Two Ontario rates, and Schedule 27 decides which one you pay
Ontario applies a 10% corporate rate to qualifying manufacturing and processing profits, against the 11.5% general rate — and the claim runs through Schedule 27 of the T2. While active income sits under the $500,000 small business limit, the roughly 12.2% combined small-business rate already beats it, so the M&P calculation earns nothing. The year income crosses the limit, it starts paying, and it keeps paying every year after.
Schedule 27 is a fraction, not a checkbox. M&P profits are computed by weighing the cost of manufacturing labour and capital against the company's total labour and capital, so a plant that also resells bought-in product, installs on site or runs a service department gets a blended answer. How wages, machine costs and revenue streams are coded through the year sets that fraction, which is why we set the tracking up before the first year it matters rather than reconstructing it at filing time.
Closing inventory is the largest estimate on the return
Taxable income moves dollar for dollar with closing inventory, and at a manufacturer that number is built, not looked up: raw materials at landed cost, WIP carrying material, labour and an overhead share, finished goods at full absorbed cost. For tax purposes each item is valued at the lower of its cost and fair market value, and the method has to hold steady from year to year. A count that misses the overhead in WIP understates income one year and overstates it the next, and a reviewer who finds it gets to choose which year to reassess.
We tie the filed inventory figure back to the count sheets, the bills of materials and the absorption rate, so the T2 and the working papers tell one story.
A writedown is deductible; a reserve is not
The Income Tax Act lets you deduct inventory written down to what it is actually worth, determined item by item — and paragraph 18(1)(e) blocks the general provision most bookkeeping software happily posts. "Ten percent of stock is probably dead" is not a deduction. "These fourteen part numbers were superseded by the customer's revision in June, written down to scrap value, with the engineering change notice and the disposal record attached" is a deduction that survives review.
Obsolete stock is a fact of manufacturing life: minimum-order quantities outlive the job, revisions strand components, a discontinued line leaves packaging behind. The deduction is real money at 12.2% and better money at 25%; it just has to be claimed the way the Act reads. When the CRA asks — and inventory writedowns are a standard question at a manufacturer — CRA Audit & Review Support answers with the file we built at year-end, not a reconstruction.
| T2 element | What actually decides it | Where it goes wrong |
|---|---|---|
| Closing inventory and WIP | The count, the bills of materials, the overhead rate | WIP carries material only, so income is misstated in both directions |
| Obsolescence writedown | Item-by-item valuation with evidence | A percentage provision paragraph 18(1)(e) disallows |
| Schedule 8 CCA | Asset classes and available-for-use dates | M&P equipment parked in a slow general class |
| Schedule 27 M&P profits | The manufacturing labour-and-capital fraction | Production never separated from resale and service revenue |
Schedule 8 deserves one note here: manufacturing equipment has its own accelerated CCA treatment, and claiming it well is a planning exercise as much as a filing one — that side lives with Tax Planning & Advisory.
The calendar the plant has to keep
The T2 is due six months after year-end, but the balance owing is due at two months — three for many CCPCs claiming the small business deduction — so the tax bill lands months before the return does. Once federal tax passes $3,000, instalments start: monthly by default, quarterly for small CCPCs with a clean compliance record. Around the corporate return sit the rest: T4s for the floor by the end of February, the HST returns, and the owners' personal filings, where salary and dividends have to land exactly as the corporate records say they were paid.
Our Corporate Tax Filing engagements take the whole calendar as one job — T2, HST and the owners' T1s prepared by the same people who saw the year-end count. For manufacturers across Mississauga and the GTA, scope and fee are quoted in writing after a free 15-minute discovery call, so there are no hourly surprises in a filing season that already has enough of them.
Source: CRA — T2SCH27, Calculation of Canadian Manufacturing and Processing Profits Deduction.
