Legislation was recently passed into law for a new temporary measure that allows Canadian-controlled private corporations (CCPCs), unincorporated businesses carried on directly by Canadian resident individuals (other than trusts), and certain eligible partnerships to immediately expense up to $1.5 million of eligible property in each year starting in 2021 for CCPCs and in 2022 for other eligible taxpayers.
The enhanced deduction is not limited to specific sectors and is meant to free up capital for businesses to invest in assets that drive growth. Parts of the measure were originally proposed in the 2021 budget as part of the federal government's aim to boost business investment.
The new temporary measure allows CCPCs to immediately expense certain capital property acquired on or after April 19, 2021 and that becomes available for use before 2024. With changes introduced in 2022, this law also allows the immediate expensing of eligible property acquired by Canadian resident individuals (other than trusts) or Canadian partnerships where all the partners are CCPCs or Canadian resident individuals (other than trusts) on or after Jan. 1, 2022.
The property must become available for use before 2025 (or before 2024 for partnerships where not all the partners are individuals). Ineligible are multi-tiered partnerships, which are partnerships with other partnerships as members. Immediate expensing would be available only in the year in which the eligible property becomes available for use. The half-year rule would not apply to eligible property that is immediately expensed.
$1.5 million limit
The immediate expensing measure has a limit of $1.5 million per taxation year that must be shared among members of an associated group of eligible persons or partnerships. The rules generally work in a similar manner as the allocation of the business limit for purposes of the small business deduction.
Where the $1.5 million limit is not used in a taxation year, there is no opportunity to carryforward the excess capacity. The limit would be prorated for short taxation years.
What properties are eligible?
For purposes of this new measure, eligible property generally includes all depreciable capital property, other than property included in capital cost allowance (CCA) classes 1 to 6, 14.1, 17, 47, 49 and 51. These exceptions generally pertain to long lived assets, such as buildings and certain structures, and unlimited life intangibles including goodwill.
Immediate expensing would generally only be available on eligible property that:
- Was neither previously owned by the taxpayer or a non-arm's length person
- Has not been transferred to the taxpayer on a tax-deferred rollover basis
Interactions with other existing deductions
Eligible persons or partnerships that have more than $1.5 million in eligible property that becomes available for use in a year would be allowed to choose which CCA class the immediate expensing would apply to and any excess capital cost would be subject to the normal CCA rules.
It is important to know that the availability of existing enhanced deductions, such as the full expensing of manufacturing and processing machinery and equipment and clean energy equipment, would not reduce the $1.5 million limit under this new immediate expensing measure.
On the other hand, the existing provisions that can restrict a CCA claim in certain situations would continue to apply such as rules pertaining to specified leasing properties, specified energy properties, rental properties, and limited partners.
In an example provided by the government, a CCPC invests $2 million in equal amounts for two properties, one falling under CCA Class 7, and the other under Class 10. The CCPC would be allowed a total first-year CCA deduction of up to $1,725,000 under the new rules compared to $675,000 under the previous rules. This would represent an additional deduction of $1,050,000 in the first year, as summarized below.
Example provided by the government
|CCA class (rate)||Cost of acquisitions||Immediate expensing||First-year CCA on remainder of class*||Total first- year CCA||First-year CCA under previous rules*|
|Class 7 (15%)||$1,000,000||$1,000,000||-||$1,000,000||$225,000|
|Class 10 (30%)||$1,000,000||$500,000||$225,000||$725,000||$450,000|
|* Assuming eligible for the enhanced CCA under the Accelerated Investment Incentive|
Understanding the benefit
The new rules do not change the total amount of CCA that may be claimed in respect of an asset. The changes instead accelerate the rate at which CCA can be claimed on eligible property for tax purposes by allowing the immediate expensing of eligible property in the year that property becomes available for use. This would have the effect of reducing taxable income in that first year. No CCA would be available in respect of that asset in subsequent years since the full amount has been claimed. As such, the main benefit of the new measure is tax deferral.
Claiming the incentive
The enabling legislation has received royal assent and the Canada Revenue Agency (CRA) is accepting tax returns with immediate expensing claims as well as amendment requests to claim immediate expensing on previously filed tax returns. The CRA has indicated it will be updating the T2 Schedule 8, Capital Cost Allowance, so that it will provide CCPCs with all the information needed related to an immediate expensing claim.
It's important to note that the official Schedule 8 form and worksheets to allow immediate expensing are not expected to be available until later this summer. If T2 corporate tax returns with immediate expensing are filed before the revised schedules become available, the CRA may contact the CCPC for more information in order to process the tax return.
The incentive must be claimed in the year that the property first becomes available for use. In that case, a filed return that didn't claim the immediate expensing deduction on eligible property should be reviewed. If necessary, the return should be amended to claim the deduction.
Even if the CCPC was in a loss position, it might still be worthwhile to claim the immediate expensing deduction if the resulting increased loss could be used in the next few tax years. We suggest contacting a Tax advisor to assess each situation to determine if a claim should be made, or an amended return filed to make a claim.
Planning points to remember
The new measure highlights several points you should keep top of mind when it comes to tax planning for your CCPC or unincorporated business:
- Time your eligible property purchases
There is no ability to carryforward an amount of the $1.5 million limit that is not used in a particular year. It would be advisable to manage the timing of eligible property acquisitions where possible. The objective would be to maximize your ability to benefit from the immediate expensing incentive.
- Choose to immediately expense eligible property in classes with the lowest CCA rate
If you acquire eligible property in excess of the $1.5 million limit in a taxation year, you can select which CCA classes the immediate expensing measure is applied to. The excess capital cost would then be subject to the normal CCA rules. As such, you should choose to immediately expense the capital cost of eligible property acquisitions in CCA classes with the lowest rates first in order to maximize your overall CCA deduction for the year. Existing enhanced CCA deductions, such as the full expensing of manufacturing and processing machinery and equipment, continue to be available and would not impact your $1.5 million limit.
- Optimize the allocation of the $1.5 million limit to eligible persons or partnerships within an associated group
Since the $1.5 million limit needs to be shared by members of an associated group of eligible persons or partnerships in each of the relevant years, certain factors including the amount of taxable income and tax rates applicable to each member of the group—as well as the CCA classes and rates of eligible property acquisitions—should be considered when determining an allocation.
- Stay informed of developments
Contact your BDO advisor to understand the implications for you and your business, learn how to benefit from the new incentive, and be made aware of new tax developments.