Purchasing property and equipment is a costly but necessary part of doing business. Items such as buildings and machinery typically require a significant cash outlay, but the expenditure cannot be deducted in full during the year of payment. Instead, you can deduct a portion of the cost each year by claiming Capital Cost Allowance (CCA) based on the prescribed rates for the type of asset purchased. In 2018, the Government of Canada implemented the Accelerated Investment Incentive which allows for an enhanced first-year CCA claim on certain property.
Purchases of capital assets are grouped together in CCA classes based on the type of asset purchased. The balance of each class is depreciated annually based on the prescribed rate for the class. The rate of depreciation is intended to approximate the useful life of the asset. For example, buildings are often grouped together in Class 1 and depreciated at an annual rate of 4%. Furniture, appliances, tools and certain equipment are commonly grouped together in Class 8 and are depreciated at an annual rate of 20%. In the year of purchase, the half-year rule applies which limits the first-year CCA claim to half of the prescribed rate (i.e. 2% for Class 1 or 10% for Class 8). The first-year claim is reduced as you likely did not own the asset for the full year.
The Accelerated Investment Incentive is intended to promote business investment by allowing for a greater income tax deduction in the year of purchase. The incentive applies to eligible property purchased after November 20, 2018 which becomes available for use before 2028. The incentives general rule is made up of two elements:
Additions to specified classes are eligible for a first-year CCA claim of one and a half times the regular CCA rate for the class; and
The half-year rule is suspended for additions to specified classes.
The combined effect of the above rule is that additions are eligible for a first-year CCA claim that is three times the regular claim. As mentioned above, the building that would have previously been eligible for a first-year claim of 2% will now be eligible for a first-year claim of 6% and the furniture added to class 8 will now be eligible for a first-year claim of 30%. The incentive will not increase the total CCA that can be deducted over the life of the property. The incentive simply shifts a larger portion of the total deduction to the year of purchase.
Both elements of the general rule will remain in effect for property that becomes available for use before 2024. For property that becomes available for use from 2024 to 2027, the first rule above will not be applicable, but the half-year rule will continue to be suspended for additions. As of 2028, CCA will be calculated based on regular rates. The incentive does not apply to certain manufacturing and processing equipment and clean energy equipment. At the same time that the incentive was announced, similar measures were announced to fully deduct the cost of these properties in the year of purchase.
There are many other rules and restrictions that apply to CCA claims. Some of these rules relate to short tax years, purchases from related taxpayers, rental properties and specified properties. These rules will continue to apply to property eligible for this incentive and we would be happy to advise on these rules separately.
If you are planning to purchase property to grow your business, it may be advisable to do so while the Accelerated Investment Incentive remains in effect. This incentive will allow for an enhanced CCA claim in the year of purchase that can significantly reduce your year-end tax bill.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA