SR&ED Overhead Calculation: Proxy vs. Traditional Method
It all begins with an idea.
Maximizing your SR&ED (Scientific Research & Experimental Development) tax credits often depends on choosing the best way to calculate your overhead expenses.
Canadian businesses can choose between:
The Proxy Method (Prescribed Proxy Amount or PPA)
The Traditional Method (Actual Overhead Costs)
Selecting the right approach can significantly impact your total SR&ED claim. Below, we break down how each method works, with examples to help you decide which suits your business best.
Traditional Method
SR&ED overhead includes indirect costs that support eligible R&D work — such as utilities, rent, maintenance, and support staff. To qualify, expenses must directly support SR&ED projects and be incremental to the work performed.
Under the Traditional Method, you claim the actual overhead expenses that meet CRA eligibility requirements.
Example: Allowable Overhead Expenses
Category Amount
Utilities $8,000
Building Operations $10,000
Support Staff Wages $20,000
Travel & Training $4,000
Supplies & Consumables $5,000
Relocation & Hiring Costs $3,000
Rent & Property Taxes $15,000
Total Allowable Overhead $70,000
Calculation Example
Category Amount
Salaries $200,000
Materials consumed $40,000
Canadian contracts $60,000
Overhead (as Above) $70,000
Total Qualified Expenditures $370,000
Investment Tax Credit (ITC) Calculation:
CCPC 35%: $370,000 × 35% = $129,500 (Canadian Controlled Private Corporation)
General Rate 15%: $370,000 × 15% = $55,500
Proxy Method
The Proxy Method replaces itemized overhead with a simplified flat-rate allowance called the Prescribed Proxy Amount (PPA).
Instead of tracking actual costs, businesses can claim 55% of eligible SR&ED salaries as overhead. This method reduces administrative work and often yields a higher tax credit for companies with modest indirect costs.
Proxy Method Calculation Example
Step 1: Determine Eligible SR&ED Salaries
Employee Salary
Engineer A $80,000
Engineer B $70,000
Technician $50,000
Total Salary Base $200,000
Step 2: Apply PPA Rate
$200,000 × 55% = $110,000
Step 3: Add PPA to Qualified SR&ED Expenditures
Category Amount
Salaries $200,000
Materials consumed $40,000
Canadian contracts $60,000
PPA $110,000
Total Qualified Expenditures $410,000
Step 4: Calculate the Investment Tax Credit (ITC):
CCPC 35%: $410,000 × 35% = $143,500
General Rate @ 15%: $410,000 × 15% = $61,500
Proxy vs. Traditional: Which Yields a Better SR&ED Credit?
Method Qualified Expenditures ITC @ 35% ITC @ 15%
Proxy (PPA) $410,000 $143,500 $61,500
Traditional $370,000 $129,500 $55,500
👉 In this example, the Proxy Method produces a higher tax credit because the PPA ($110,000) exceeds the actual overhead ($70,000).
When to Use Each Method
Use the Proxy Method if:
✅ Your actual overhead is low or moderate relative to 55% of SR&ED salaries.
✅ You want simplified record-keeping and fewer documentation requirements.
Use the Traditional Method if:
✅ You operate facilities with high indirect costs (labs, equipment-heavy operations).
✅ You can document all overhead expenses directly tied to SR&ED work.
Conclusion
Both the Proxy Method and Traditional Method can help you maximize SR&ED credits — the right choice depends on your company’s cost structure and administrative capacity.
For most businesses, the Proxy Method offers a simpler and often more lucrative approach. However, firms with high, traceable overhead may benefit from the Traditional Method.
At Ledger & Strategy, we help Canadian companies maximize SR&ED returns — from calculating overhead to preparing full claim documentation.
Cost Accounting: How to Uncover Hidden Costs and Boost Profitability Across Industries
Introduction
Many businesses believe they’re earning solid margins, only to find that hidden or untracked costs quietly erode profits. Without full visibility into labor, materials, equipment time, and overhead, it’s easy to misjudge true profitability.
Cost accounting provides the financial clarity every business needs to stay competitive. Even efficient operations can overlook key expenses such as:
Labor inefficiencies – setup time, rework, or waiting for materials
Equipment use and depreciation – downtime, maintenance, or slow performance
Project or shop time opportunity cost – time spent on low-margin jobs
Utilities and consumables – energy use, supplies, and small tools
Packaging, transport, and storage – underestimated costs that reduce profit
By accurately tracking all inputs, cost accounting calculates the true cost per job or product, enabling you to:
Set profitable, competitive prices
Identify waste and inefficiency
Compare estimated vs. actual costs
Improve budgeting and forecasting
How to Implement Cost Accounting for Better Profitability
Businesses of any size can enhance profitability through disciplined cost accounting practices:
Track every cost – include wages, materials, energy, and downtime.
Separate direct and indirect costs – clarify true project or product costs.
Log time per job or service – assess opportunity costs and capacity use.
Use accounting or job-costing software – automate tracking and reporting.
Review reports regularly – identify trends and adjust before problems grow.
Modern management accounting tools simplify data collection and help business owners make informed, timely decisions that protect margins.
Conclusion
Profitability doesn’t come from sales alone—it comes from clarity. Understanding your true costs ensures smarter pricing, efficient resource use, and sustainable growth.
By applying cost accounting principles, businesses can uncover hidden expenses, refine pricing strategies, and strengthen their bottom line.
The key to lasting profitability is knowing your true costs.