New Tax Incentives Announced With Fall Economic Statement
Finance Minister, Bill Morneau, released the Department of Finance Canada’s (“Finance”) 2018 fall economic update yesterday. While there weren’t any changes to tax rates, new tax incentives for business investment were a welcome change. These incentives are targeted at improving tax competitiveness in Canada amidst similar tax incentives being offered south of the border. Specifically, Finance is trying to promote business investments by allowing for an increased upfront write off on capital investments/purchases.
Under the current rules, in the year of acquisition of a capital assets, a business is entitled to deduct half of the normal capital cost allowance (commonly called depreciation) as an expense. This has been termed the half year rule and is a simplification so that businesses didn’t need to track the exact date in the year an asset was purchased and then prorate. The new rules proposed yesterday, would eliminate the half year rule as well as apply capital cost allowance to one and a half times the net additions for the year. In effect, this will triple the amount that will be eligible for deduction in the first year. In the second and subsequent years, the CCA rules would be unchanged and would be calculated normally.
For example, let’s assume your business purchased equipment for $1,000 that fell into a class with a CCA rate of 20%. Under the old rules, you would be eligible to deduct $100 in the first year ($1,000 x 50% x 20%). Under the proposed new rules, you would be eligible to deduct $300 as an expense in the first year ($1,000 x 1.5 x 20%).
In addition to these changes, Finance has proposed special rules for manufacturing and processing machinery and equipment and clean energy equipment that may entitle you to expense the full amount in the year of acquisition.
These rules are proposed to be effective for property acquired after November 20, 2018. While these changes won’t have a significant effect on total taxes paid over time, they will allow for businesses to reduce tax bills in the first year of acquisition. If you’ve been holding out on purchasing that expensive piece of equipment for your business, now just might be the time to do it.
Please note that this is not a comprehensive tax summary and is intended as a broad overview of the proposed changes. We would be happy to discuss this with you in more detail on how it may affect your business.