Roughly one year after U.S. tax reform, the Department of Finance has introduced amendments to Canada's income tax laws aimed at encouraging investment in Canada. The proposed changes included in the Fall Economic Statement released on November 21, 2018, fall under three main headings:
The proposed legislative amendments accelerate the deductibility of various capital expenses and are generally temporary in nature, having effect for investments made after November 20, 2018, and before 2024, with reduced incentives for investments made after 2023 and before 2028.
The Income Tax Act (Canada) (the "Act") generally allows taxpayers to deduct a portion of the cost of depreciable property from their business or property income as a "capital cost allowance" ("CCA"). Under the CCA system, the costs of depreciable properties are pooled into various CCA classes and deductible at a rate per year generally estimated to equate to the useful life of the properties in each class, typically on a declining balance basis.
Most CCA classes are subject to the "half-year rule", which limits the CCA a taxpayer can deduct in the year a property first becomes available for use to half the amount otherwise deductible. The Accelerated Investment Incentive announced in the Fall Economic Statement modifies the current half-year rule to allow taxpayers to deduct CCA faster to increase the attractiveness of making capital investments in Canada.
The proposed definition of "accelerated investment incentive property" includes property acquired by a taxpayer after November 20, 2018, that becomes available for use before 2028, but excludes property that has been used, or acquired for use, for any purpose before it is acquired by the taxpayer, unless both of the following are true:
The current half-year rule is incorporated into the new half-year rule and will continue to apply for property that is not accelerated investment incentive property. As a result, the half-year year is expected to return to normal after 2027.
The Accelerated Investment Incentive will generally apply to accelerated investment incentive property belonging to all CCA classes, with the exception of property belonging to Class 53 (manufacturing and processing machinery and equipment) and Classes 43.1 and 43.2 (clean energy equipment), which are discussed below. The costs of Class 43.1, 43.2 and 53 property will generally be fully deductible in the year the property first becomes available for use if acquired and brought into use after November 20, 2018, and before 2024.
The Accelerated Investment Incentive increases the CCA a taxpayer can deduct in the year a property first becomes available for use. For CCA classes currently subject to the half-year rule, the Accelerated Investment Incentive will essentially triple the CCA a taxpayer may deduct in the year the property first becomes available for use, if that year is before 2024 and the property was acquired after November 20, 2018. After 2023 and before 2028, this incentive is reduced to effectively suspend the half-year rule which will result in twice the CCA deduction currently available in the year a depreciable property first becomes available for use.
For CCA classes not currently subject to the half-year rule, the Accelerated Investment Incentive will essentially allow taxpayers to deduct 1.5 times the current first year CCA deduction if the property was acquired after November 20, 2018, and first becomes available for use before 2024, and 1.25 times the current first year CCA deduction if the property first becomes available for use after 2023 and before 2028.
The following table demonstrates how the Accelerated Investment Incentive impacts the CCA deduction available in a year a property first becomes available for use, assuming a 20% CCA rate:
| |
Date Property First Becomes Available For Use | ||
| CCA Class | Before Nov. 20, 2018, or after 2027 | After Nov. 20, 2018, before 2024 | After 2023, before 2028 |
| Currently Subject to Half-Year Rule | 10% | 30% | 20% |
| Not Currently Subject to Half-Year Rule | 20% | 30% | 25% |
The Accelerated Investment Incentive also accelerates the deductibility of Canadian development expenses ("CDE") and Canadian oil and gas property expenses ("COGPE") incurred after November 20, 2018, and before 2028. CDE and COGPE are tax pools relevant to Canada's natural resource sector. Drilling and completion costs are generally included in CDE and deductible at a rate of 30% per year, on a declining balance basis, whereas COGPE generally includes intangible costs associated with the acquisition of Canadian resource properties and is deductible at a rate of 10% per year, also on a declining balance basis.
The proposed definitions of "accelerated CDE" and "accelerated COGPE" effectively allow taxpayers to claim an additional 15% deduction for new CDE, and an additional 5% deduction for new COGPE for taxation years that end before 2024 when such CDE or COGPE was incurred after November 20, 2018. The acceleration is reduced to 7.5% for new CDE and 2.5% for new COGPE for taxation years that begin after 2023 and end before 2028. Successored expenses, and costs in respect of Canadian resource properties acquired not at arm's length, will not qualify for treatment as accelerated CDE or accelerated COGPE.
| Deductions Available for Newly Incurred CDE and COGPE | |||
| Tax Pool | Before Nov. 20, 2018, or after 2027 | After Nov. 20, 2018, before 2024 | After 2023, before 2028 |
| CDE | 30% | 45% | 37.5% |
| COGPE | 10% | 15% | 12.5% |
While the Accelerated Investment Incentive allows taxpayers to deduct expenses earlier, it will not affect the total amounts taxpayers can deduct over time. Rather, the accelerated first year deductions are offset by smaller deductions in subsequent tax years.
Currently, machinery and equipment acquired by a taxpayer after 2015 and before 2026 primarily for use in Canada in the manufacturing or processing of goods for sale or lease qualifies for an accelerated 50% CCA rate under Class 53 on a declining balance basis, subject to the half-year rule. Under the current rules, manufacturing and processing machinery and equipment acquired after 2025 will be included in Class 43 and qualify for a 30% CCA rate.
As part of the formula for the new half-year rule, the Department of Finance has introduced new rules that will effectively provide a 100% deduction for manufacturing and processing machinery and equipment acquired after November 20, 2018, that first becomes available for use before 2024. For manufacturing and processing machinery and equipment that first becomes available for use after 2023 and before 2028, the enhanced CCA deduction will gradually be phased out.
Currently, the cost of clean energy equipment is generally deductible at a 30% CCA rate under Class 43.1, unless the equipment qualifies for an accelerated 50% CCA rate under Class 43.2 if acquired after February 22, 2005, and before 2025.
Following the Fall Economic Statement, the cost of clean energy equipment, whether included in Class 43.1 or 43.2, will effectively be 100% deductible in the year the equipment first becomes available for use if acquired after November 20, 2018, and before 2024. As is the case for manufacturing and processing machinery and equipment, the enhanced CCA deduction will gradually be phased out for clean energy equipment that first becomes available for use after 2023 and before 2028.
The Department of Finance announced that the Government intends to amend the Act to make non-profit news organizations eligible to receive charitable donations and issue charitable receipts. No draft legislation was included in the Fall Economic Statement to effect this change, but the Department of Finance indicated that the change will be made by introducing a new category of qualified donee.
The Government also announced its intention to extend the 15% mineral exploration investment tax credit for an additional five years. This credit is generally available for "grass roots" mineral exploration and was scheduled to expire on March 31, 2019, but will now remain in effect until March 31, 2024.