The Government of Canada’s 2018 Fall Economic Statement, released on November 21, 2018 introduced three important and immediate changes to Canada’s Tax System:
- Allowing businesses to immediately write off the cost of machinery and equipment used for the manufacturing or processing of goods;
- Allowing businesses to immediately write off the full cost of specified clean energy equipment; and,
- Introducing the Accelerated Investment Incentive for businesses of all sizes that are making capital investments.
These incentives are only available from 2018 to 2027, with reduced incentives during the phase-out period from 2024 to 2027.
The overall message of the update was that Canada needs to implement changes in order to promote innovation within our borders. Ongoing global developments have created an increasingly competitive environment for Canada to attract investment. The goal of the update is to encourage innovation so that businesses seeking to expand and grow can confidently choose to invest in Canada.
We have chosen to focus on the Accelerated Investment Incentive as this change will have the greatest impact for most of our clients. If you are interested in learning more about the other incentives available, please reach out to our tax team.
Business Income Tax Measures
Accelerated Investment Incentive
The government has introduced an Accelerated Investment Incentive which allows Canadian businesses to deduct the cost of their investments faster. The purpose of this incentive is to motivate business owners to make more capital investments by offering up to 3 times the regular tax deductions available in the first year of investment.
Depending on the type, capital equipment is added to a specific CCA class when it is purchased. Each CCA class requires the taxpayer to depreciate the equipment at a different rate.
For example, furniture is added to CCA class 8 and is depreciable at 20% each year on a declining balance. Under the current CCA regime, here is how the equipment is depreciated:
In Year 1:
- Office furniture is purchased for $20,000.
- The half-year rule causes the furniture to be depreciable at only 50% in the first year. $20,000*20%*0.5 = $2,000. $2,000 in depreciation is deductible for tax purposes.
In Year 2:
- The remaining cost to depreciate is $18,000 ($20,000-2,000).
$18,000*20% = $3,600. $3,600 in depreciation is deductible for tax purposes.
In Year 3:
- The remaining cost to depreciate is $14,400 ($18,000-3,600). Depreciation would be calculated on the remaining cost as in Year 2 until the furniture is fully expensed.
The proposed change is to the half-year rule in Year 1, increasing it to one-and-one-half. In the example above, the $2,000 depreciation expense in Year 1 would increase to $6,000 ($20,000*20%*1.5). Then, in Year 2, the remaining cost to depreciate would be $14,000 ($20,000-6,000) rather than $18,000.
The overall tax deductions will still equal the initial investment, but these changes will allow those deductions to be taken over a shorter period of time.
This incentive will be available for eligible property that is acquired after November 20, 2018 and that becomes available for use before 2028. For property that becomes available for use during the phase-out period from 2024 to 2027, the half-year rule will be eliminated, but not replaced by one-and-one-half. For those years, the property will simply be depreciable at the full depreciation rate available for that CCA asset class.
This incentive is available for all CCA classes except for Class 53 (manufacturing and processing machinery and equipment), and Classes 43.1 and 43.2 (clean energy equipment), which are eligible for immediate Expensing in Year 1 as detailed below.
Manufacturing & Processing and Clean Energy Equipment – 100% Deduction
For equipment added to CCA Classes 53, 43.1, and 43.2, these new rules will allow a 100% deduction of the cost if it is acquired after November 20, 2018 and available for use before 2028. There will be a phase-out from 2024 to 2027, similar to the Accelerated Investment Incentive, which will decrease the depreciation expense allowable in Year 1 on these assets.
The integrity rules within the Income Tax Act will continue to apply. As well, for a taxpayer to be eligible for the Accelerated Investment Incentive, the following conditions must be met:
- Neither the taxpayer nor a non-arms’-length person previously owned the property; and,
- The property has not been transferred to the taxpayer on a tax-deferred “rollover” basis.
Personal Income Tax Measures
Support for Canadian Journalism
The government intends to introduce a new temporary non-refundable tax credit of 15% for qualifying subscribers of eligible digital news media. Further details will be available in Budget 2019.
In addition, other new tax credits for news organizations have also been introduced and will be effective January 1, 2019.