How proposed changes to Capital Cost Allowance impact manufacturing

Manufacturing & processing (M&P) is a capital-intensive business. If the cost of that capital investment can be written off quickly for income tax purposes, then M&P businesses get a tax break. In 2007, the federal government offered manufacturers and processors an incentive to invest in capital equipment by introducing a fast-write-off capital cost allowance (CCA) for qualifying M&P equipment.

Under this method, CCA is calculated on a straight-line basis using a 50% rate. Since the “half-year rule” applies, qualifying investments in machinery and equipment can be fully depreciated over three years (see example below). To qualify, the property must be machinery and equipment acquired by a taxpayer primarily for use in Canada for the manufacturing or processing of goods for sale or lease. This particular incentive will end with purchases made in 2015. However, in the 2015 federal budget, a new CCA class for M&P capital assets was proposed for assets acquired after 2015 and before 2026. Although the depreciation rate will remain at 50%, it will be applied on a declining balance basis, which provides a slower write-off when compared to straight-line depreciation. The half-year rule also applies to this new CCA class (Class 53).

Under current law and the 2015 Budget proposals, purchases of qualifying assets after 2025 will go into Class 43, which has a 30% declining balance rate of depreciation (assuming, of course, that further changes are not made before then).As can be seen in the following example, Canadian manufacturers and processors will be able to write-off their new investment faster if the equipment is purchased in 2015 when compared to the result if the same equipment is purchased in 2016.

Example—CCA Before and After the 2015 Federal Budget Proposals

Best Manufacturing Company makes an investment in capital assets to be used in their Canadian manufacturing business of $1,000,000. The chart below shows the maximum CCA that can be claimed on this investment in the first five years of ownership. As shown, if the equipment is purchased in 2015, it can be fully depreciated in three years. If the equipment is purchased in 2016, approximately 81% of the capital cost will have been written off after three years. By the end of five years, approximately 95% of the capital cost will have been written off. The remaining 5% of the original balance will continue to be depreciated after year five at the rate of 50% of the declining balance each year.

Conclusion

As noted, manufacturers and processors may want to ensure that they make any planned equipment purchases before the end of 2015. Not only will you be entitled to a faster write-off, you may also be able to claim CCA sooner if you have a December 31st year end. If you have any questions about how the changes in CCA rules for M&P equipment will affect your business, please contact your BDO advisor.

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