SR&ED Case Study #2: Manufacturing Company

Here's a more complicated example of a manufacturing company's potential SR&ED claim for 2014.

Company XYZ is a large manufacturing enterprise based in Edmonton, Alberta. It is classified as a CCPC (Canadian-controlled private corporation) with over $1.5M in annual taxable net income. Since they are over the small business limit they will be classified as a non-CCPC in the eyes of SR&ED.

Company XYZ is working on improving the durability and performance of their widgets while keeping their internal cost of goods sold the same.

They have hired 4 senior mechanical engineers and 1 sub-contractor 75% of their time on this project. The engineers' salaries are $100K each and the sub-contractor fees total $125K.

Now to calculate their potential SR&ED return:

Company XYZ can claim $300K ($100K x 4 x 75%) worth of salaries for their SR&ED claim. You can only claim 80% of sub-contractor fees so only $100K will qualify ($125K x 80%). We're assuming 100% of the sub-contractor's work is SR&ED eligible.

Using the proxy method and non-CCPC rates, Company XYZ would qualify for ~$133K worth of investment tax credits (ITCs).
Since they are a large non-CCPC, Company XYZ will receive their ITCs as a tax credit that can be applied indefinitely or carried back 3 years.

Here's the step-by-step calculation:

Step Calculation
1a. Determine Total Qualifying Expenditures for Salaries
(Salaries of 4 engineers being paid $100K per year, 75% of the time)		 $100K x 4
= $400K

$400 x 75%
=$300K
1b. Determine Total Qualifying Expenditures for
Sub-Contractors (Sub-contractor was paid $125K. Only 80% of total sub-contractor fees may be claimed)		 $125K x 80%
= $100K
2. Apply Overhead Proxy Method to Salaries (55%) $300K x 55% = $165K
3. Calculate Total Qualifying Expenditure Pool
(Salaries + Overhead+ Sub-contractors)		 $300K + $165K + $100K = $565K
4. Calculate Provincial ITCs (AB rate is 10%) $565K x 10% = ~$57K
5. Determine Federal Expenditure Pool
(Remove Provincial ITCs from Total Qualifying Expenditure Pool)		 $565K - $57K = ~ $508K
6. Calculate Federal ITCs (Non-CCPC rate is 15%) $508K x 15%
= ~$76K
7. Calculate Total ITCs Earned
(Add Provincial and Federal ITCs)		 $57K + $76K = ~$133K
If Company XYZ was a CCPC, their total ITCs would be $234K and all of it would be refundable!
*Kindly note: Determining qualifying expenditures is a complicated part of the SR&ED claim process that we skipped over for the purpose of this case study. This case study should not be used as a template to calculate your potential SR&ED return.

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