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The Federal Government announced a plan to encourage business investment in Canada. The announcement was made in response to the corporate tax changes introduced by the US.
The plan allows businesses to claim larger tax deductions in the year that the business purchases a qualifying business asset such as a building, vehicle or equipment.
Accelerated Investment Incentive
The Accelerated Investment Incentive (AII) is a change to the application of the existing Capital Cost Allowance (CCA), or tax depreciation rules. Under the existing CCA rules, businesses can deduct a percentage of the total cost of an asset each year, essentially writing off the cost of the asset over its estimated useful life. The tax deduction the company could claim in the first year is restricted to half the amount (in most cases) of the purchase cost multiplied by the specified CCA rate.
For example, say the business purchased a piece of equipment for $100,000 in January 2018. The business would be able to make a tax deduction of $10,000 ($100,000 x ½ year rule x 20% rate) on its December 31, 2018 tax return, with the remaining $90,000 cost being deducted in subsequent years as follows:
| Previous CCA rules | CCA |
| Year 1 | 10,000 |
| Year 2 | 18,000 |
| Year 3 | 14,400 |
| Year 4 | 11,520 |
| Year 5 and subsequent | 46,080 |
Under the new proposed rules, the business will be allowed to claim a much larger tax deduction in the first year for assets purchased after November 20, 2018 (as long as it is available for use in that year). The new rules allow a CCA deduction of three times the previous example, or $30,000 ($100,000 x 1.5 x 20%) in the first year.
These rules do not increase the total deducted, but allows a larger deduction up front, as follows:
| New AII CCA rules | CCA |
| Year 1 | 30,000 |
| Year 2 | 14,000 |
| Year 3 | 11,200 |
| Year 4 | 8,960 |
| Year 5 and subsequent | 35,840 |
Manufacturing & Processing (M&P) Equipment
The government has taken AII a step further for M&P equipment, by allowing the business to claim a tax deduction for 100% of the purchase price in the year of purchase (for equipment purchased after November 20, 2018 and available for use in the tax year). For example, if the business purchases equipment on December 1, 2018 for $100,000, then the business would be eligible to claim the full $100,000 as a CCA deduction on its December 31, 2018 tax return.
Clean Energy Equipment
The full tax deduction in the year of purchase is also available for all assets that qualify as “clean energy equipment” (equipment that generates power from sources other than fossil fuels), such as wind turbines, solar panels, heat pumps, etc.
Planning considerations
If you are purchasing equipment for your business, consider making the purchase before the business’ year-end in order to take immediate advantage of the AII. However, there is no need to rush to purchase business assets as the AII will be in full effect until 2024, before the government begins gradually phasing out the program by 2028.
If you have any questions about this tax change, how it may affect your business or to discuss tax planning opportunities, please contact us.
Additional details may be found at:
https://www.budget.gc.ca/fes-eea/2018/docs/statement-enonce/anx03-en.html
The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.
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What does “acquired after November 20, 2018” mean? If expenditures were made prior to November 20, 2018 but the asset became available for use in December, 2018, do the new AII rules apply?
Do you know if the accelerated investment incentive has been enacted or whether it is still just a proposal?
What does “acquired after November 20, 2018” mean? If expenditures were made prior to November 20, 2018 but the asset became available for use in December, 2018, do the new AII rules apply?
Could I take advantage of these new rules if I transferred equipment into one company from another??
Jason
Good question! Unfortunately, the new Accelerated Investment Incentive rules do not apply on equipment that has been transferred from a “non-arm’s length party”, such as a shareholder of the company, or another company controlled by the same group of shareholders.