Canadian Tax and Estate Planning

On March 19^th, Finance Minister Bill Morneau tabled the Liberal government’s 2019 federal budget. The following is a summary of the proposed changes to the SR&ED tax incentive, and the enhanced CCA deduction. 

Scientific Research & Experimental Development

Under the current Scientific Research & Experimental Development (SR&ED) incentive program, qualifying expenditures are fully deductible by the taxpayer in the year they are incurred. In addition, Canadian-controlled private corporations (CCPCs) are eligible for an enhanced refundable tax credit of 35% on the first $3,000,000 of qualifying expenditures. This limit is gradually phased-out based on two factors:

• Prior year’s taxable income for the associated group of companies between $500,000 and $800,000; and
• Prior year’s taxable capital employed in Canada between $10 million and $50 million.

Any qualifying expenditures in excess of the annual expenditure limit are eligible only for a 15% non-refundable tax credit.

For taxation years ended after March 19, 2019, the federal budget proposes to eliminate the phase-out of the $3,000,000 expenditure limit for CCPCs based on the taxable income. As a result, only the taxable capital phase-out will be applicable going forward. This will allow CCPCs with taxable capital of less than $10 million to have access to an enhanced refundable tax credit on a more predictable basis, regardless of their taxable income, which can significantly fluctuate on a year-to-year basis.

Enhanced Capital Cost Allowance Deduction

The 2019 federal budget proposes to provide an enhanced first-year Capital Cost Allowance (CCA) deduction of 100% for eligible zero-emission vehicles purchased after March 18, 2019 that become available for use before 2028. This measure is achieved through the creation of two new asset classes:

• Class 54 for zero-emission passenger vehicles (these vehicles are normally placed in class 10 or 10.1 with 30% annual CCA deduction);
• Class 55 for zero-emission vehicles used as taxi cabs and for short-term rentals, as well as heavy trucks designed for hauling freight (these vehicles are normally placed in class 16 with 40% annual CCA deduction).

It should be noted that the “half-year” rule, generally applicable in the first year to most asset classes, will not apply to the assets placed in Class 54 and 55. In addition, the amount on which CCA can be claimed for vehicles placed in Class 54 will be limited to $55,000 plus applicable sales taxes on a per vehicle basis. This limitation is to be reviewed annually. The budget also provides for an amendment to GST/HST rules to align with proposed income tax treatment for vehicles placed in Class 54 based on the $55,000 limit.

The vehicle is required to meet two additional criteria in order to qualify for the enhanced CCA deduction:

• Be fully electric, a plug-in hybrid with a battery capacity of at least 15 kWh, or fully powered by hydrogen; and
• Not have been used, or acquired for use, for any purpose before it is acquired by the taxpayer.

This measure is temporary and will be phased out between 2024 and 2027 as follows:

• March 19, 2019 – 2023: 100%
• 2024 – 2025: 75%
• 2026 – 2027: 55%
• 2028 onward: –

Contact us today for more information on how these proposed changes from the 2019 federal budget may affect your personal tax situation.