On April 19, 2021, the Federal Budget had proposed to permit the expensing of the full cost of “eligible property” acquired on or after the Budget Day, provided the property is available for use before January 1, 2024. The maximum is $1.5 million per taxation year, with this limit prorated for short taxation years. This deduction limit is shared among associated parties in the group. Any expenditures in excess of this threshold are subject to the regular capital cost allowance rules.
Where does the proposal stand currently?
On June 23, 2022, Bill C-19, Budget Implementation Act, 2022 No.1 received Royal Assent. The Bill implements certain proposals and tax measures introduced in the 2022 and 2021 federal Budgets. The Bill also contains the new capital cost allowance (CCA) immediate expensing rules for taxpayers.
Who is affected by the CCA immediate expensing rules?
The CCA immediate expensing rules apply to “eligible property” acquired by Canadian-controlled private corporations (CCPCs), Canadian-resident individuals and Canadian partnerships of which all the members are CCPCs or Canadian-resident individuals.
What is “eligible property”?
Eligible property for the purposes of the immediate expensing rules includes capital property that is subject to CCA rules, other than property included in CCA classes 1 to 6 (buildings), class 14.1 (goodwill and other intangibles), class 17 (paving, electrical generating equipment), class 47 (transmission or distribution of electrical energy equipment), class 49 (oil & gas pipelines) and class 51 (natural gas pipelines). These excluded asset classes are generally those that have long asset lives like buildings, fences, and goodwill.
Further, the property must be designated as a “Designated Immediate Expensing Property” to take advantage of the immediate expensing incentive. The designation must be filed on or before the day that is 12 months after the taxpayer’s filing due date for the tax year to which the designation relates.
How do the CCA expensing rules correlate with other provisions?
In the event that the cost of eligible capital assets acquired exceeds the limit of $1.5 million during a tax year, the taxpayer can decide which assets to deduct in full and the remainder would be subject to normal CCA rules. Any other deductions already available, such as the full expensing for manufacturing and processing machinery would not reduce the maximum amount available of $1.5 million.
Other implications and considerations
The CCA immediate expensing rule does not apply to property acquired from a non-arm’s length person or which was transferred to the taxpayer on a tax-deferred rollover basis. Any existing rules that restrict the amount of CCA that may be claimed in certain circumstances such as leasing property rules, rental property rules, specified leasing property rules and specified energy property rules will continue to apply.
Further in the case of CCPCs or a partnership where eligible property may have been acquired in a taxation year or fiscal year that ended prior to the Legislation date of April 28, 2022 (but after April 18, 2021) and the related return was already filed, an amended return may be filed to claim this deduction.
To conclude there have been important updates to the capital cost allowance immediate expensing rules. These rules apply only to eligible property. Taxpayers may reach out to their trusted Welch LLP advisor to help work through the complex rules to clarify any questions or to discuss their current situation.