ACCELERATED CAPITAL COST ALLOWANCE: RESPONSE TO U.S. CORPORATE TAX CUTS
On November 21, 2018, the Department of Finance announced income tax measures to address recent corporate tax changes made in the United States. The new measures focus on accelerating the claim for capital cost allowance (“CCA” − tax depreciation), for most capital properties acquired after November 20, 2018.
The changes are intended to keep Canada’s corporate tax system competitive with that of the United States. However, unlike the recent changes in the United States, the new measures do not reduce Canadian corporate income tax rates. Despite that, the Department of Finance states the new accelerated CCA measures “will give businesses in Canada the lowest overall tax rate on new business investment in the G7, significantly lower than that of the United States”.
Depreciable capital property is divided into Classes, and each Class is a pool of assets on which CCA is claimed each year. For example, computers generally go into Class 50. When depreciable property is purchased (e.g., a new computer), its purchase price is added to the "Undepreciated Capital Cost" (UCC) of the Class. Each year, a percentage of the UCC for the class (55% for Class 50) can be deducted as CCA, and the UCC for that Class is reduced by the amount deducted.
Under existing rules, the CCA for the year the property is acquired is subject to the so-called "half-year" rule. Basically, for the year of acquisition, a taxpayer can claim CCA on only half of the amount added to the Class for that property. The other half remains in the UCC pool for the Class, so it can be deducted in future years, based on the percentage rate for the Class.
The new CCA measures replace the detrimental half-year rule with beneficial rules, as discussed below.
New rules for “accelerated investment incentive property”
The half-year rule is effectively eliminated for most depreciable capital properties, which are referred to as “accelerated investment incentive property” (“AII property”).
AII property acquired after November 20, 2018 and before 2024 will qualify for an accelerated CCA deduction in the year of acquisition (technically, in the year in which the property becomes “available for use”). In that year, an additional 50% of the cost of acquired property is added to the Class, which means that CCA can be deducted on 150% of the cost of the property in that year. After the year of acquisition, the CCA applies as usual to the balance in the Class.
The Department of Finance provides the following example (we have made some modifications):
X spends $100 to purchase AII property included in Class 10 (30% CCA rate) in 2019, and it becomes available for use in that year. X may deduct $45 instead of the $15 that would previously have been allowed in the first year due the half-year rule, as calculated below:
Regular UCC at the end
of the year: $100
50% addition: $50
Adjusted UCC: $150
CCA rate: 30%
First year CCA deduction
($150 x 30%) $45
UCC pool for next year after
CCA deduction $55
In the following year, assuming no new acquisitions, the taxpayer may deduct 30% of the $55 UCC and no additional amount for accelerated investment incentive property.
For AII acquired after 2023 and before 2028, the 50% addition does not apply in the year of acquisition, but the half-year also does not apply. In other words, CCA will be allowed at the percentage rate for the Class, on the full cost of the property in the year of acquisition.
Similar rules with an accelerated upfront deduction apply to specific types of AII, such as the cost of leasehold interests, and the cost of patents, franchises, or concessions or licenses for a limited period.
There are some exceptions, where property does not qualify as AII. For example, AII does not include property previously owned or acquired by the taxpayer or by a person or partnership with which the taxpayer did not deal at arm’s length.
Immediate write-off for certain AII
The new measures provide that in the year of acquisition, the full cost of machinery and equipment used in the manufacturing and processing of goods (Class 53) and specified clean energy equipment (Classes 43.1 and 43.2) may be deducted as CCA. (The normal CCA rates are 50% for Classes 53 and 43.2, and 30% for Class 43.1.)
This immediate 100% write-off applies to property acquired before 2024.
For Classes 53 and 43.1, an enhanced deduction, but less than a full write-off, is allowed in the year of acquisition of the property for 2024-2027 (although Class 53 will be effectively replaced by Class 3 after 2025). For Class 43.2, a 75% write-off is allowed if the year of acquisition is 2024.