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For income tax purposes, the cost of eligible property can be deducted over time by claiming Capital Cost Allowance (CCA).
Immediate Expensing of Certain Capital Assets
Included in Budget 2021 was the proposal for new immediate expensing rules, allowing eligible taxpayers to immediately expense up to $1.5 million of capital asset additions amongst their associated group per taxation year. The $1.5 million is prorated for short taxation years, and no carryforward is available if the $1.5 million is not used in a particular year. These rules were passed into legislation on June 23, 2022, when Bill C-19 received Royal Assent.
To be eligible for immediate expensing, the taxpayer must be:
- A Canadian-controlled private corporation (CCPC) throughout the year;
- An individual (other than a trust) who was resident in Canada throughout the year; or
- A Canadian partnership, all of the members of which were CCPCs or Canadian resident individuals throughout the year.
The temporary measure that allowed Canadian Controlled Private Corporations (“CCPC”) to immediately expense certain capital property acquired on or after April 19, 2021, and that became available for use before 2024 will end as of December 31, 2023.
Non CCPC’s will be able to take advantage of the Immediate Expensing rules for an additional year.
Capital Cost Allowance (“CCA”): Accelerated Investment Incentive
In the 2018 Fall Federal Budget, The federal government introduced an Accelerated Investment Incentive (AII) for eligible capital property acquired after November 20, 2018, and available for use before 2028. This incentive allows businesses that purchase capital property to claim a larger tax deduction in the year of acquisition, thus reducing the taxpayer’s taxable income. The introduction of AII changed two major parts of the CCA calculation for first year acquisitions:
- The existing CCA half-year rule is suspended; and
- A rate of one-and-a-half times applies to net capital property additions in the acquisition year.
Pre 2024 Rules
Under the 2018 rules, newly acquired property, normally subject to the half-year rule, would qualify for CCA equal to three times the regular CCA deduction in the first year of use and newly acquired property, not normally subject to the half-year rule, will qualify for CCA equal to one-and-a-half times the regular CCA deduction in the first year of use.
Accelerated Investment Incentive – Phase-out period
The AII phase-out period begins in 2024 and ends in 2027.
For property normally subject to the half-year rule that becomes available for use between 2024 and 2027, the half-year rule is suspended. This results in the taxpayer qualifying for CCA on the net addition equal to two times the regular CCA deduction for assets acquired during the phase-out period. For property that is not subject to the half-year rule that becomes available for use during the 2024-2027 phase-out period, the CCA deduction for the newly acquired property will be one-and-a-quarter times the regular first year CCA deduction.
Manufacturing and processing (M&P) and Clean Energy Equipment
Like the Accelerated Investment Incentive, a phase-out period for these categories of property will be applied if the property is acquired and available to use after 2023.
- The first-year deduction will be reduced to 75% for assets that become available for use in 2024 and 2025.
- It will be further reduced to 55% for assets ready to use in 2026 and 2027.
- From 2028 onwards, there will be no enhanced CCA rate applied to asset acquisitions in these specified classes.
Zero-Emissions Vehicles (ZEV) and Equipment
For all CCA classes, a phase-out period begins in 2024. The first-year enhanced deduction will be reduced to 75% for assets that become available for use in 2024 and before 2026, and it will be further reduced to 55% for assets ready to use in 2026 and before 2028. From 2028 onwards, there will be no enhanced CCA rate applied to asset acquisitions in classes 54, 55, and 56.