As the Government continues to roll out measures to alleviate the economic impact of the pandemic, the 2021 federal budget proposed legislation for a temporary measure that would encourage Canadian Controlled Private Corporations (CCPCs) to invest in assets by allowing CCPCs to immediately expense up to $1.5 million of eligible property. The measure is designed to help free up capital for businesses to invest in capital assets to stimulate growth. The proposed rule does not change the total amount of Capital Cost Allowance (CCA) that may be claimed but offers a tax-deferral vehicle by accelerating the rate at which CCA can be claimed.
Proposed changes to accelerate growth
The new measure is applied to depreciable capital property with the exception of property included in capital cost allowance classes (CCA) 1 to 6, 14.1, 17, 47, 49, and 51. Notable exclusions found in these classes include most buildings and related structures, certain electrical and telecommunication equipment, and goodwill. Eligible property that has been acquired after April 18, 2021, and is available for use before Jan. 1, 2024, may be immediately expensed up to a limit of $1.5 million. The $1.5 million limit must be shared amongst members of an associated group of CCPCs and there is no opportunity to carry forward the excess capacity. The normal rules of CCA will be applied to amounts over the $1.5 million limit.
Eligible properties are generally ones that (i) have not been previously owned by the taxpayer, (ii) have not been previously owned by a person at arm’s length of the taxpayer, and (iii) has not been transferred to the taxpayer on a tax-deferred rollover basis.
It should be emphasized that this is a tax deferral mechanism. By allowing the immediate expensing of eligible property in the year that property becomes available for use, a CCPC can reduce the taxable income in the first year by depreciating all or a portion of the capital cost in year one. Consequently, the CCA would not be available in subsequent years. Ultimately it allows CCPCs to claim the full deduction upfront and frees up cash flow for accelerated growth.
Planning and Purpose
It is worth examining how your CCPC may take advantage of the opportunity. Like many things, timing is everything. Because there is no ability to carry forward any amount of the $1.5 million limit, the timing of the purchase and when the asset will be ready for use are important considerations. In order to maximize deductions for the year, it is recommended to immediately expense the capital cost of properties in the CCA classes with the lowest rates first. Fortunately, the proposal does not inhibit the application or availability of other deductions, but more complex transaction structures that are subject to the capital cost allowance regime of the Tax Act and Tax Regulations may reduce or limit the scope of capital cost deductions that can be claimed.
Given that this new rule applies to eligible property purchased and ready for use between April 18, 2021, and Jan. 1, 2024, with no carry-over capacity for the $1.5 million limit, planning is critical to maximizing the tax deferral opportunity. If your CCPC has capital expenditures that would qualify for the immediate expense measures, we would be happy to review the tax implications.
For more information or to discuss your proposed purchase, please contact SB Partners at 905-632-5978.