June 28, 2021 by Luther VanGilst

New tax savings for farmers buying capital assets

Farmers who are thinking of buying a major capital asset like machinery or equipment may soon see significant tax savings. In the 2021 federal budget, important changes were proposed to the capital cost allowance rules. Before these changes were introduced, capital assets were depreciated according to their class. For example, if a farmer purchased a Class 10 tractor or combine, the capital cost allowance on that asset in the year of purchase was 45 per cent. However, the new rules no longer organize assets by class, instead allowing farmers to fully expense capital assets up to $1.5 million in the year of purchase.

This applies to certain assets purchased on or after the budget date (April 19, 2021), and will remain available for assets purchased before Jan. 1, 2024. In other words, corporations can automatically write off $1.5 million of equipment in each of the next three tax years (2021, 2022 and 2023), regardless of the traditional capital cost classification of those assets.

Additional tax savings

If a farmer is considering replacing a major piece of equipment, the new rules ensure additional tax savings right off the bat, to help fund the purchase. If a farmer purchases a $500,000 combine, the new rules increase the available write-off from $225,000 to $500,000. If the farmer is paying 15 per cent corporate tax, the extra $275,000 write-off will result in $41,000 of additional tax savings. For larger farms – which aren’t eligible for the small business deduction – the tax rate is closer to 25 per cent, which means tax savings on a $500,000 combine will be closer to $69,000.

Qualifying assets

Both new and used equipment is eligible for this opportunity, but some capital cost allowance classes are excluded. For example, buildings (Class 1 and 6) and quota (Class 14.1) do not qualify. However, other examples – including tillage and planting equipment (Class 8) or tractors, combines and other self-propelled equipment (Class 10) – that don’t usually qualify for a full write-off do in this case.

Choosing where to take your write-off

If you have a farm with purchases that exceed the $1.5 million annual limit, you can choose where to take the immediate write-off. If you buy $2 million of Class 10 equipment and $1 million of Class 8 equipment that would normally have a lower write-off, you will see the most savings if you immediately write off the complete Class 8 purchase and top it off with $500,000 that would normally go in Class 10. This will give you the highest write-off possible on these purchases.

Lease or purchase?

If you are currently deciding whether to lease or purchase a piece of equipment, this new opportunity can steer that decision toward purchase because the tax advantage is far greater. With a lease, the write-off is spread over the number of years you’re making payments, but with a purchase, you get the full write-off at the outset. Unfortunately, supply chain slowdowns have made it more difficult to buy farm machinery, so you may have to wait before making this purchase. Luckily, these new rules apply until the end of 2023, so you should have plenty of time to take advantage of this opportunity.

Meet the Author

Luther VanGilst Luther VanGilst
Winchester, Ontario
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