On December 22, 2017, US President Donald Trump signed the Tax Cuts and Jobs Act (“TCJA”) into law.
This new legislation represented the largest US tax reform measures enacted in decades and provided US businesses with significant tax incentives for investment in capital assets.
Since the TCJA’s passing, the Department of Finance of Canada has faced considerable pressure to enact legislation that provides Canadian businesses with similar tax incentives for new capital expenditures.
In its Fall Economic Statement released on November 21st, 2018, the Canadian government responded by announcing the introduction of the “Accelerated Investment Incentive” which will provide Canadian businesses with an increased tax deduction for the cost of capital expenditures in the year they are purchased.
Although the Canadian incentives are not quite as generous as those introduced by our US counterparts, the Accelerated Investment Incentive does provide a significant opportunity for Canadian businesses to reduce their tax bill.
The details are as follows:
- For most types of capital expenditures (both tangible and intangible), businesses will be entitled to claim 1 ½ times the regular amount of depreciation expense for tax purposes (“Capital Cost Allowance” or “CCA”) in the year of purchase than would otherwise be allowed under the existing rules.
- The “half year rule” which resulted in ½ of the regular CCA being disallowed in the year of purchase for many types of assets will be suspended.
- For certain types of capital expenditures such as machinery and equipment used in manufacturing and processing and clean energy equipment, businesses will be entitled to deduct the full cost of the equipment in the year of purchase.
- The incentive will apply to assets acquired after November 20th, 2018 which become available for use before 2028.
- There will be a phase out period that will reduce the available incentive for capital assets that become available for use between 2024 and 2027.
- During the phase out period, assets that are normally subject to the half year rule will continue to be eligible for a full year’s CCA in the year of purchase (i.e. the half year rule will continue to be suspended) but the entitlement to claim 1 ½ times the regular deduction will be removed.
- For assets not subject to the half year rule, 1 ¼ times the regular CCA will be permitted during the phase out period.
- For 2024 and 2025, the deduction available for manufacturing and processing equipment and clean energy equipment will be reduced to 75% of the cost of purchased assets.
- For 2026 and 2027, the allowable deduction for manufacturing and processing equipment and clean energy equipment will be reduced to 55% of the cost of purchased assets.
- Any used property acquired by a business will only be eligible for the incentive if it was acquired from an arm’s length person and was not transferred to the business on a tax-deferred “rollover” basis.
- If the business elects not to claim CCA in the year the asset is purchased or becomes available for use, the incentive will not be available in subsequent years when CCA is actually claimed.
To illustrate the operation of these measures, consider the following application of the rules to a piece of office furniture purchased in December of 2018.
Under the existing rules, 10% of the cost of the furniture would be allowable as CCA in the year of purchase (20% CCA rate x ½ year allowable claim in the year of purchase).
Due to the Accelerated Investment Incentive, businesses will now be able to claim 30% of the cost of the furniture as CCA in the year of purchase (20% CCA rate x 1 ½ allowable depreciation with no half year rule).
For more information on how this incentive can help your business reduce its tax bill, please contact your Kraft Berger LLP advisor.