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Canada Announces Enhanced Capital Cost Allowances

On November 21, 2018 the Minister of Finance, Bill Morneau, released the Fall Economic Statement.

This Statement included the Accelerated Investment Incentivewhich 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.”

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Changes to the Income Tax Act that may affect your 2016 personal tax return

As the Income Tax Act is ever evolving here are the top five changes you should be aware of:

  1. Sale of Principle Residencenew – 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.
  1. 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.
  1. 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.
  1. 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.
  1. Family Tax Cut Credit – eliminated – This non-refundable tax credit that was available in the 2014 and 2015 taxation years has now been eliminated.

2016 Community Volunteer Income Tax Clinics

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.

Top 10 Personal Tax Season FAQs

We are beginning our 2016 personal tax return preparation season tomorrow.  Although we very much enjoy assisting our clients with the preparation of their personal tax returns, we work long hours at this time of year to do our best to sure everyone’s personal tax return is accurate and filed on time.  If we were super heroes we would be “super-organized” – not as exciting as being invisible, but it enables us to get the job done.

  1. “When are my taxes due?”

Although most Canadians have been required to file their personal tax return on April 30th each year (or the next business day if April 30th falls on a weekend) since as long as I can remember, we understand the confusion here as our neighbours to the south have a April 15th personal tax return filing deadline.

The filing due date for 2016 personal tax returns is May 1, 2017 (since April 30th falls on a Sunday this year) unless one of the following applies:

  • If you or your spouse or common law partner have self-employment business income you have until June 15, 2017 to file your personal tax return.
  • If you died last year between November 1st and December 31st, the due date for your final return is six months after the date of death.
  1. “I am going on vacation until April 25th. Can I bring all of my personal tax information in on April 26th”?

Yes you can bring your information in but we likely won’t have time to complete it until we return from our holidays.  See point 10 below.

  1. “When are my 2016 personal taxes due?”

May 1, 2017, since April 30, 2017 falls on a Sunday, no matter when your filing due date is.

  1. “How do I pay my tax liability?”

I recommend that clients set the Canada Revenue Agency (CRA) up as a payee in their online banking, using their social insurance number as the account number, and remit a payment this way.

Not everyone participates in online banking.  One of our clients enjoys going directly to a CRA office each year and standing in what he calls the “crying and paying line”. There are several other ways to pay the Canada Revenue Agency.  Here is a link to other payment options.

  1. “Do you need all of my tax slips?”

Yes

  1. “My printer is broken.”

We email our clients forms during our personal tax return season that require to be printed, signed and returned. To facilitate this process, now is a good time to give your printer a check-up, replace your printer or find an alternative way to print the documents we send to you.  Before you do please see point 8 below.

  1. “I don’t have any toner for my printer.”

Now is a good time to buy some toner.  Before you do please see point 8 below.

  1. “My scanner is broken.”

In this crazy hi-tech world we live in, perhaps the need to purchase a separate machine to scan documents is over.  There are several apps available for your phone that can receive a document, place your signature on the document and return the document. Tiny Scanner and Tiny Scans are two examples of these apps.

  1. “You look tired.  Are you tired?”

Yes

  1. Are you taking a vacation soon?”

Yes on May 2, 2017 and we will be back in the office on May 15, 2017.

Beware of scammers posing as CRA employees

Over the past year a few of our clients have called to say they have received either a threatening telephone call from a person claiming to work for the Canada Revenue Agency who was demanding payment for a tax debt or an email from the Canada Revenue Agency requesting their banking information to facilitate the deposit of their tax refund.  In all of these instances we concluded that the communication was a scam.

If you are questioning the validity of any communication received from the Canada Revenue Agency, whether it be regarding a tax debt or refund, we recommend that you review your account online through My Account or My Business Accounts.  If you have not yet set up an online account with the Canada Revenue Agency you can also call Personal Income Tax Inquiries at 1-800-959-8281 or Business Inquiries at 1-800-959-5525.

The Canada Revenue Agency is well aware of these and other communication scams.  Please visit the Canada Revenue Agency’s webpage that discusses these scams.  We recommend that you take a few minutes and watch the Canada Revenue Agency’s video on this topic.