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Manufacturer tax services: the Ontario rate cut, shop-floor research credits, CCA timing
Manufacturers leave money in three places: the reduced Ontario manufacturing rate that nobody calculates once profits pass the small business limit, research credits on process work that never reaches a claim because it happened on the shop floor instead of in a lab, and equipment write-offs taken in the wrong year. Our tax work for manufacturers is built around those three, plus the refund rhythm that comes with zero-rated exports.
By the AnalytIQ Accounting team · Last reviewed: August 12, 2026
Two rates matter on a manufacturer's T2
The first $500,000 of active profit gets the small business deduction — about 12.2% combined in Ontario — same as any CCPC. The manufacturing angle starts above that line: Ontario taxes manufacturing and processing profits at 10% instead of the general 11.5%, so a plant earning past the limit pays roughly 25% combined instead of 26.5% on those profits. The federal M&P deduction no longer lowers the federal rate below the general 15%, which is why many firms stopped computing M&P profits at all — and why the Ontario point-and-a-half goes unclaimed. Schedule 27 runs the calculation from your manufacturing labour and capital, and we prepare it whenever profits justify it. Remember, too, that manufactured inventory must carry direct labour and a fair share of overhead into work-in-progress and finished goods — materials-only costing understates inventory and misstates the year.
SR&ED lives on the shop floor, not in a lab
The SR&ED program pays for systematic experimentation wherever it happens, and in a plant it happens at the machines. Work that routinely qualifies:
- Process development — trial runs to hold a tighter tolerance, raise line speed, or adapt a process to a new material, where the outcome was genuinely uncertain.
- Scrap and yield work — structured experiments to cut reject rates, including the cost of material consumed in failed trials and experimental production.
- Automation integration — making new robotics or controls work with legacy equipment when no documented solution existed.
For a CCPC the federal credit is 35% and refundable up to the expenditure limit, with Ontario adding a refundable 8% credit and a non-refundable 3.5% on top; recent federal budgets raised the expenditure limit from its long-standing $3 million and made eligible equipment purchases claimable again. What kills manufacturing claims is evidence, not eligibility — so we set up contemporaneous records: dated trial logs, machine settings per run, scrap counts tied to experiments. A claim assembled from memory in month eleven reviews badly.
Equipment: the class, the year, and the immediate write-off
CCA timing is a real planning lever in a capital-heavy business, because the first-year deduction depends on what you bought, when it arrived, and when it became available for use — a machine sitting in crates at year-end deducts nothing.
| Plant asset | Class and rate |
|---|---|
| Machinery used directly in manufacturing or processing | Class 53 — 50% declining balance, with enhanced first-year rules |
| General equipment, tooling, furniture | Class 8 — 20% declining balance |
| Computers and servers running the plant | Class 50 — 55% declining balance |
| The building itself | Class 1 — 4%, or 10% by election for new builds used 90%+ in M&P |
The November 2025 federal budget sharpened the timing question further, restoring full first-year expensing for manufacturing and processing machinery and introducing an immediate write-off for new buildings used at least 90% in manufacturing — both time-limited measures. When a seven-figure machine is on order, the delivery date and the available-for-use date are tax numbers, and we model them before the deposit goes out.
Exports are zero-rated — expect refunds, and expect questions
Goods exported from Canada are zero-rated: you charge 0% GST/HST yet keep full input tax credits on materials, utilities, and equipment. A manufacturer selling mostly to US customers is therefore a perpetual refund claimant, and refund claims draw verification — CRA will want proof of export, so bills of lading and customs documentation belong in the file the month of the sale. Domestic sales follow place-of-supply rules keyed to where the goods are delivered, not where the plant sits: the same product ships to Toronto at 13%, to Calgary at 5%, and to Halifax at 15%, so the ship-to province has to drive the tax code on every invoice. The border raises the rest of the questions: USMCA origin on your inputs and outputs, tariff exposure, whether a US warehouse creates US filing obligations, and transfer pricing once a US affiliate buys from the plant. Those are covered on our cross-border tax page for manufacturers; the domestic engine — T2, Schedule 27, SR&ED, GST34 refunds — runs through our tax services on fixed fees.
Source: CRA — Scientific Research and Experimental Development (SR&ED) tax incentives.
Common questions.
Do we need a lab or engineers to claim research credits?
No. SR&ED rewards systematic experimentation wherever it happens — trial runs to hold tolerances, structured scrap-reduction work, integrating automation with legacy lines. What claims need is contemporaneous evidence: dated trial logs, settings, and scrap counts.
Is the manufacturing and processing deduction still worth calculating?
Federally it no longer beats the general rate, but Ontario taxes M&P profits at 10% instead of 11.5%. Once profits exceed the $500,000 small business limit, Schedule 27 is worth about 1.5 points on every manufacturing dollar above it.
Do we charge GST/HST on sales to US customers?
No — exported goods are zero-rated, and you keep full input tax credits, which usually puts an exporter in a recurring refund position. Keep shipping and customs proof of export; CRA verifies refund claims against it.
Related reading
Tax built around the plant floor.
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