Three Proposed Tax Measures to Encourage Investment in Canada
The Federal Government delivered its Fall Economic and Fiscal Update (“Economic Update”) on Wednesday, November 21, 2018. There was much anticipation in the business community as to how the Government would address Canada’s competiveness concerns, especially in relation to the United States, where favourable business tax measures have been implemented by the Trump administration. Rather than announce a cut to corporate income tax rates, the Canadian Government proposed a few targeted tax incentives for businesses that invest in Canada. We have highlighted the three major tax measures proposed in the Economic Update below.1. Accelerated Investment Incentive
The Government proposes to introduce the Accelerated Investment Incentive (the “Incentive”). The Incentive will suspend the half-year rule in respect of depreciable capital assets that are subject to the Capital Cost Allowance (“CCA”) tax rules (aka, the tax depreciation regime). The half-year rule applies in the year a business purchases a depreciable asset, to effectively limit the first year CCA deduction in respect of that asset to half of the amount otherwise allowable. The policy behind the half-year rule is to reflect the fact that the asset was not owned throughout the entire taxation year, and hence should not be eligible for a full year’s worth of CCA deduction.
In addition, the Incentive will permit a taxpayer to deduct CCA equal to three times the amount the taxpayer would otherwise have been eligible for under the previous rules.
The following example illustrates the Incentive compared to the current tax depreciation rules. Assume a business purchases a Class 10 asset (eligible for CCA at a rate of 30 per cent per annum) for $10,000. The asset is immediately available for use in the business.
| Current Rules | Proposed Rules | |
| Cost of property acquired | $10,000 | $10,000 |
| Half-year rule | (5,000) | n/a |
| Depreciable amount | $5,000 | $10,000 |
| CCA rate | 30% | 30% |
| Regular CCA | $1,500 | $3,000 |
| Enhanced CCA | n/a | $1,500 |
| Total CCA deduction – year of acquisition | $1,500 | $4,500 |
Keep in mind, these proposed rules simply accelerate the rate at which a taxpayer will be able to claim and deduct CCA. The CCA deductions in future years will be smaller as more CCA will be taken in the first year.
The Incentive will apply to assets acquired after November 20, 2018 which become available for use before 2028, subject to a phase-out for assets acquired or available for use after 2023.
For assets that are not otherwise subject to the half-year rule, the Incentive will provide an enhanced CCA deduction of one-and-a-half times the CCA deduction the business would ordinarily be entitled to claim in the first year. The Incentive will apply to businesses if the following two conditions are met:
- Neither the taxpayer nor a non-arm’s length person previously owned the property; and
- The property has not been transferred to the taxpayer on a tax-deferred basis (i.e., “rollover” transactions).
2. Full Expense for Manufacturing and Processing (“M&P”) Machinery and Equipment
M&P machinery and equipment acquired after 2015 and before 2026 is included in Class 53 and subject to a CCA rate of 50 per cent. All other M&P assets are included in Class 43 at a CCA rate of 30 per cent.
The Economic Update proposes to provide an enhanced first-year CCA for assets in Class 53 to the extent they are acquired after November 20, 2018 and become available for use before 2028. Businesses will be able to deduct 100 per cent of the cost of Class 53 assets with a phase-out for assets that are acquired or become available for use after 2023. Similar to the Incentive discussed above, the half-year rule for the year in which the asset is acquired and available for use will be suspended.
3. Full Expense for Clean Energy Equipment
Currently, certain clean energy equipment purchased after February 22, 2005 and before 2025 is included in Class 43.2 and is subject to an accelerated CCA rate of 50 per cent.
The Economic Update proposes to provide an enhanced first-year CCA deduction for assets included in Class 43.2 provided the assets are acquired after November 20, 2018 and become available for use before 2028. Businesses will be able to deduct 100 per cent of the cost of Class 43.2 assets with a phase-out for assets that are acquired or become available for use after 2023. Similar to the Incentive discussed above, the half-year rule for the year in which the asset is acquired and available for use will be suspended.
Planning Considerations
Not sure whether to defer the purchase of a major capital asset until the new year? Are you expecting a significant tax profit in your business for calendar 2018? Consideration should be given to accelerating the purchase of that asset to sometime before year-end. Even though the asset will be owned for a short period of time in the tax year, the half-year rule will not apply to limit the CCA deduction in the business, providing a potentially material deduction that will reduce the 2018 tax profit.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.
