Are you thinking about investing in your business? Learn how the new tax incentives will make it easier!
The changes will affect the Capital Cost Allowance and will allow your business to write off a larger share of costs in the year an investment is made. These incentives apply to property and equipment acquired after November 20, 2018 and will be phased out starting in 2023.
CFIB fought hard for these measures to allow your business to make new investments that will help you innovate, grow and create.
If you are considering investing in new buildings or equipment, here is what you need to know:
What is the Capital Cost Allowance (CCA)?
Capital Cost Allowance (CCA) is the yearly tax deduction you can claim for the cost of depreciable property – i.e. property that wears out or becomes obsolete over time such as a building, furniture, or equipment.
Usually, when you purchase a new piece of equipment or a building, you can’t write off the full cost as a business expense when filing your taxes; you can claim it gradually over time since you’ll be using it over several years.
The yearly amount you can deduct varies based on the type of property. For example, buildings and vehicles are categorized in different classes, so different rates apply.
You don’t have to claim the whole amount of CCA you are able to deduct in any given year. You can claim all of it, none of it, or any amount in between; what you don’t claim will be carried over and available in the next tax year.
The definition of all classes is on the CRA website.
What is the new incentive and how could it help my business?
The incentive will allow your business to write off the cost of your investments more quickly by boosting the CCA rate to up to three times its normal value in the first year. For example, computer software usually has a CCA rate of 50%, but under the new incentive, the CCA rate will be 100% in that first year.
Here is a summary of the changes:
- Enhanced first year allowance
This incentive provides a higher allowance in the year of purchase for all property subject to CCA rules.
This means property currently subject to the half-year rule* will effectively qualify for an allowance three times higher than usual. Other property rule will qualify for an allowance 1.5 times higher than normal.
*The half-year rule states that in the year you buy a property, you can usually only claim the Capital Cost Allowance on half of the cost.
- Manufacturing and processing machinery and equipment property
You will be able to write off 100% of the cost in the first year for machinery and equipment used in Canada for manufacturing and processing.
- Clean energy equipment
You may write off 100% of the cost in the first year for clean energy equipment. The half-year rule will effectively be suspended for property eligible for this measure.
Enhanced first year allowance:
• Road Group, a transportation business, will be able to use the enhanced first year allowance to help purchase five new semi-trucks in 2019, with a total value of $1 million. Of that amount, Road Group will be able to deduct $600,000 for tax purposes, compared to $200,000 without the Accelerated Investment Incentive.
Current First year allowance for class 16 (half year rule): 40%*(1/2* $1million) = $200,000
New First year enhanced allowance: 40%*(1.5*$1milion) = $600,000
Full Expensing for Manufacturing and Processing Machinery and Equipment property:
• Autoparts Corporation (AC) is an automobile parts manufacturer. In 2019, Autoparts is planning to purchase $1 million in new automotive assembly equipment to modernize its facilities. Immediate expensing would allow Autoparts to fully deduct this investment, reducing its current-year taxable income. Without immediate expensing, Autoparts’s deduction for this capital investment would be limited to $250,000 in the first year.
Current First year allowance for class 53 (half year rule): 50%*(1/2* $1 million) = $250,000
New First year enhanced allowance: 100% = $1 million
Full Expensing for Clean Energy Equipment:
• Community Apartments, a small apartment rental company, is seeking to invest in electric vehicle chargers for use by tenants at its two rental apartment buildings. The acquisition and installation cost for six chargers is $18,000. With immediate expensing, this amount can be deducted in full in the first year, compared to $2,700 under current rules. This will result in additional federal and provincial tax savings which will allow Community Apartments to make energy efficiency improvements to its buildings.
Current First year allowance for class 43.1 (half year rule): 30%*(1/2* $18,000) = $2,700
New First year enhanced allowance: 100% = $18,000
• Warehouse Inc. is a distributor of refrigerated goods, with a large warehouse that requires significant amounts of energy. In order to offset a portion of its electricity requirements, Warehouse Inc. invests in a solar array with solar panels costing $500,000. Immediate expensing will allow Warehouse Inc. to deduct its entire capital investment in the first year, as opposed to $125,000 under current rules, resulting in federal and provincial tax savings.
Current First year allowance for class 43.2 (half year rule): 50%*(1/2* $500,000) = $125,000
New First year enhanced allowance: 100% = $500,000
How do I know if my investment is eligible for the new incentive?
All property subject to CCA rules are eligible for the first year enhanced allowance except for the following classes, which are eligible to be expensed in full in the first year:
- Class 43: Machinery and equipment used in Canada primarily to manufacture and process goods for sale or lease.
- Class 43.1: Electrical vehicle charging stations (EVCSs) set up to supply more than 10 kilowatts but less than 90 kilowatts of continuous power.
- Class 43.2: Electrical vehicle charging stations (EVCSs) set up to supply 90 kilowatts and more of continuous power.
- Class 53: Machinery and equipment that is acquired after 2015 to be used in Canada primarily in the manufacturing or processing of goods for sale or lease.
If you are unsure of the eligibility of your equipment, do not hesitate to talk to your tax professional or our business counsellors.
Can I invest in used equipment?
You can still benefit from the accelerated depreciation if you buy used equipment, just as long as you or your business did not previously own it.
Any questions? Talk to your tax professional or call our business counsellors today.