With tax season gearing up, now is a good time to be reminded of some recent changes to the tax regime affecting your firm's business planning. In its 2018 Fall Economic Statement, the Department of Finance made some proposals to enhance business confidence and encourage more capital investments. Of the proposals, one that sole and small firms can take advantage of is the Accelerated Investment Incentive.
The pre-existing framework
Property depreciates. Businesses are allowed to deduct the cost for purchases made in the year for depreciable property, so long as it is available for use by the taxpayer. Property is available for use when it is first used by the taxpayer for the purpose of earning income. The goal of this condition is to prevent a taxpayer from deducting the cost of property that was not being used. A taxpayer cannot deduct the entire amount immediately though. They are allowed to deduct a percentage of the amount over several years to reflect the depreciation over time. This is called the capital cost allowance.
An important aspect of CCA is the half-year rule. This rule circumvents the situation where a taxpayer purchases property nearing the end of the year and claims the full cost of the newly acquired property. This would mean that the taxpayer could claim a CCA for the property even though it was owned for much less than a full year. The half year rule works by reducing the cost of acquisition during the year by 50 per cent. Thus, if a capital property cost $100 to purchase, the CCA would be calculated based on only $50.
The accelerated investment incentive allows businesses to deduct larger amounts of capital costs up front. It applies to capital property other than manufacturing and processing equipment and clean-energy equipment. Property acquired on a rollover basis and property acquired in a non-arm’s length transaction are also excluded.
The accelerated investment incentive assists small firms in a couple of ways. First, it relaxes the condition of ‘available for use.’ Property acquired after November 20, 2018 and that is available for use before 2024 can benefit from the capital cost allowance deduction in the first year. After 2024, the enhanced deductions are phased out until 2027.
Secondly, the half year rule mentioned above is effectively suspended. This occurs by allowing the full cost of the property to be factored into the calculation of the capital cost allowance in the first year rather than just 50 per cent of it. The taxpayer is also allowed to claim a higher CCA rate of 1.5 times the standard rate for the asset class in the first year.
Though the taxpayer can front-load the amount deducted for capital property in the year of purchase, they cannot deduct more than the total capital cost. In other words, there is no long-term difference between the pre-existing framework and the temporary relaxation of the rules. Nonetheless, the measures allow businesses to deduct a larger percentage of the cost of capital property earlier on.
The hope is that these measures will incentivize businesses to invest more in capital assets by allowing businesses to more quickly recover the initial cost of the assets. Armed with this knowledge, lawyers and other business owners may be able to make capital investments in their business that on which they might have been holding off. However, the measure is temporary, so take advantage of the incentive while it lasts.