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Provincial Tax Credits – Making the Most of SR&ED

Canadian innovation tax credits

Provincial tax credits for SR&ED – Yours for the taking!

In addition to the generous federal tax credits for SR&ED, many provinces and territories have their own tax credits that can increase the overall amount of your refund. Depending on a) the province in which the organization is based, and b) where the tax returns are filed  (usually the same location), your claim can be given quite an impressive “boost” that can then be put toward innovative work.

Provincial / Territorial Investment Tax Credits

Based on our knowledge of existing provincial and territorial investment tax credit programs, these are the current provincial SR&ED tax credit amounts. Click on the links provided below to open a new tab that will connect you to the relevant provincial website where you can get more information about tax credits.

In addition to the amounts listed above, provinces and territories may offer additional alternative or supplemental investment programs. For example:

How do provincial and federal tax credits work together?

This is where most organizations get confused as, at first glance, the numbers just don’t seem to add up. How can 35%+10% = 68.5% refund? Furthermore, why is 35%+10% = 41.5%? These questions are best answered using simple examples.

First, select your method: proxy or traditional. There are pros and cons to what can be claimed under both methods. In short:

proxy method is best for organizations where the majority of the expenses are salaries, whereas

traditional method is best when there are many other expenses, such as equipment, materials, and recruiters fees.

Proxy Method – 35% +10% = 68.5% !

Step 1: For the sake of simplicity, imagine that you have an employee whose salary is $100. When using the proxy method, multiply this salary amount of $100 by 0.65, which represents the 65% proxy “top up”.

This “top up” theoretically includes non-eligible administrative and support costs (salaries, rent, equipment, etc.) that are required to support SR&ED-eligible work. 

You now have $165 ($100 + $65).

Step 2: Next, work out your provincial tax credit refund. As an example, in British Columbia, this amount would be 10%.  It is important to note that provincial tax credits are always applied first and deducted from the total eligible amount. 

You now have $165 – $16.5 (provincial refund) = $148.5

Step 3: Finally, apply the federal tax credit.

You now have $148.5 x 35% = $51.975

The total provincial + federal tax credits:

$51.975 + 16.5 = $68.475

Thus, if you use the proxy method, of the $100 you spent on salaries, ~$68.5 of that total amount is eligible for a refund.

Traditional Method – 35% + 10% = 41.5% !

Step 1: If using the traditional method, work out your exact direct and indirect costs. For a complete list, see section 3 (Rules for SR&ED) of the CRA’s Allocation of Labour Expenditures for SR&ED Guidance Document. For simplicity, it will remain $100.

Step 2: Next, work out your provincial tax credit refund. In British Columbia, this would be 10%.

You now have $100 – $10 (provincial refund) = $90

Step 3: Finally, apply the federal tax credit.

You now have $90 x 35% = $31.5

The total provincial + federal tax credits:

$31.5 + $10 = $41.5

Thus, if you use the traditional method, of the $100 you spent, you are eligible for a ~$41.5 refund.

Proxy vs. Traditional: What is the better option?

“Context is everything.”

Use this as your mantra when selecting the best method for your project.

While it may seem tempting to use the proxy method of calculation given that it yields a larger return, it is often more beneficial to use the traditional method as the eligibility criteria are much more forgiving. More forgiving eligibility criteria mean that you can claim more project expenses such as hiring a recruiter to find employees who will do SR&ED work.

Typically, labour-intensive development (such as software) will best benefit from the proxy method, whereas resource-intensive development (engineering prototyping) will best benefit from using the traditional method.

This article is presented only for informational purposes and does not constitute legal advice. You should retain legal counsel if you require legal advice regarding your individual situation.

Unsure about what method is best for your project? Have some insight to share? Contact us directly, or start a discussion on our LinkedIn® forum.

  1. How long have you been running this blog? It looks like you have a great website right here and I will be bookmarking you. I will almost certainly submit this write-up to Reddit so that my followers can verify it out as well.

  2. confusing me with the US dollars in the basket – in a Canadian R&D article – shame on you?

    • We looked long and hard for a picture with Canadian cash! We are shamed… thanks for noticing. We were wondering if anyone would point that out!

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