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.
Please note:
- 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.
Example:
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, [1991] 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.”