Manufacturing and Processing Profits Deduction Calculator
Income from manufacturing or processing is taxed at a lower Ontario rate than other business income. Work out how much of your income qualifies under the capital and labour formula, and what the reduced rate is actually worth.
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The Formula, Step by Step
| Step | Basis | Amount |
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What the Reduced Rate Is Worth
| Item | Without the Deduction | With It |
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Moving the Ratio
| If the Ratio Were | M and P Profits | Annual Saving |
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Points That Decide This
What to Do Next
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Disclaimer: Canadian manufacturing and processing profits are computed under section 125.1 of the Income Tax Act and the regulations made under it, and are reported on Schedule 27 of the T2 return. In broad terms, manufacturing and processing profits are determined by applying to adjusted business income the proportion that the cost of manufacturing and processing capital plus the cost of manufacturing and processing labour bears to the cost of capital plus the cost of labour. Where that proportion is ninety per cent or more, all of the adjusted business income is generally treated as manufacturing and processing profits, and where it is less than ten per cent, none of it generally is. Adjusted business income excludes, among other things, income eligible for the small business deduction, so a corporation whose income is entirely within the business limit obtains no additional benefit from this deduction. Cost of capital and cost of labour are defined terms with prescribed components and exclusions, including rules on leased property and on amounts paid to persons other than employees, and the figures entered here are simplified proxies rather than the prescribed computations. Certain activities are excluded from manufacturing or processing by regulation, including farming, fishing, logging, construction, operating an oil or gas well, and extracting minerals, and additional exclusions apply where particular thresholds are not met. The federal manufacturing and processing rate and the federal general corporate rate are presently the same, so the deduction generally produces no federal saving, and the benefit arises from provincial rates where the province applies a lower rate to manufacturing and processing income; not every province does. All rates on this page are editable inputs that should be replaced with the figures applicable to your taxation year and province. Whether particular activities constitute manufacturing or processing is a question of fact. This page is general information, not tax advice.
The Federal Saving Is Zero, and That Surprises People
The manufacturing and processing deduction has a long history of being described as a federal tax break. It was, once. The federal general rate and the federal manufacturing rate have been aligned for years, so for most corporations the deduction produces no federal saving at all.
What remains is provincial. Ontario applies a lower rate to manufacturing and processing income than to other business income, and that spread is the entire benefit. It is real, but it is a point and a half rather than the larger number people often have in mind.
On a million dollars of qualifying income that spread is fifteen thousand dollars a year. Worth claiming properly, not worth restructuring a business around. Knowing which it is saves a lot of wasted effort.
The Formula Measures Inputs, Not Output
This is the part that catches people out. The proportion of income treated as manufacturing profits is not based on what share of your sales come from manufactured goods. It is based on where your capital and labour sit.
Specifically, manufacturing capital plus manufacturing labour, divided by total capital plus total labour. That ratio is applied to adjusted business income to arrive at manufacturing and processing profits.
| Component | What Goes In |
|---|---|
| Manufacturing capital | Assets used in manufacturing or processing |
| Manufacturing labour | Wages for time spent on manufacturing or processing |
| Total capital | All assets used in the business |
| Total labour | All salaries and wages |
So a business with a large sales force and a modest plant can have most of its revenue coming from manufactured goods and still produce a low ratio, because the labour denominator is dominated by people who are not manufacturing anything.
There are thresholds at both ends. Where the ratio reaches ninety per cent, essentially all adjusted business income is treated as manufacturing profits. Below ten per cent, generally none of it is. A business sitting just under either line is in a materially different position from one just over it.
Small Business Income Is Already Out
Adjusted business income excludes income eligible for the small business deduction. That income is already taxed at a lower rate, and the manufacturing deduction does not stack on top of it.
The practical consequence is that a manufacturer whose income sits entirely within the business limit gets nothing from this deduction at all. It only begins to matter once income exceeds the limit, which is why it tends to be a mid-sized manufacturer’s issue rather than a small one’s.
Time Records Are What Make the Labour Number Defensible
Manufacturing labour means wages for time spent on manufacturing or processing. For a worker who spends all day on the line that is simple. For a supervisor splitting time between production and administration, or an owner who does everything, it is a judgment that needs support.
A reasonable allocation recorded at the time holds up. A number produced at filing time from someone’s recollection does not, and the labour component is usually the larger half of the ratio, so it is where a review will focus.
Some Activities Are Excluded Outright
Regulation excludes a list of activities from manufacturing and processing regardless of how industrial they look: farming, fishing, logging, construction, operating an oil or gas well, and extracting minerals among them.
A business that carries out both an excluded activity and genuine processing needs to separate them, and the excluded part does not count toward the ratio however much capital and labour it absorbs.
The deduction and the investment credit are different things. This deduction reduces the rate on profits. The Ontario made manufacturing investment tax credit is a refundable credit on buildings and equipment. A manufacturer can have both in the same year, and they are calculated independently.
What This Calculator Does Not Cover
- The prescribed definitions of cost of capital and cost of labour in full
- Leased property rules and amounts paid to non-employees
- Provincial rates outside Ontario, which differ and sometimes do not exist
- Whether specific activities qualify, which is a question of fact
- Zero-emission technology manufacturing, which has its own reduced rates
- Allocation between provinces for a corporation with establishments in several
The ratio is where the work is. Our manufacturing accounting service covers computing the capital and labour components properly, supporting the labour allocation, and claiming the deduction alongside the investment credit and any SR&ED in the same year.
Frequently Asked Questions
Common questions on the manufacturing deduction.
Related Calculators and Guides
More for Ontario manufacturers.
Get the Ratio Right and the Rest Follows
Send us the capital and labour figures and what the business actually does. We will compute the proportion under the formula, make sure the labour allocation is supportable, and claim the deduction alongside the investment credit and any SR&ED in the same year.