Highlights of Bill Morneau’s 2018 fiscal update
- Responding to U.S. Tax Cuts And Jobs Act of 2017 (TCJA):
- Enhance capital cost allowance (CCA) in the first year;
- Immediate expensing for manufacturing and processing and clean energy investments
Responding to U.S. Tax Cuts and Jobs Act of 2017 (TCJA)
In the U.S., businesses can accelerate the write-off of tangible depreciable properties. This is achieved in the form of the bonus depreciation or the section 179 deduction.
After TCJA, Canada had to respond in order to attract and keep investments.
Also, In the fall 2018 economic update, the Province of Ontario – which has a large manufacturing sector–wrote to the federal government, calling for initiatives such as the immediate expensing of depreciable assets similar to the U.S. If the federal government introduces such measures, Ontario expressed its commitment to follow.
The Federal government responded and introduced the measures to enhance capital cost allowance for certain capital investments after November 20, 2018.
Two Measures to Enhance Capital Cost Allowance (CCA)
The government introduced two measures to enhance the existing CCA write-offs:
- Immediate expensing of manufacturing and processing and clean energy investments
- Accelerated investment incentive for all other depreciable properties
Taxpayers can now immediately expense 100% (with no half-year rule) manufacturing and processing and clean energy equipment used in Canada. (The CCA rates stay the same; instead, the immediate expense happens by a gross up to the net additions during the year – effectively resulting in a 100% CCA write-off.)
The rule will be applicable for all the acquisitions after November 20, 2018, that are available for use before 2028. The rules will gradually be phased-out starting in 2024 and will be completely phased out after 2027.
The immediate expensing measure impacts the following CCA classes:
|Class 53||50%||Machinery and equipment acquired after 2015 and before 2026 that is used in Canada mainly to manufacture and process goods for sale or lease.|
|Class 43||30%||Eligible machinery and equipment, used in Canada to manufacture and process goods for sale or lease that are not included in Class 29. For more information, go to Class 43 (30%).|
|Class 43.1||30%||Electrical vehicle charging stations (EVCSs) set up to supply more than 10 kilowatts but less than 90 kilowatts of continuous power. For property acquired for use after March 21, 2016 that has not been used or acquired for use before March 22, 2016.|
|Class 43.2||50%||Electrical vehicle charging stations (EVCSs) set up to supply 90 kilowatts and more of continuous power. For property acquired for use after March 21, 2016 that has not been used or acquired for use before March 22, 2016.|
Short taxation years
The immediate expense will be prorated for the short taxation year and will not be available in the following taxation year. As such, there is a need to consider these rules when planning for re-organizations (amalgamation, acquisition of control).
Accelerated Investment Incentive (AII)
The AII – as defined in Regulation 1104(4) – will allow businesses to claim up to three times the CCA amount that would otherwise apply in the year. This rule applies to all tangible and intangible capital assets. This rule is only applicable for the first year. In subsequent years, the CCA is calculated using the old (existing) rules. (The CCA rates stay the same; instead, the immediate expense happens by a gross up to the net additions during the year – effectively resulting in 3 x the normal CCA in the first year.)
The Canadian deduction incentive targets a broader category of assets than the U.S. measure. The U.S. does not grant the temporary bonus depreciation for excluded assets such as patents and real property, and assets with a normal useful life of less than 21 years.
In order qualify as AII property, the depreciable property must be acquired by a taxpayer after November 20, 2018 and become available for use before 2028.
Certain assets are excluded from the definition of AII, these include:
- Assets acquired on a rollover basis (e.g., assets acquired in a transaction to which section 85 applies), and asset acquired in a transaction to which section 87 applies.
- Assets previously owned or acquired by the taxpayer or by a person or partnership with which the taxpayer did not deal at arm’s length at any time when the property was owned or acquired by the person or partnership.
Assume that a taxpayer purchased equipment (class 8) for $1,000. Under the old regime, the CCA in the first year would have been $1,000 x 20% x 1/2 year = $100. The new rules will enhance the CCA from $100 to $300 (i.e. 3 times).
In year 2, the CCA will be $700 x 20% = $140 (i.e. same under old and new rules).
Short taxation years
The AII will be prorated for the short taxation year and will not be available in the following taxation year. As such, there is a need to consider these rules when planning for the re-organizations (amalgamation, acquisition of control).
Other Tax Measures and Updates for Private Companies
- The eligibility for the mineral exploration tax credit is extended for an additional five years until April 1, 2024.
- The government intends to support certain not-for-profit local news organizations.
- No mention of private companies in the fall update.