SR&ED Refundable Tax Credit Calculator for Ontario CCPCs
Process improvement on a shop floor qualifies for SR&ED far more often than the people doing it realise. Work out the qualified expenditure pool, the federal and Ontario credits, whether the proxy or the traditional overhead method serves you better, and how long is left to file.
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Building the Qualified Expenditure Pool
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Proxy Against Traditional Overhead
| Item | Proxy Method | Traditional Method |
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The Credits
| Credit | Basis | Amount | Refundable |
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Points That Decide This
What to Do Next
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Disclaimer: Scientific research and experimental development is defined in subsection 248(1) of the Income Tax Act, and the investment tax credit is provided under section 127, with refundability for qualifying corporations under section 127.1. A Canadian-controlled private corporation may earn the enhanced federal rate on qualified SR&ED expenditures up to its expenditure limit, with the general rate applying above it; the expenditure limit is reduced where taxable capital employed in Canada of the corporation and associated corporations exceeds a lower threshold, and is eliminated at an upper threshold. The reduction of the expenditure limit by reference to prior-year taxable income that formerly applied was repealed for taxation years beginning after 2018 and is not modelled here. Overhead may be claimed either by tracking directly attributable costs under the traditional method or by taking the prescribed proxy amount, computed as a percentage of the salaries and wages of employees directly engaged in the SR&ED, subject to limits including those applying to specified employees which this calculator does not model. Payments to arm’s length Canadian contractors are included at a prescribed proportion. The Ontario innovation tax credit is refundable and subject to its own eligibility conditions and expenditure limit, and the Ontario research and development tax credit is non-refundable; provincial assistance generally reduces the federal qualified expenditure pool, which this simplified estimate does not apply. A claim must be filed within the statutory reporting deadline, generally eighteen months after the end of the taxation year, and that deadline is not extendable. Every rate, threshold and proportion on this page is an editable input that should be replaced with the current published figure before being relied on. Whether particular work meets the definition of SR&ED is a technical question that this page cannot answer. This is general information, not tax advice.
Most Machine Shops Are Doing It and Not Claiming It
SR&ED has a reputation as something for laboratories and software companies. In practice a great deal of qualifying work happens on shop floors: trying to hold a tolerance the existing process cannot hold, running a new alloy that behaves differently, rebuilding a fixture because the first three attempts distorted the part.
What matters is not whether the work looks like research. It is whether there was a technological uncertainty that could not be resolved by standard practice, and whether the attempt to resolve it was systematic. Scrapped parts and a logbook of failed settings are often better evidence of that than a white paper would be.
Failure is not a problem for the claim. Work that did not produce the improvement still qualifies, provided the uncertainty was genuine and the attempt was methodical. A shop that only claims its successes is under-claiming.
Materials Are the Pool Manufacturers Forget
The expenditure pool is not only wages. Materials consumed or transformed in the course of the work count, and for a manufacturer that can be the second-largest component of the claim.
Consumed means the material was destroyed or rendered useless. Transformed means it was incorporated into something else during the work. Bar stock scrapped across a run of trials, a batch spoiled while proving a new heat treatment, tooling consumed in the attempt: these belong in the pool and are routinely left out by shops that assume only labour counts.
Material that was sold afterwards is treated differently. Where the trial produced saleable output, the treatment of that material changes, and the pool has to be reduced accordingly. That is not a reason to leave materials out; it is a reason to track which trials produced sellable parts and which did not.
Proxy or Traditional: This Is Where a Plant Differs From Software
Overhead can be claimed two ways. The proxy method takes a set percentage of the salaries of employees directly engaged in the work and requires no tracking at all. The traditional method claims directly attributable overhead and requires that the costs be identified and supported.
For a software company the proxy almost always wins, because a developer’s overhead is a desk and a laptop. For a manufacturer it frequently does not, because machine time, power, consumables and floor space attributable to the work are real and substantial.
| Consideration | Proxy | Traditional |
|---|---|---|
| Record keeping | None required | Costs must be identified and supported |
| Suits a plant with heavy overhead | Often understates it | Captures what was actually spent |
| Suits a low-overhead operation | Usually generous | More work for less |
| Review risk | Little to challenge | Attribution can be questioned |
The choice is made claim by claim, so it is worth calculating both rather than defaulting to the proxy because it is easier. This calculator computes each so the gap is visible.
The Expenditure Limit and What Grinds It
The enhanced federal rate applies only up to an expenditure limit. Above it, the general rate applies, and for a CCPC only part of that general-rate credit is refundable.
The limit is reduced where taxable capital employed in Canada, counting associated corporations, exceeds a lower threshold, and disappears entirely at an upper one. A group that has grown, or that holds significant assets in an associated holding company, can find the limit reduced without anything about the research changing.
The old income-based grind is gone. The expenditure limit used to be reduced by reference to prior-year taxable income as well. That reduction was repealed for taxation years beginning after 2018, so a profitable year no longer cuts the limit and older guidance saying otherwise is out of date.
Federal and Ontario Stack
A CCPC in Ontario can claim the federal credit, the Ontario innovation tax credit, which is refundable, and the Ontario research and development tax credit, which is not. They apply to overlapping but not identical bases and have their own conditions.
Provincial assistance generally reduces the federal qualified expenditure pool, so stacking them is not simply a matter of adding the percentages together. The figures here are an indication of scale rather than a computation of the final entitlement.
Eighteen Months, and It Does Not Move
The claim has to be filed within the statutory reporting deadline, generally eighteen months after the end of the taxation year. That deadline is not extendable and a late claim is simply lost, however good it was.
It is the single most common way shops lose money on SR&ED. The work happened, the costs are in the ledger, the claim would have succeeded, and nobody filed in time. A first-time claimant who starts at month sixteen is unlikely to assemble the technical narrative and the cost allocation properly before the door closes.
What This Calculator Does Not Cover
- Whether the work qualifies, which is a technical judgment about uncertainty and method
- Specified employee limits on salaries included in the proxy base
- The reduction of the federal pool by provincial assistance
- Capital expenditures, which have not been claimable as SR&ED for some years
- Non-arm’s length contractor payments, which follow different rules
- The technical narrative, which is what a review actually turns on
The arithmetic is the easy half. Our SR&ED claim service covers identifying which projects qualify, building the cost pool, choosing the overhead method, writing the technical narrative and defending the claim if it is reviewed. Software and SaaS companies have their own version of this at the software SR&ED calculator.
Frequently Asked Questions
Common questions on SR&ED for Ontario manufacturers.
Related Calculators and Guides
More tools for innovation tax credits.
Eighteen Months Is Less Time Than It Sounds
Tell us what the shop tried to do that it had not done before, what went wrong, and roughly what it cost in time and material. We will tell you whether it qualifies, build the pool, choose the overhead method that serves you and file before the deadline rather than after it.