Immediate expensing: buyer beware
As part of the federal government’s economic recovery plan, Budget 2021 proposes new measures that provide Canadian-controlled private corporations (CCPCs) the ability to immediately expense certain capital purchases acquired on or after April 19, 2021. The larger deduction is estimated to provide 325,000 businesses with $2.2 billion in income tax savings. These tax savings are anticipated to encourage small to medium-sized businesses to invest in assets that will improve their production, which will in turn create jobs and promote growth in the Canadian economy.
As a result of this measure, CCPCs will be able to expense certain capital investments eligible for the CCA regime up to a maximum of $ 1.5 million per year and per business (in the case of associated groups of companies, that amount would need to be shared by the member companies). These certain investments are assets thought to stimulate growth and create jobs, such as investments in production equipment and digital assets.
Immediate expensing is available only in the year in which the properties become available for use and only where they are acquired on or after April 19, 2021, and before January 1, 2024. Budget 2021 excludes longer-term asset additions, such as buildings and goodwill, from the immediate expensing rule by defining eligible property as all property included in the CCA regime “other than property included in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51 ….” Eligible property is estimated to be 60 per cent of all capital additions usually purchased by a CCPC.
Budget changes to the Income Tax Act do not take legal effect until the proposed changes have been included in a bill and granted Royal Assent. At this time, no draft legislation has been released by the Department of Finance related to these new immediate expensing rules and no legislation has been introduced by way of a bill. The delay is causing uncertainty for many Canadian businesses with year-ends after April 19, 2021, that invested in eligible property, as the tax filings are coming due in late 2021 and early 2022. In addition, the Canada Revenue Agency (CRA) has confirmed that it is not able to process the deductions for immediate expensing, and it has advised tax software providers that they should not release updates to allow them.
Without the supporting law and updated tax software for immediate expensing, there is concern that taxpayers may not have the ability to file amended tax returns if the related legislation is delayed further. The CRA takes the position that it will process an adjustment to an original filing only if the request is made within 90 days of the issuance of the Notice of Assessment if a taxpayer claimed less than the maximum CCA deduction available on the original filing. Corporations accelerating purchases for immediate expensing should consider this issue, as well as the risk that the proposal never becomes law, particularly given that the current federal government is a minority government.
During this time of uncertainty, it may be appropriate for businesses to delay filing corporate tax returns until the due date. If immediate expensing becomes law during this time, or within 90 days of the CRA issuing the related Notice of Assessment, the taxpayer should have access to the deduction. If opting to postpone filing, taxpayers should take extra care to ensure they do not miss the deadline. As well, taxpayers should continue to connect with their advisors at Baker Tilly for updates.
The purpose of immediate expensing is to promote growth in the Canadian economy by encouraging new investment by CCPCs. As businesses wait for clarity on these new measures, realization of that objective remains in limbo.
Overview of immediate expensing
The benefit
The $1.5 million immediate expensing does not change the lifelong deduction available to a corporation on investment in capital property. It allows a one-time large deduction in the first year, and subsequent smaller deductions of CCA in future years for the amounts in excess of the $1.5 million limit. The benefit is the value of the immediate tax expense compared to the present value of the future CCA deductions. In the example below, a corporation applying immediate expensing to an acquisition that would otherwise result in an addition to the CCA regime as a Class 8 asset with a 20 per cent declining balance deduction realizes savings of nearly $79,000.
|
Eligible for immediate expense |
Added CCA regime |
Savings of immediate expense |
|
|
Investment in Class 8 equipment |
$1,500,000 |
$1,500,000 |
|
|
Present value of tax savings* |
$435,000 |
$356,286 |
$78,714 |
|
*Assumes 29% corporate tax rate and 5% discount rate |
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Limitations and criteria
- The annual $1.5 million limit must be shared by the associated group of companies.
- Unused limit during a taxation year may not be carried forward to a future taxation year.
- To be expensed, the capital asset must be available for use in the year.
- CCA limitation rules applicable to limited partners, specified leasing properties, specified energy properties and rental properties will continue to apply.
- Used property acquired will not qualify if it was previously owned by a non-arm’s length person or was acquired by transfer on a tax-deferred rollover basis.
- The $1.5 million limit is prorated for taxation years that are shorter than 365 days.
Immediate expensing in combination with existing CCA provisions
- The $1.5 million limit will not be reduced if a taxpayer is also taking advantage of other enhanced deductions (i.e., enhanced deductions introduced in the 2018 Fall Economic Statement).
- If the asset addition exceeds $1.5 million, the $1.5 million expense will be realized in the first year and the remaining amount will be included in the CCA regime for depreciation in future years.
Planning opportunities
- For maximum benefit of the present value of the immediate expense, corporations having eligible property in excess of the $1.5 million limit should apply the immediate expense to assets with lower CCA rates (i.e., equipment in Class 8 subject to 20 per cent).
- If the $1.5 million limit for the year has been used and the $1.5 million limit will not be fully utilized in the following year, a corporation may want to consider delaying the acquisition of eligible property or delay making it available for use until the target year.
Contact your Baker Tilly advisor for more information and guidance.
Meet the Author
M. Ruphina Kaulback
Information is current to December 16, 2021. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.