On November 21, 2018, the Department of Finance (“Finance”) released the 2018 Fall Economic Statement (the “Statement”) in response to the U.S.’s tax reforms introduced at the end of 2017, that allows U.S. businesses to immediately expense 100% of the cost of certain capital purchases in the year of acquisition.
Specifically, Finance introduced enhanced capital cost allowance rates which allow Canadian businesses to expense the entire cost of certain capital investments in the year they are purchased.
Enhanced Capital Cost Allowances
Finance introduced the new Accelerated Investment Incentive (“AII”) rules which will allow businesses to have a faster write-off of tangible and intangible capital assets in the year of acquisition. This is done by increasing the capital cost allowance (“CCA”) rate for certain assets, which enhances the first-year tax deduction of capital investments. This effectively suspends the half-year rule that applies to capital assets in the year they are acquired, allowing corporations to apply the prescribed CCA rate to one-and-a-half times the net addition to the CCA class. Consequently, capital additions will be eligible for up to three times the tax deduction in the first year that would otherwise be eligible under the current rules. It should be noted that the proposed changes merely accelerate the rate at which a business will be able to claim CCA – the deductions in future years will be smaller as more CCA will be taken in the year of acquisition. The following example illustrates the impact of the new rules on the purchase of computer equipment costing $10,000.
|Year||CCA Claim – Old Rules||CCA Claim – New Rules|
The CCA deduction in Year 1 under the proposed rules is 3 times larger than the deduction under the old rules, but the total CCA claimed after Year 4 is only $500 higher.
These CCA rates will be pro-rated for short taxation years and no adjustments for additional CCA will be available for the year following the short taxation year.
For property to be eligible for the AII, it must not have previously been owned by the taxpayer or a non-arm’s-length party and the property cannot have been transferred to the business on a tax-deferred “rollover” basis.
AII is effective for capital additions made after November 20, 2018 and made available for use before 2028. It will be phased out beginning in 2024, and will no longer be available after 2028.
Manufacturing and Processing Equipment
The new AII rules will have even more generous deductions for manufacturing and processing (“M&P”) equipment. A full 100% deduction will be available in the year M&P equipment is purchased. The rules will apply to capital asset additions after November 20, 2018 and before 2024. Previously, M&P equipment (Class 53) had a CCA rate of 25% in Year 1 and a 50% rate (declining balance) in subsequent years. The new 100% deduction in Year 1 will be gradually reduced in future years – additions after 2024 will be reduced to 75%, with a further reduction to 55% after 2025, and will be phased out after 2027.
Clean Energy Equipment
Similar to M&P equipment additions, the new proposals allow for businesses to write off the entire cost of the clean energy equipment purchases made after November 20, 2018 and made available for use before 2024. This applies for equipment that is added to CCA classes 43.1 and 43.2, effectively increasing the CCA rates to 100% in the year of acquisition. The first-year deduction for any additions will be reduced for equipment available for use beginning in 2024 to 75%, with a further reduction to 55% after 2025, and will be completely phased out for additions made after 2027.
Mineral Exploration Tax Credit
Finance has extended the 15% mineral exploration tax credit from March 31, 2019 to March 31, 2024.
Finance also announced changes that will help support Canadian news organizations:
- A new refundable tax credit for qualifying news organizations will be introduced to support Canadian journalism. Eligibility criteria for this credit has yet to be determined and more information will be provided in the 2019 federal budget;
- A new temporary, non-refundable 15% tax credit will be introduced for subscribers of eligible digital news media; and
- A new category of qualified donee will be introduced for non-profit journalism organizations. As a result, these organizations will be able to issue official donation receipts and receive funding from registered charities.
Get in touch with us
The tax advisors at Welch LLP can help you and your corporation in better understanding how these new changes in the 2018 Fall Economic Update will affect your personal and business tax matters.