Purchasing a capital asset?  Consider buying it now to advance your tax savings.

It seems like only yesterday that the snow was melting and the spring flowers were blooming, but the summer flew by and the leaves are now getting ready to turn as we rapidly approach the holiday season (bet you didn’t see that reference coming) and the new year.  While thinking about the year gone by and the year to come I realized that the immediate expensing rules were about to end for our corporate clients along with the current year.  These rules, while only short lived (2021 to 2023), have provided some substantial cash flow improvements to our clients by advancing the tax savings they would otherwise receive over multiple years.

These rules are not going to help everyone, but if you are considering purchasing an asset to use in your business in early 2024 you should really consider advancing that purchase to take advantage of these rules.  The advanced savings will vary depending on each company’s specific tax scenario and the type of asset purchased, but if we assume a Canadian Controlled Private Corporation (“CCPC”) purchases an eligible property that becomes available for use for $1.5 million dollars in 2023 and that the asset is a class 10 asset, the CCPC would get a full deduction in 2023 of $1.5 million dollars.  If on the other hand, the CCPC waits until 2024, the deduction against taxable income will only be $450,000.

The advantage of the advanced deduction to reduce overall taxable income in the current year and potential cash savings for those companies that would otherwise have a tax bill is clear.  I encourage those of you looking to acquire assets in the near term to contact your Welch advisor and ask about accessing this opportunity before it is gone along with the falling leaves and holiday season.  I would wish you all Happy Holidays, but it feels a little to early…. 

Joshua Smith, CPA, CA

For those of you who want more specifics, read on below for a summary of the application of the immediate expensing rules.

The Basics

Who Qualifies

Canadian Controlled Private Corporations, individuals (other than trusts) resident in Canada and partnerships all members of which were CCPCs or individuals resident in Canada.

What Qualifies

Eligible property for the purposes of the immediate expensing rules includes capital property purchased from an arms’ length party 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.

Filing Requirements

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.

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 and the related return was already filed, an amended return may be filed to claim this deduction.

The Timing

For CCPCs, an eligible property must be acquired after April 18, 2021 and be available for use before January 1, 2024 to qualify.

For individuals resident in Canada and partnerships all members of which were CCPCs or individuals resident in Canada, an eligible property must be acquired after December 31, 2021 and be available for use before January 1, 2025 to qualify.

The Limits

The maximum expenditure amount that can qualify 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.

If you have any questions or if you would like assistance, please contact your Welch LLP advisor.

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