Ask the Experts
Fred Richardson, Partner
FranchiseCanada
June 2009
Q: “What do the changes to the Capital Cost Allowance (CCA) tax deduction rate for technology mean for me as a small business owner?”
A: The temporary 100% CCA deduction for eligible computers and software introduced in the January 2009 federal budget is good news for franchise owners. The government has introduced this measure to stimulate the economy and encourage businesses to become more productive. Now your business has a valuable incentive to invest in technology.
When you purchase eligible computers and software before February 2011, your franchise will be able to claim 100% of the CCA. The purchases will not be subject to the usual half-year rule, which only allows half of the CCA write-off in the first year.
This new measure applies to CCA Class 50 of schedule II of the income tax regulations, which refers to “general purpose electronic data processing equipment and systems software for that equipment.” This includes computers, servers, storage devices, monitors, drives, cables, and printers as well as pre-installed system software that operates these devices.
Excluded are applications or software purchased separately from the hardware, as well as electronic communications control equipment such as phone systems and data networks, data handling equipment and electronic process control or monitoring equipment such as that which operates machines. As well, this accelerated write-off does not apply to leased assets.
The CCA is a tax deduction that allows a business to deduct a specified amount of the cost of a depreciable capital asset (such as equipment, property, furniture) over a specified number of years to allow for its loss in value as a result of use or obsolescence. There are more than 40 classes of assets with defined CCA rates.
The government sometimes accelerates certain CCA rates, allowing the assets to be depreciated more quickly and thus increasing the incentive for investing in these assets. The accelerated CCA for computer and software should encourage many small business owners to invest in technology sooner rather than later, especially since it will also reduce business taxes, enhance cash flow and align the useful life of these assets with their actual tax write-off period.
Franchises involved in computer sales and services are also likely to see an increase in revenue as more businesses take advantage of this incentive.
Typical Savings for Small Business using Accelerated CCA on Computers and Software
Purchase
of computers and software |
Standard CCA rate
(Class 50,
Schedule II) |
Temporary
Accelerated
CCA rate
(Class 50,
Schedule II) |
Savings for CCPC taxed at small business rate* |
$20,000 |
55% ($5,500)
subject to half-year rule** |
100% ($20,000) |
$2,392.50 |
* Canadian Controlled Private Corporation based in Ontario paying 16½% small business tax rate
** The half-year rule allows only half of an asset’s available capital cost allowance to be claimed in the first year when it is put into use
There is also another CCA incentive for businesses* involved in manufacturing and processing, Equipment used for these purposes that is purchased before the end of 2011 is eligible for a 50% straight-line accelerated rate, subject to the half-year rule. Those that claim the maximum CCA would therefore be able to deduct 25% in year one, 50% in year two and 25% in year three.
As well, buildings purchased after March 18, 2007 and used at least 90% for manufacturing and processing are eligible for an additional 6% CCA, bringing the rate to 10% from the current 4%. If a building doesn’t meet this threshold but at least 90% of the building is used for non-residential purposes, a 2% additional CCA rate is available, bringing the total CCA rate to 6%.
There are some other specialized CCA incentives, such as one for clear energy generation, but these incentives tend to be less commonly used. Best to check with a tax professional to ensure that you take advantage of all of the incentives available to your franchise – while time is on your side.
Fred Richardson, CGA, TEP, is a senior tax manager who works in the Burlington office of BDO Dunwoody LLP (www.bdo.ca/burlington). BDO, one of Canada’s leading accounting and advisory firms, helps businesses succeed. If you have questions about this article, you can reach Fred at frichardson@BDO.ca or (905) 633-4921.
