Manufacturing is one of the backbones of the Canadian economy, and recent updates in the 2025 Federal budget will fuel growth in 2026. This is a time of rapid innovation in the manufacturing space with automation, material science innovation and supply chain challenges leading to new approaches. Through all of these changes, SR&ED is the most lucrative way for manufacturing companies to recover their expenses and further innovate.
The 2025 Federal budget has significant changes to the SR&ED program, such as the return of capital expenditure eligibility, giving manufacturers a chance to recover a larger share of the time and financial investment.
This guide explains SR&ED for manufacturing companies, how the program is evolving, and how to build a practical strategy for 2026 that strengthens your investment in engineering, production, and technology.
Understanding SR&ED for Manufacturing
SR&ED (Scientific Research and Experimental Development) is a tax credit program facilitated by the Canadian government to support innovation in Canada. More on the basics of the program here: Is Your Project SR&ED Eligible?
SR&ED rewards Canadian companies that solve challenging technical problems and don’t shy away from the difficult and tedious work required to innovate. SR&ED for manufacturing often include projects like:
- Developing and iterating new production processes
- Improving throughput, yield, or cycle times
- Reducing scrap, waste, or variability
- Prototyping equipment, tooling, or fixtures when the outcome was not known
- Integration challenges between machines, PLCs, sensors, robotics, and software
- Material science work, such as adhesion, thermal resistance, wear, or corrosion testing
- Automation development and tuning
- Process redesigns driven by novel engineering challenges
The key requirement in any of these examples is that there must be a specific technical challenge and uncertainty that requires testing and iteration to address. Simple problems where the team adjusted one or two variables, and it was fixed, do not meet the “systematic investigation” requirement from the Canada Revenue Agency (CRA).
The CRA does not require patents to deem something as technically challenging or innovative, but the process to address the problems does need to involve real engineering work where challenges are investigated scientifically.
Manufacturing SR&ED is different from software SR&ED. Software teams deal with algorithm performance, architecture, and system behaviour. Manufacturers face physical constraints, mechanical limits, machine variability, environmental conditions, and material properties. The work is hands-on, experiment-heavy, and often tied to improving or stabilizing a complex production environment.
There are still misconceptions across the industry. Many teams believe SR&ED applies only to white coat lab work. Others think continuous improvement cannot qualify. The truth sits in the middle. When you are solving a challenging technical problem that has no guaranteed path to success, in an iterative, systematic way, and that is documented, SR&ED applies.
Eligible Costs: SR&ED for Manufacturing Companies
Try out our SR&ED calculator to understand and quantify your SR&ED refund with just a few clicks: SR&ED Calculator. In general, there are 4 eligible types of expenses for SR&ED: Salaries for Canadian technical employees, contractor invoices for Canadian third-party companies, materials used or consumed in testing, and the 2025 budget includes capital expenses as well.
With SR&ED for manufacturing companies, these categories often appear in very specific and practical ways:
Salaries and wages for technical employees
This includes engineers, production specialists, technologists, toolmakers, or technicians who are directly working on resolving uncertainties. Examples:
- A process engineer running trials to reduce cycle time on an inefficient process
- A tooling specialist redesigning and testing a fixture that fails under specific conditions
- A maintenance technologist performing structured testing on a new automation setup to diagnose inconsistent results
- An R&D engineer evaluating how a new material behaves during forming to improve machine throughput
Subcontractors and consultants in Canada solving technical problems
These are external companies or individuals working on supporting the technical work through experimentation and design. Examples:
- A robotics integrator debugging a novel robotic welding process where parameters are not yet understood
- A materials lab performing tensile, fatigue, or corrosion testing to evaluate a new coating material
- A PLC consultant investigating unexpected sensor behaviour that impacts machine efficiency
- A mechanical designer contracted to design and prototype custom tooling needed for experimental production trials
Work must be technical and tied to overcoming an uncertainty. If the work performed by the contractor is routine to them, such as creating prototypes, and that is standard work for that company, it can still be considered SR&ED eligible as “support work”. As long as the work directly supports (and is required) to address the core technical challenge, it is considered support work.
Materials consumed or transformed during experiments
These are materials that are destroyed, altered, or consumed during testing. Examples:
- Sheets, castings, or billets used for trial runs
- Components scrapped during testing of new cycle parameters
- Resins, coatings, adhesives, or chemical inputs used in experimental formulations
- Prototype tooling inserts that are machined, tested, and revised
Capital equipment that supports experimental development
With capital now eligible again, manufacturers can recover costs on equipment used directly for experimentation. This includes the cost of equipment or machinery that a company buys specifically to support research and development work.
To qualify, the asset must meet one of two tests. It must be used at least 90 percent of operating time for SR&ED in Canada over its useful life. Or the company must expect to consume almost all of its value while performing SR&ED, which captures assets that wear out and deteriorate quickly during experimentation. If it doesn’t meet one of these two requirements, a portion of the cost can still be recovered through SR&ED.
More information on these proposed changes here: A Practical Guide to the 2025 SR&ED Changes.
Examples:
- A prototype fixture or mould designed specifically to validate a new forming process
- Sensors, or hardware equipment purchased for experimental trials
- A temporary production line created to validate a new process flow before full-scale rollout
- Machinery purchased to address and iterate on a specific technical issue in a manufacturing line
Eligibility applies when the equipment is used to resolve a true technical uncertainty. More on the difference between general R&D and SR&ED available here: Why Not All R&D Qualifies For SR&ED.
Overhead costs through the proxy method
Most manufacturers use the proxy method to simplify overhead calculations. The proxy method adds a 55% proxy to all salaried SR&ED eligible dollars to account for these overhead costs. This means that for every $1 paid to a technical employee for SR&ED eligible work, your SR&ED eligible expense is calculated as $1.55 to include these overhead costs. This allows recovery of:
- Utilities supporting experimentation areas
- Use of plant floor space during testing
- Supervisory support tied to the SR&ED work
- Indirect supplies such as shop consumables used during trials
As described by the CRA here, the proxy method avoids itemizing these costs, which is why it is the default choice for most claims. The alternative method is the traditional method, which requires extremely detailed tracking of expenses and costing allocations for these overhead expenses. At GrowWise, we always explore both options and select the method that will maximize the claim.
What is Not Eligible: SR&ED for Manufacturing Companies
SR&ED gets blurry in many manufacturing settings where documentation is lacking, and there is confusion about what engineering work is eligible and what isn’t. As the CRA defines it, routine engineering work is not eligible, but whenever there is a systematic investigation, iterative testing and a larger uncertainty, that is SR&ED eligible.
Some common questions we get at GrowWise from manufacturing companies are about these sorts of projects switch are not SR&ED eligible:
- Routine quality control and inspections to ensure quality standards are met
- Commercial production where the process has been ironed out, and now the line is operating and facing small issues that are quickly fixed
- Standard equipment upgrades with straightforward off-the-shelf implementation processes
- Design and prototyping work for cosmetic or aesthetic changes to a product
- Reverse engineering a solution with a known SOP
- Maintenance and simple repairs of machinery and equipment
- Adjusting and tweaking variables on a machine in a trial-and-error basis to improve output (SR&ED requires a systematic approach, not just tweaking variables without clear parameters and targets)
Designing an Effective SR&ED Strategy for a Manufacturing Environment
Unlike some other industries that naturally have stronger tracking and documentation, manufacturing companies are often more focused on day-to-day operations, and therefore are left trying to pull together documentation and proof after the fact
Manufacturing work moves fast. Information gets lost if not captured early. The simplest process for tracking SR&ED integrates into what you are likely already doing:
- Bi-weekly or monthly engineering/project review meetings
- Documenting process trials and outcomes
- Tracking test logs, scrap reports and data records from trial runs
- Saving cycle time data, PLC revisions, and lab results
- Tracking changes to tooling, equipment, or recipes
- Keeping photos, CAD versions, and testing notes
This is the type of documentation CRA prefers because it reflects how engineers work in real environments. Good documentation does not need to be heavy. The CRA needs four key things to be evident based on your documentation:
- What was the uncertainty? You need to demonstrate that there was a challenge that could not be solved with routine practices or SOPs.
- What work was done to address the uncertainty? What tests were performed, what variables were adjusted, and what is the proof of all of this?
- What lessons were learned? You do not have to solve the problem, but you need to clearly document that lessons were learned.
- Who did this work, and how much time did it take them? The CRA needs to see how you logically calculated what percentage of your employees’ time was spent on these projects in each month. Ideally, that is daily time tracking, but other forms of work tracking can often substantiate these calculations. The CRA needs to see that you aren’t just guessing that someone spent 40% of their time in March; you have a data-based method to calculate that.
How GrowWise Supports SR&ED for Manufacturing Companies
Manufacturing environments are busy, fast-moving, and full of untapped SR&ED opportunities. GrowWise makes it easier to capture this information without disrupting your operations. Our platform helps you identify technical work you may have missed and organizes your experiments, whether they come from production engineering, automation, or materials research.
We have built a supervised AI platform that is extremely simple to use and will save you and your team time in preparing your maximized SR&ED claim. With our Document Smart-Detect, we can identify SR&ED eligible activities with the simple upload of your files into our platform. We make this process simple, efficient, and all while maximizing your SR&ED claims.
If you want to talk about SR&ED for your manufacturing company, especially in light of the recent changes to the program to include capital expenses, reach out here: [email protected]
