on payroll via the Canadian company.
   • Ensure proper CRA deductions (CPP, EI, income tax) are made.
3. Define R&D ownership
   • Make sure the Canadian entity owns the IP or a defined portion of the R&D work.
   • This ensures it can claim the work in its own SR&ED filing.
4. Track technical work in real time
   • Keep contemporaneous records of experiments, prototypes, test results, and technical challenges.
   • Link staff hours to specific R&D activities.
5. Prepare and file the claim
   • File the Canadian entity’s T2 return with the T661 SR&ED form.
   • Consider a review process (human in the loop) to ensure all work meets CRA’s three-part test.

6. Why documentation matters even more for cross-border teams

For cross-border R&D, CRA will look closely at:

• Who owns the R&D work
• Where the work is performed
• Whether the Canadian entity can demonstrate technological uncertainty, systematic investigation, and technological advancement

Having contemporaneous documentation — including time tracking, experiment logs, and technical results — is critical to defending your claim.

The takeaway

U.S. startups can claim SR&ED for Canadian employees, but only if they set up a proper Canadian entity, run Canadian payroll, and own the R&D work. Without that structure, the credits are out of reach, no matter how innovative the work is.

SREDSimplify helps Canadian entities — including U.S.-owned subsidiaries — document their R&D in real time and prepare a strong, CRA-ready claim. Our free pre-screener will tell you in minutes whether your project is likely to qualify.

Try it here: https://sredsimplify.com/

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