When the most recent federal budget was released on April 19, 2021, it was announced that CCA rates will change for farm businesses that are Canadian-controlled private corporations (CCPC). Under this announcement, CCPCs would be entitled to immediately expense their capital purchases when they calculate their income for tax purposes. However, it is important to realize that this has not been yet brought into legislation and with the recent federal election results, it remains to be seen whether this will come into effect.

Prior to 2018, any capital property purchased by incorporated or non-incorporated farms was put into defined CCA classes. Based on those classes, there was a defined CCA rate that determined how much these businesses could deduct when calculating their income for tax purposes.

For example, a mobile piece of equipment like a tractor would be in CCA Class 10 and you could depreciate up to 30 per cent of that pool per year. Under the old rules, farm businesses could only claim half that amount in the year of purchase, so you only got half of the defined CCA rate (15 per cent in the example above), whether you made the purchase on Jan. 2 and had it available for an entire year, or Dec. 30 and only had it available for one day. However, this changed on Nov. 21, 2018 when the CRA introduced the Accelerated Investment Incentive.

Accelerated Investment Incentive

Under the accelerated investment rules, an enhanced first-year allowance was made available. This meant businesses could claim the full amount of a purchase’s depreciation rate for its class, but also an additional half of that amount. In essence, this meant you were able to claim three times the amount of depreciation you would be able to claim under the traditional first-year rules.

In the example above, if you purchased a Class 10 tractor which would normally have a 30 per cent CCA rate, the traditional first-year write-off of 15 per cent increased to 45 per cent. On budget day 2021, additional changes were made. Under these new rules, farm corporations can immediately expense an entire purchase – a 100 per cent write-off on eligible capital depreciable property. These new rules are only applicable for farm corporations. Sole proprietors and partnerships do not get the full write-off.

What qualifies?

Under the new rules, only Canadian-controlled private corporations can immediately expense all depreciable capital property, with the exception of property normally included in Classes 1-6, 14.1, 17, 47, 49 and 51. These exclusions include long-lived assets such as buildings, bins, pipelines and pipeways. For farm corporations, most qualifying property is equipment normally in Class 8, mobile equipment in Class 10, highway equipment in Class 16 and computer equipment in Class 50. Only assets purchased after April 19, 2021 and before 2025 qualify for the full deduction. While these purchases must be new to the farm, they do not have to be brand new. In other words, a used piece of equipment could qualify if it is new to your corporation and purchased in an arm’s length manner.

Optional inventory adjustments

In Saskatchewan, there is a provincial rate reduction where income eligible for the small business deduction would normally be taxed at 11 per cent, but as a result of the provincial rate reduction, the tax rate is 9 per cent for 2021. In any province where this kind of reduction is in effect, it would be wise to claim the full amount of the depreciation available, then bump up your income to the top of the income eligible for the small business deduction by using optional inventory. This adjustment will give you a greater deduction for future years as your tax rate increases. Claiming as much as you can in terms of depreciation is a valuable opportunity, as it creates a higher optional inventory adjustment for future years.

Potential for recapture

If you take advantage of immediate expensing, you’re getting a much quicker write-off, but it’s important to realize you’re not getting additional write-offs throughout the lifetime of the asset. In essence, you’re simply getting the write-off sooner. However, there are some other significant implications. For example, if you write off the full amount now and sell that piece of equipment in later years, that could give rise to recapture of income. This depends on the other assets you have, but it’s worth keeping in mind.

Meet the Author

Ryan Kitchen
Yorkton, Saskatchewan
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