Bill Morneau's 2018 Fall Economic Statement announced several tax goodies that will hopefully benefit Canadian businesses. The most notable among them is the Accelerated Investment Incentive for capital cost allowance (“CCA”) and full CCA write-offs for manufacturing and process property and eligible clean energy property. These changes are briefly discussed below.
Also, the mineral exploration tax credit will be extended for five years, until March 31, 2024.
And last, the government is promising several tax incentives to support the Canadian media—more clarity on these will be provided in Budget 2019. Specifically, the government is proposing a refundable tax credit for labour costs incurred by Canadian news organizations, a temporary non-refundable tax credit for eligible digital news media subscriptions, and to give non-profit news organizations qualified donee status.
Copies of the full economic statement, the Notice of Ways and Means Motion, and explanatory notes are available on IntelliConnect, and a print copy of these materials is available too. The Special Report (no. 116H) can be ordered at [email protected] or 1–800–268–4522.
The Accelerated Investment Incentive
The Accelerated Investment Incentive (“AII”) will accelerate CCA for basically all types of assets that are already eligible for CCA. This will be achieved by two changes. First, the CCA for the first year in which an asset becomes available for use will be 1.5 times what would normally be allowed. Second, the half-year rule will be temporarily suspended. As a result, the CCA deduction for an asset in the year it is acquired (and presumably available for use) will be 3 times what is normally allowed (2 times because no half-year rule, and 1.5 times the CCA from the acceleration). The CCA in subsequent years will be computed normally.
The proposed AII will be in full effect for assets that acquired after November 20, 2018 and that becomes available for use before 2028. There will be a phase-out for property that becomes available for use after 2023. During the 2024 – 2027 phase-out period, the half-year rule will still be suspended for assets that become available for use during that period. However, the AII provision that allows a CCA amount equal to 1.5 times the normal amount is not available to assets that become available for use during the phase-out period.
The AII is completely phased-out for assets that become available for use before 2028.
If an asset is in a class that is not subject to the half-year rule, it is eligible for CCA equal to 1.5 times the normal amount for the first year. If such an asset is acquired during the 2024 – 2027 phase-out period, the accelerated CCA is 1.25 times the normal CCA amount.
For CCA classes subject to straight-line depreciation, the half-year rule is also suspended. However, the 1.5 times accelerated CCA is only provided for the first year, so the CCA amount for subsequent years for these classes (leasehold interests or Class 14 patents, for example) is simply the normal amount.
For assets that are depreciated on the basis of unit use, the 1.5 times CCA acceleration will only apply to the amount of depletion in the first year, and CCA amounts computed on the basis of usage in subsequent years will not be affected by the accelerated CCA in year 1.
The AII is also applicable to most existing additional allowances, with some exceptions. The AII will also apply for Canadian development expenses and Canadian oil and gas property expenses.
Since they have their own accelerated CCA rules proposed, manufacturing and processing equipment and clean energy equipment will not be subject to the AII. See a discussion of the proposals regarding these assets below.
The AII will appropriately not be available where the taxpayer or a non-arm’s length person previously owned the property, or where the property was transferred to the taxpayer as a tax-deferred rollover.
Full Expensing of M&P and Clean Energy Equipment
Currently, manufacturing and processing (“M&P”) equipment is included in Class 53, which is eligible for 50% CCA. Various types of clean energy equipment are included in Classes 43.1 and 43.2, which are eligible for 30% and 50% CCA respectively. Where assets in these classes are acquired after November 20, 2018 and before 2024, the cost of the asset is eligible for a 100% CCA deduction—a full write-off for tax purposes. Thus, the half-year rule is effectively suspended. The accelerated CCA is only available if the property is available for use before 2028.
The tax benefit will be phased-out for such equipment acquired after 2023. Equipment acquired in 2024 – 2027 will still have accelerated CCA in the year it is acquired, but it will not be a 100% write-off. The CCA amount will revert to normal treatment for assets acquired after 2027.