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Accelerated expensing: A piece of the competitiveness framework

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By Ted Mallett

The federal government’s Fall Economic Statement contained some pretty significant news on the business tax front. For a year business owners have been tapping their feet waiting for the finance minister to respond to the massive tax changes south of the border which suddenly tilted general tax competitiveness in favour of the Americans. For even longer, the resource price crunch has unsteadied the oil patch but left business owners in much of the rest of the economy with nagging doubts about whether to risk expansion. 

The plan to accelerate capital cost allowances (CCA) in the first year of new investments through 2024 has been generally well received on the ground. One wonders, however, if the positive reaction has more to do with relief that this government is doing something concrete with respect to the investment climate than with the CCA measures themselves. After all, the general feeling that the government can’t get anything done is still widespread. Nevertheless, we’ll take it.

Accelerated deductions, while helpful, are not a panacea and it is important not to overstate their influence on economic fundamentals. CCA rules are about distributing a business’s tax obligations over the years, not raising or lowering them. Capital expenditures tend to be large and lumpy. Unlike raw materials, wages, rent or fuel which can be fully deducted from income for tax purposes each year, new buildings, vehicles, machinery and other long-lasting production inputs must be expensed gradually over time.  Allowing business owners to triple the per cent of allowable capital deductions in the first year of investments will indeed lower their taxable incomes for that year, but it will also result in smaller allowable deductions (or none at all) in later years, which will raise taxable incomes—and taxes. Over the life of the asset, the tax effects in an accelerated CCA scenario versus a non-accelerated one are more or less the same. There will certainly be a kick start effect, but to be a net benefit over time to the economy, more businesses would need to be induced by this measure to make investments they previously would not have made. 

For government too, the tax revenue effects cancel out over time. Revenues are lower in early years, but build higher later on. The net costs we see in the federal government’s accounting lines show the short term costs of front-end loading of the deductions in successive years of new investments, but not the higher corporate taxes that will show up in their coffers beyond their forecast horizon. In other words, the measure is a loan, not a gift to the business sector. 

It is also important to remember that tax represents only a part of the competitiveness equation when comparing jurisdictions. Plotting marginal effective tax rates are useful exercises, but they do not represent a full accounting of the relative costs and benefits of operating a business in either Canada or the US. In that vein, it is good to see the government addressing competitiveness from another angle by also pledging to put new life into the process of cutting red tape. In the long run, perhaps it will have the most impactful effects on the economy. 

Ted Mallett is vice president and chief economist at the Canadian Federation of Independent Business.