On November 21, 2018 the Minister of Finance, Bill Morneau, released the Fall Economic Statement.
This Statement included the Accelerated Investment Incentive – which outlined a number of tax changes relating to the capital cost allowance (CCA) system (amortization of assets that may be claimed for income tax purposes).
The Accelerated Investment Incentive was introduced to allow business in Canada to deduct the cost of their investments more quickly – and therefore increasing the attractiveness of making capital investments to improve a business’ efficiency and/or to expand a business’ operations. The intention of the Accelerated Investment Incentive is to enhance the ability of businesses in Canada to compete internationally and is a reaction to the U.S. Government’s Tax Cuts and Jobs Act of 2017.
Significant change #1 – First-year capital cost allowance
Prior to November 21, 2018, only one-half of the allowable CCA could be claimed in most asset classes in the year of acquisition. This was commonly known as the half-year rule.
From November 21, 2018 to December 31, 2023, the allowable CCA is in the year of acquisition is three times the ‘prior to November 21, 2018 rate’.
January 1, 2024 to December 31, 2027, the half-year rule does not apply in the year of acquisition.
January 1, 2028 and onward, the half-year rule is again applicable in the year of acquisition.
- For those CCA classes for which the half-year rule does not apply the provisions of the Accelerated Investment Incentive allow for the accelerated depreciation of these CCA classes as well.
- After the year of acquisition, the CCA rate will return to the normal declining balance rate for the respective asset class.
Your business purchased $1,000 of equipment and you immediately began using the equipment in the business. For income tax purposes the equipment is added to CCA class 8. The depreciation rate of CCA class 8 is 20%.
Prior to November 21, 2018, your business would claim a $100 deduction for tax purposes in the year of acquisition ($1,000 times 20% times ½).
From November 21, 2018 to December 31, 2023, your business would claim a $300 deduction for tax purposes in the year of acquisition ($1,000 times 20% times ½ *3).
January 1, 2024 to December 31, 2027, your business would claim a $200 deduction for tax purposes in the year of acquisition ($1,000 times 20%).
January 1, 2028 and onward, your business would claim a $100 deduction for tax purposes in the year of acquisition ($1,000 times 20% times ½).
Significant change #2 – Manufacturing and processing machinery and equipment
From 2016 to November 21, 2018, a previous Ministry of Finance incentive allowed for the addition of manufacturing and processing machinery and equipment to be added to class 53 with an amortization rate of 50% per year on a declining balance basis and with the half-year rule applying in year of acquisition.
Under the Accelerated Investment Incentive:
From November 21, 2018 to December 31, 2023, the allowable CCA is in the year of acquisition is 100%. The half-year rule does not apply. Therefore, this allows for a full deduction in the year of acquisition.
2024 and 2025 calendar years, the allowable CCA in the year of acquisition is 75%. The half-year rule does not apply. For the remaining years this addition is depreciated at a rate of 50% per year on a declining balance basis in class 53.
2026 and 2027 calendar years, the allowable CCA in the year of acquisition is 55%. The half-year rule does not apply. For the remaining years this addition is depreciated at a rate of 30% per year on a declining balance basis in class 43.
2028 onward calendar years, the allowable CCA in the year of acquisition is 15% – as the half-year rule is reintroduced. For the remaining years this addition is depreciated at a rate of 30% per year on a declining balance basis in class 43.
Please note: Income Tax Folio S4-F15-C1, Manufacturing and Processing, includes the following discussion of the activities that constitute manufacturing and processing:
“1.2 It may be said, however, that the manufacture of goods normally involves the creation of something (for example, making or assembling machines, clothing, soup) or the shaping, stamping, or forming of an object out of something (for example, making steel rails, wire nails, rubber balls, wood moulding). On the other hand, processing of goods usually refers to a technique of preparation, handling, or other activity designed to effect a physical or chemical change in an article or substance, other than natural growth. Examples of such activities are galvanizing iron, creosoting fence posts, dyeing cloth, dehydrating foods, and homogenizing and pasteurizing dairy products.
1.3 In Tenneco Canada Inc. v The Queen,  1 CTC 323, 91 DTC 5207, the Federal Court of Appeal indicated that the two tests for determining whether a taxpayer is engaged in processing are:
- whether there is a change in the form, appearance, or other characteristics of the goods subject to the operation; and
- whether the product becomes more marketable.
1.4 The activities of breaking bulk and repackaging for subsequent resale where there is a systematic procedure to make a product more marketable are generally considered to be processing. However, the filling of orders from bulk inventories is not viewed as processing where the activities involved are nothing more than counting or measuring and packaging.”
Increase in CPP rates
CPP rates will increase gradually from 2019 to 2025.
In 2018 and prior years, CPP retirement benefits were intended to replace one quarter of a taxpayer’s average work earnings. The purpose of the CPP rate increases is to have CPP retirement benefits replace one third of a taxpayer’s average work earnings.
Phase one of the CPP rate increase will have the current CPP rate of 4.95% increase by the following increments:
By the end of the series of increases, the 4.95% contribution rate will have increased to 5.95%.
Phase two of the CPP rate increase will require a 4% premium to be paid on earnings in excess of the year’s maximum pensionable earnings (YMPE) up to 107% of the YMPE.
For example, if the YMPE is $70,100 in 2024, the additional limit will be $75,007. The 4% rate will be applied to the difference between the $75,007 and the YMPE of $70,100 ($4,907) – resulting in $196.28 in additional premiums payable.
For 2025 and later calendar years, the 107% multiplier will be increased to 114%.
Change in EI Rates
Employment Insurance rates will be reduced to 1.62% in 2019. This is a decrease of 0.04% from the 2018 rate of 1.66%.
The maximum insurable earnings for 2019 is $53,100. The maximum insurable earnings in 2018 was $51,700.
The maximum employee premiums for 2019 will be $860.22 – this is an increase of $2.00 compared with 2018. The maximum employer premium will be $1,204.31 – this is an increase of $2.80 compared with 2018.
Introduction of B.C. Employee Health Tax
The B.C. Employer Heath Tax (EHT) comes into effect on January 1, 2019.
The purpose of the B.C. EHT is to replace the revenue derived from Medical Service Plan premiums previously paid by residents of B.C. Although residents of B.C. have had their MSP premiums reduced by 50%, it is the B.C. government’s intention to eliminate MSP premiums paid by residents of B.C. by 2020.
Employers with remuneration of $500,000 or less are exempt from EHT.
Employers with B.C. remuneration between $500,001 and $1,500,000 pay a reduced tax of 2.925% of the portion of B.C. remuneration that is above the $500,000 exemption.
Employers with B.C. remuneration greater than $1,500,000 pay tax at 1.5% of the total B.C. remuneration.
If you are associated with other employers, you must share the $500,000 exemption with the other employers.
How to register: Registration begins on January 7, 2019 and should be completed through your eTaxBC account.
When to remit: Using the lessor of your 2018 BC remuneration paid and your estimated 2019 BC remuneration, calculate your 2019 employer health tax liability. If your employer health tax liability is greater than $2,925, you are required to make quarterly instalments on or before the following dates: June 15th, Sept 15th, Dec 15th and March 31st with the filing of the EHT return.
When to file the EHT return: On or before March 31st each year. The 2019 EHT return will be due on March 31, 2020.
As the Income Tax Act is ever evolving here are the top five changes you should be aware of:
- Sale of Principle Residence – new – Individuals who have sold their home on or after January 1, 2016 and claim the principle residence exemption because it was their primary residence for all of the years the home was owned now need to report this transaction on schedule 3. For more information on this new reporting requirement please visit CRA’s website on this topic.
- Teachers and Early Childhood Educator School Supply Tax Credit – new –This new tax credit allows teachers and early childhood educators to claim a 15% tax credit on up to $1,000 of eligible teaching supplies. For more information on this new reporting requirement please visit CRA’s website on this topic.
- Back-to-School Amount – new – Residents of British Columbia may claim a $250 tax credit for each child, who is at least 4 years of age and under 17 years of age, attending school. No receipts are required to claim this tax credit.
- Children Fitness and Art Tax Credit – change – The maximum amounts that can be claimed for the Children’s Fitness and Art Tax Credit has been reduced to $500 and $250 respectively.
- Family Tax Cut Credit – eliminated – This non-refundable tax credit that was available in the 2014 and 2015 taxation years has now been eliminated.
If you had modest income in 2016 and a simple tax situation then you may be able to have your 2016 personal tax return prepared for free at a Community Volunteer Income Tax Clinic. For information on the definition of modest income and simple tax situation please visit this Canada Revenue Agency webpage. This webpage also includes a link to assist in finding a tax clinic near you.