Capital Cost Allowance: Important changes and updates
Many Canadian businesses use depreciable capital assets such as machinery or equipment in their operations. As businesses grow and change, new capital property is acquired to improve processes or to replace old assets at the end of their useful life.
For income tax purposes, the cost of eligible property can be deducted over time by claiming Capital Cost Allowance (CCA). This article will summarize the key changes to CCA implemented by the federal government in 2018 and 2019 as well as legislation passed in Bill C-19 which received Royal Assent on June 23, 2022.
What is CCA?
CCA is a tax deduction of an asset’s cost over time. Rather than allowing taxpayers to deduct depreciation expense calculated based on accounting rules, taxpayers must follow the methodology outlined in the Income Tax Act to determine the depreciation expense for tax purposes. For this reason, accounting depreciation is added back to taxable income, and CCA is deducted. Only depreciable property is eligible for CCA deductions.
Over time, the cost of the depreciable property is deducted through CCA. This is done through the tax return by tracking the Undepreciated Capital Cost (UCC), which is the balance of the capital cost left to be further depreciated. The CCA deducted will lower the UCC over time until the property is fully depreciated for tax purposes or sold.
The rate at which CCA is calculated depends on the type of property, as eligible capital assets are organized into specific classes. Properties belonging to the same class are pooled together and a specific CCA rate is applied to those classes. For example, vehicles that fall under Class 10 would have a CCA rate of 30 per cent applied to them. Determining what class an asset falls under can be difficult, as the classification may depend on factors such as the type of asset, the cost to acquire the asset, when the asset was acquired, and how the asset is used. A detailed list of property classes and the corresponding rates can be found here.
Certain types of eligible property are subject to the half-year rule in the year of acquisition. This means when CCA is determined for the first year of the asset’s useful life, CCA is only calculated on half of the asset’s capital cost. For example, a business acquiring a Class 10 Vehicle for $10,000 can only take CCA of $1,500 in the first year ($10,000 * 0.5 * 30%). The remaining $8,500 will be part of the UCC balance of Class 10 to be carried forward to future years.
CCA: Accelerated Investment Incentive
In the 2018 Fall Federal Budget, the federal government made changes to how the CCA deduction is determined to encourage Canadian taxpayers to acquire new capital property to stimulate the economy.
The federal government introduced an Accelerated Investment Incentive (AII) for eligible capital property acquired after November 20, 2018, and available for use before 2028. This incentive allows businesses that purchase capital property to claim a larger tax deduction in the year of acquisition, thus reducing the taxpayer’s taxable income. The introduction of AII changed two major parts of the CCA calculation for first year acquisitions:
- The existing CCA half-year rule is suspended; and
- A rate of one-and-a-half times applies to net capital property additions in the acquisition year.
Under the new rules, newly acquired property, normally subject to the half-year rule, would qualify for CCA equal to three times the regular CCA deduction in the first year of use. Newly acquired property, not normally subject to the half-year rule, will qualify for CCA equal to one-and-a-half times the regular CCA deduction in the first year of use.
The total amount of CCA deductible over the life of the asset will not change. Only the amount claimed in the first year will be greater under the AII.
There are restrictions on the ability to use the AII. The asset:
- Cannot be previously owned by a person who deals with the business in a non-arm’s length capacity.
- Cannot have been transferred via a tax-deferred rollover.
- Cannot be a Class 43.1, 43.2, or 53 asset.
AII: Phase-out period
The AII phase-out period begins in 2024 and ends in 2027.
For property normally subject to the half-year rule that becomes available for use between 2024 and 2027, the half-year rule is suspended. This results in the taxpayer qualifying for CCA on the net addition equal to two times the regular CCA deduction for assets acquired during the phase-out period.
For property that is not subject to the half-year rule that becomes available for use during the 2024-2027 phase-out period, the CCA deduction for the newly acquired property will be one-and-a-quarter times the regular first year CCA deduction.
Businesses may want to take note of the phase-out period to take full advantage of the AII. The full benefits of the AII incentive will only be available until the end of 2023. Businesses may aim to make larger asset purchases in 2022-2023 for which the full incentive is available, prior to the start of the phase-out period.
Other changes: Manufacturing and processing (M&P) and clean energy equipment
Additional measures for M&P equipment and clean-energy equipment purchased after November 20, 2018, have been introduced as part of the Fall 2018 Economic Statement. Under these changes, M&P equipment that qualifies as Class 53 property and clean energy equipment that qualifies as Class 43.1 or 43.2 property will be eligible for a 100 per cent CCA rate in the first year of use, which means that the cost of such assets can be expensed entirely at that time. Clean energy property in Class 43.1 and 43.2 includes equipment that generates power from sources other than oils and/or fossil fuels, electric vehicle charging stations, or geothermal heat recovery equipment.
Like the AII, a phase-out period for these categories of property will be applied if the property is acquired and available to use after 2023.
- The first-year deduction will be reduced to 75 per cent for assets that become available for use in 2024 and 2025.
- It will be further reduced to 55 per cent for assets ready to use in 2026 and 2027.
- From 2028 onwards, there will be no enhanced CCA rate applied to asset acquisitions in these specified classes.
CCA: Zero-emissions vehicles and equipment
As part of the CCA updates in Federal Budget 2019 and Bill C-30 in 2021, temporary measures were introduced to encourage the use of eligible zero-emission vehicles and equipment to reduce Canada’s greenhouse gas emissions. Eligible vehicles must be fully electric or powered by hydrogen. Like other measures, these rules allow for an enhanced first year CCA deduction for eligible property.
To appropriately account for these specific property types, three new CCA classes have been created:
Class 54 | Class 55 | Class 56 | |
---|---|---|---|
Type of eligible vehicle | Zero-emission vehicles designed for highways/streets that would otherwise be included in Class 10 or 10.1 | Zero-emission vehicles designed for highways/streets that would otherwise be included in Class 16 (e.g., taxis, tractors) | Zero-emission equipment or vehicles that would otherwise not fit in Class 54 or 55 such as zero-emission aircraft, watercraft, railway locomotives, and trolley buses. |
Limit on capital cost | $55,000 per vehicle | None | None |
Enhanced first year CCA allowance | If acquired and available for use after March 19, 2019 and before January 1, 2024,100 per cent CCA can be taken in the year of acquisition | If acquired and available for use after March 19, 2019 and before January 1, 2024,100 per cent CCA can be taken in the year of acquisition | If acquired and available for use after March 2, 2020 and before January 1, 2024,100 per cent CCA can be taken in the year of acquisition |
For all classes, a phase-out period begins in 2024. The first-year enhanced deduction will be reduced to 75 per cent for assets that become available for use in 2024 and before 2026, and it will be further reduced to 55 per cent for assets ready to use in 2026 and before 2028. From 2028 onwards, there will be no enhanced CCA rate applied to asset acquisitions in classes 54, 55, and 56.
CCA: Immediate expensing rules
To assist small and medium-sized business across Canada in recovering from the pandemic, the federal government introduced new CCA measures with respect to certain newly acquired capital assets.
As discussed in our Federal budget 2021 article, the federal government has put forward a variety of programs, updates, and changes in last year’s budget that may be of note.
Included in Budget 2021 was the proposal for new immediate expensing rules, allowing eligible taxpayers to immediately expense up to $1.5 million of capital asset additions amongst their associated group per taxation year. The $1.5 million is prorated for short taxation years, and no carryforward is available if the $1.5 million is not used in a particular year. These rules were passed into legislation on June 23, 2022, when Bill C-19 received Royal Assent.
To be eligible for immediate expensing, the taxpayer must be:
- A Canadian-controlled private corporation (CCPC) throughout the year;
- An individual (other than a trust) who was resident in Canada throughout the year; or
- A Canadian partnership, all of the members of which were CCPCs or Canadian resident individuals throughout the year.
Eligible property consists of all depreciable capital property other than property in CCA classes 1 to 6, 14.1, 17, 47, 49, and 51. These assets are longer-lived, such as buildings or goodwill and are excluded from the immediate expensing rules. The $1.5 million immediate expensing limit must be allocated to capital asset additions amongst the associated group. If capital asset additions surpass $1.5 million in the year, assets with a lower CCA rate should be selected to have the immediate expensing rules apply, as they would otherwise be deducted slower than assets with a higher CCA rate. Eligible assets that are not immediately expensed under these rules may still be eligible for the other enhanced CCA rates.
Immediate expensing: Eligibility periods
For CCPCs, the immediate expensing rules apply to eligible capital property purchases made on or after April 19, 2021. For Canadian resident individuals and eligible partnerships, the property must be acquired on or after January 1, 2022. For Canadian resident individuals and eligible partnerships where all members are individuals, the acquired property must become available for use before 2025. For CCPCs and eligible partnerships with at least one CCPC as a member, the property must become available for use before 2024.
CCA changes: Example
In this example, we will look at a $1,000,000 ready-to-use asset acquisition by a CCPC, and the varying effects the acquisition year has on the amount of CCA that can be deducted. The equipment is categorized as a Class 8 asset, which has a 20 per cent CCA rate. We will consider the CCA implications of the asset acquisition for three different acquisition years, seeing how the AII rules and the new immediate expensing rules affect the CCA claimable.
Impact of CCA rules on the equipment:
- Acquired in 2017: The half-year (½) rule will apply for the first year of the asset’s useful life. The first year CCA is calculated as: $1,000,000 * 20% * ½. = $100,000.
- Acquired in 2019: The new AII rules will apply. The existing half-year rule is suspended, and instead the first year CCA is calculated as: $1,000,000 * 20% * 1.5 = $300,000.
- Acquired in 2024: The AII will apply, but the phase-out period has begun. The existing half-year rule is suspended and the first year CCA is calculated as: $1,000,000 * 20% = $200,000.
- Immediate expensing rules: For CCPCs, equipment acquired after April 18, 2021 and available to use before 2024 are eligible for the immediate expensing rules. If eligible, the $1,000,000 can be fully expensed if the business decides to include it as part of their $1,500,000 immediate expensing pool limit.
Acquired in 2017 | Acquired in 2019 | Acquired in 2024 | Immediate expensing* | |||
---|---|---|---|---|---|---|
Cost of Equipment Acquired | $1,000,000 | $1,000,000 | $1,000,000 | $1,000,000 | ||
Year | CCA rate | CCA claimed | CCA claimed | CCA claimed | CCA claimed | |
1 | 20% | $100,000 | $300,000 | $200,000 | $1,000,000 | |
2 | 20% | $180,000 | $140,000 | $160,000 | - | |
3 | 20% | $144,000 | $112,000 | $128,000 | - | |
UCC end of Y3 | - | $576,000 | $448,000 | $512,000 | - |
*Asset must have been acquired after April 18, 2021 and became available to use before 2024 to be eligible for the immediate expensing rules.
In summary, the new rules for the Accelerated Investment Incentive provide businesses acquiring capital property a further incentive to do so, as it will result in a larger tax deduction in the first year of use. Further, the immediate expensing rules allow eligible persons and partnerships to acquire capital assets and immediately expense them in the year they are ready for use, up to the $1.5 million limit.
These rules have a wide range of tax implications for businesses across Canada. If you think your organization may benefit from these incentives, or if you have any other questions, the Canadian Tax group at Fuller Landau LLP is ready to help.
About the authors
Ben Schwarz is a Senior Tax Specialist in our Tax group. He can be reached at 647-417-0353 or bschwarz@fullerllp.com.
Matthew Maxin was a Junior Tax Specialist in our Tax group during his 2022 co-op term. He is currently completing his Bachelor of Arts – Accounting and Finance degree at the University of Waterloo.