Immediate Expensing of Capital Property of Up To $1.5 Million Per Year
To encourage businesses to invest in assets that promote productivity growth, legislation was recently passed to temporarily allow certain corporations and individuals to immediately expense up to $1.5 million of eligible capital property in each year starting in 2021. Implementing the new rules would result in significant tax deductions and increase cash flow.
Read also: Holding companies 101: a guide.
What types of businesses are eligible
To be eligible, taxpayers must be one of the following:
- Canadian-controlled private corporations (CCPCs); or
- Unincorporated businesses carried on directly by Canadian resident individuals (other than trusts); or
- Canadian partnerships where all the partners are CCPCs or Canadian resident individuals (other than trusts).
Read also: Tax return deadlines in canada 2023 .
The individual or partnership must satisfy the qualifications and maintain their status throughout the taxation year. Muti-tiered partnerships, those who which have other partnerships as members, are ineligible.
Dates on when the capital property must be acquired and available for use differ on the type of business:
|||Date property must be acquired||Date property must be available for use|
|CCPC||On or after April 19, 2021||Before January 1, 2024|
|Canadian resident individual or a partnership where all the members are individuals||On or after January 1, 2022||Before January 1, 2025|
|Partnerships where not all the partners are Canadian resident individuals||On or after January 1, 2022||Before January 1, 2024|
The capital property must also be immediately expensed in the year that it becomes available for use and the half-year rule would not apply.
As mentioned, the maximum amount that can be immediately expensed is $1.5 million. This limit follows similar rules that pertain to the small business deduction in which it must be shared among members of an associated group. The limit would also be prorated for taxation years that are shorter than 365 days and no carry-forward of excess capacity is allowed for businesses with less than $1.5 million of eligible capital costs.
If the eligible property is greater than $1.5 million, businesses can choose which items would be attributed to immediate expensing and which should be subject to the normal capital cost allowance (CCA) rules.
It is worth mentioning that there are differing CCA rules for each class and certain properties may have other enhanced deductions. As such, it is highly recommended that businesses speak with their accountant to ensure that the benefits of both the new and old rules are maximized.
What types of capital properties are eligible
All properties subject to CCA rules are eligible, except for those that belong in the following CCA classes:
- Classes 1 to 6 (e.g., buildings, greenhouses, structures)
- Class 14.1 (e.g., goodwill)
- Class 17 (e.g., surface construction such as roads)
- Class 47 (e.g., transmission or distribution equipment and structures used for transmission or distribution of electrical energy)
- Class 49 (e.g., pipelines, including monitoring devices used for the transmission of oil and gas)
- Class 51 (e.g., pipelines, including control and monitoring devices used to distribute natural gas)
The property must also
- not have been previously owned by the taxpayer or non-arm’s length person, i.e., acquired from a third party
- not been transferred to the taxpayer on a tax-deferred roll-over basis
Note that leased assets are ineligible for the new rule seeing the full amount of the lease payments would have already been deducted for tax purposes. In comparison, assets purchased through financing agreements are subject to CCA rules and would be considered eligible.
The following example is adapted from the Department of Finance explanatory notes.
Facts and assumptions – A CCPC invest $2 million in equal amounts to acquire two properties: one in CCA Class 7 (15%) and another in CCA Class 10 (30%). All properties become available for use in the year in which they are acquired. CCPC is not associated with any other eligible businesses, as such, its immediate expensing limit is $1.5 million for the year.
As illustrated below, the new rules would permit a total 1st-year CCA deduction of up to $1,725,000 compared to $675,000 under the previous rules, an additional deduction of $1,050,000 in the year.
|CCA class (rate)||Cost of acquisitions||Immediate expensing||1st-year CCA on remainder of class||Total 1st-year CCA||1st-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|
Tax planning recommendations
To maximize the benefit of this new rule
- You may want to consider accelerating your fixed asset acquisitions up to $1.5m, if cash flow permits, seeing the temporary nature of the rule.
- If currently on the fence between financing or leasing an asset acquisition, consider this new tax benefit as a tiebreaker
- It may be worthwhile to time purchases if the total cost would be more than $1.5 million. For instance, if the business has already acquired more than $1.5m in the current year, and more acquisitions were planned for this year, consider delaying remaining acquisitions to following year.
- If the acquired eligible properties are greater than $1.5 million, then it is generally more favourable to immediately expense those that belong in classes with the lowest CCA rate. Again, certain properties may have other enhanced deductions and should be considered in the calculations.
Department of Finance Canada - Expansion of the Eligibility for Tax Support for Business Investments