The Case: AG Shield Canada Ltd.

March 18, 2026

Sector:

This week, I sat down with Bal Katlai (Partner, Tax) to discuss a Tax Court of Canada (TCC) decision that highlights how shareholder compensation can affect Scientific Research and Experimental Development (SR&ED) claims. In particular, we discussed the case AG Shield Canada Ltd. v. The Queen and what it tells us about the treatment of wages paid to shareholder-managers involved in SR&ED activities. Here is a summary of our discussion:

The Case: AG Shield Canada Ltd.

In AG Shield Canada Ltd. v. The Queen, the Tax Court examined how compensation paid to two shareholder-managers should be treated when calculating eligible SR&ED labour expenditures. The company was owned equally by Tom McCrea and Gary McCrea, who were both responsible for managing the business while also contributing to its research and development work. The corporation elected to use the proxy method for calculating SR&ED expenditures.

As is common in early-stage companies, the shareholders did not receive fixed salaries during the year. Instead, they took draws from the business, and the company determined the final allocation of compensation at year end. The allocation was based on the hours each shareholder spent performing SR&ED work.

• Tom McCrea worked a total of 3,000 hours during the year, of which 1,094.5 hours were spent on SR&ED activities and 1,905.5 hours were spent on non-SR&ED activities.
• Gary McCrea also worked 3,000 hours, but spent significantly less time on SR&ED work. Of those hours, 201.5 hours were related to SR&ED activities, while 2,798.5 hours were devoted to non-SR&ED responsibilities such as management and operational duties.

At the end of the year, the corporation allocated compensation between salary and dividends. Using an hourly rate of $30 per hour for SR&ED work, the company calculated the salary attributable to SR&ED activities:

• Tom McCrea received $26,940 in wages, reflecting the hours he spent on SR&ED work.
• Gary McCrea received $11,940 in wages based on his SR&ED hours.

The remainder of the compensation was paid as dividends. In total, the company paid $62,400 in dividends during the year, with each shareholder receiving $31,200 as equal owners of the corporation.

In effect, the company made a clear distinction between the roles performed by the shareholders:

• SR&ED work was compensated through wages, which were included in the SR&ED claim.
• Management and ownership responsibilities were compensated through dividends.

This distinction became the central issue in the dispute with CRA.

CRA’s Position

CRA did not accept this rationale and focused on the fact that a large portion of the shareholders’ time was spent on non-SR&ED activities. For example, Tom McCrea spent approximately 63 percent of his time on non-SR&ED work, while Gary McCrea spent more than 90 percent of his time outside SR&ED activities. Based on this, CRA argued that the wages paid should be allocated proportionally between SR&ED and non-SR&ED work, reflecting the overall mix of activities performed by each individual.

• For Tom McCrea, SR&ED work represented 1,094.5 hours out of 3,000 total hours, or 36.5 percent of his time. CRA therefore argued that the corporation was only entitled to claim 36.5 percent of the $26,940 salary, or approximately $9,830, as an SR&ED expenditure.
• Similarly, Gary McCrea spent 201.5 hours on SR&ED out of 3,000 total hours, representing only 6.7 percent of his time. CRA argued that the corporation should only be able to claim 6.7 percent of his $11,940 salary, or roughly $800, as eligible SR&ED labour.

In essence, CRA attempted to apply a pro rata allocation of wages based on the proportion of SR&ED hours worked, rather than accepting the corporation’s position that the wages were specifically intended to compensate SR&ED work.

The Court’s Decision

The Tax Court rejected CRA’s approach.

Justice D’Arcy found that the shareholders had intentionally structured their compensation so that wages related to SR&ED work, while dividends compensated them for their broader roles as owners and managers of the business. As controlling shareholders and managing directors, they were entitled to make that decision. The court accepted that they had chosen to receive dividends instead of salary or bonuses for their non-SR&ED activities.

Importantly, the court also noted that this choice did not require a formal agreement. Because the wages were specifically intended to compensate SR&ED work, the court concluded that CRA could not simply reallocate those wages based on the proportion of time spent on other activities. The corporation’s appeal was therefore allowed.

What This Means for SR&ED Claimants

While this decision is fact specific, it highlights several practical considerations for founder-led companies claiming SR&ED incentives.

1. Compensation structure can influence how SR&ED labour expenditures are interpreted. Where shareholder-managers perform both research and operational roles, the form of compensation may determine how those activities are treated during a CRA review.
2. The decision confirms that salary does not necessarily need to cover all activities performed by a shareholder-manager. Compensation for other roles within the business may legitimately be provided through dividends instead.
3. The case reinforces the importance of clear documentation. Companies should be able to demonstrate how SR&ED hours were tracked and how compensation decisions were made.

   In practice, this means maintaining detailed time records and ensuring that the rationale behind compensation allocations is clear and consistent with the company’s overall governance and financial practices.

How Experienced Advisors Can Help

Navigating SR&ED requirements is rarely just about identifying eligible technical work. It also involves ensuring that the financial structure supporting a claim aligns with CRA expectations.

An experienced SR&ED advisor can help businesses:

• align compensation structures with SR&ED labour eligibility rules
• implement defensible time tracking and documentation practices
• anticipate how CRA may evaluate claims during a review

For founder-led innovation companies, these considerations can make a meaningful difference in both the value and sustainability of their SR&ED claims.