SR&ED Overhead Calculation: Proxy vs. Traditional Method
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.