Canada

Keeping up with the neighbours - 2018 Federal Fall Economic Statement

TAX ALERT  | 

On the heels of a new trade agreement and a generous United States tax reform package, the Canadian federal government announced economic and tax measures in its Fall Economic Statement aimed directly at addressing Canada’s competitiveness with the United States. Finance Minister Bill Morneau’s update leaves corporate and personal tax rates unchanged but announces similar deductions for capital investments to those introduced as part of tax reform in the United States.

Capital investments

When Canadian businesses make investments in capital assets such as premises, machinery, and equipment, current tax rules allow those businesses to deduct the cost of the capital assets over a time period that corresponds to the useful life investment (referred to as capital cost allowance or CCA). The new incentives proposed in the Fall Economic Statement will allow businesses to write off a larger share of their capital costs in the year the asset is acquired.

Investments in manufacturing and processing equipment and clean energy equipment

In order to stimulate investments in capital-intensive sectors, the Minister has proposed that investments in manufacturing and processing machinery and equipment, and specified clean energy equipment bought after November 20, 2018 are fully deductible in the year. The incentive will be gradually phased out starting in 2024, and will no longer be in effect for investments put in use after 2027.

Accelerated Investment Incentive

Businesses across all sectors that invest in capital assets that are not eligible for the full cost deduction may benefit from a new Accelerated Investment Incentive proposal for capital assets acquired before 2024. The proposals will allow these businesses to also deduct more of the cost of their investment in the year of acquisition. Most capital assets, including intangible property will qualify for this enhanced deduction.

The program objective is achieved by (i) suspending the application of the half-year rule on eligible assets in the year of acquisition, which previously only allowed for half the tax depreciation in the year of acquisition for certain assets, and, (ii) grossing up the asset acquisition cost by 50 per cent thus allowing for a higher base on which tax depreciation is calculated in the year of acquisition. The result is that tax depreciation claimed in the year of acquisition may be up to three times the tax depreciation that could have been claimed previously for assets subject to the half-year rule, and up to one-and-a half times the tax depreciation that could have been claimed previously for assets not subject to the half-year rule.

Example

A taxpayer that acquires $100 of Accelerated Investment Incentive property included in CCA Class 8 (20 per cent tax depreciation rate) will have the following tax deduction available in the first year of use of the asset:

 

Current CCA Regime

New Enhanced CCA

Undepreciated capital cost (UCC) at
end of the year - A

$100

$100

Notional bump to capital cost – 50%

N/A

$50

Adjusted UCC

$100

$150

CCA rate

20%

20%

First year CCA deduction - B

$10 (half-year rule applies)

$30

UCC after CCA deduction – A - B

$90

$70

 

Similar provisions will apply to oil patch investments in Canadian development and Canadian oil and gas property expenses.

Property will be an Accelerated Investment Incentive property of a taxpayer if:

  1. neither the taxpayer nor a non-arm’s length person previously owned the property; and
  2. the property has not been transferred on a tax-deferred ‘rollover’ basis.

The Accelerated Investment Incentive program does not change the aggregate tax depreciation of a property over its useful life. Businesses will have an incentive to make capital investments where a larger tax deduction is allowed in the first year followed by smaller deductions in the later years.

Business combinations

From a tax perspective, purchasers in a business acquisition transaction generally have a preference to acquire assets as compared to shares in order to obtain a higher depreciable tax cost in the assets acquired. Sellers typically prefer the opposite in order to claim certain tax benefits such as a favorable capital gains rate or lifetime capital gains exemption. The proposed changes may further widen this gap given the faster access to tax depreciation.

A tax advisor can help you understand how these changes may impact you.

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