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July 8, 2019 by Thomas Blonde

The new rules surrounding capital cost allowance

In your farming business, you are likely to acquire depreciable property such as buildings or equipment. Since this property wears out or becomes obsolete over time, you can deduct the cost of each item over a period of several years in an annual deduction known as the capital cost allowance (CCA). For example, before recent changes to the rules, you would receive half of the 30 per cent CCA in the first year after purchasing a Class 10 asset (e.g., a self-propelled vehicle). If you bought a tractor that cost $100,000, you would receive a $15,000 write-off in the first year. In subsequent years, that 15 per cent would increase to 30 per cent of the remaining balance.

Recent tax changes in the United States allow businesses to write off capital assets faster than they could in the past. In order to keep our tax system competitive, the Canadian government announced a similar change to the CCA rules. Rather than cut the CCA in half for the first year, an additional 50 per cent was added to the base eligibility. In the aforementioned Class 10 asset example, the 15 per cent available in the first year (a $15,000 write-off) would become 45 per cent (a $45,000 write-off). In subsequent years, the amount remains unchanged at 30 per cent of the remaining balance. In light of these new rules, here are some key considerations for farmers to keep in mind.

Limited time only

This enhanced CCA is only available for a short period of time. It will apply to any capital asset purchased between Nov. 21, 2018 and Dec. 23, 2023. From the end of this window to Dec. 31, 2027, there will still be an enhanced CCA, but it won’t be as lucrative. In the case of Class 10 assets, the write-off amount in the first year (and subsequent years) will be 30 per cent, rather than 45 per cent. With this in mind, it would be advantageous to make any major capital asset purchases before Dec. 23, 2023.

100 per cent write-offs

While a larger first-year CCA write-off is cause for excitement, you still only have the opportunity to write off a percentage of what you’re spending. However, there are other opportunities available that allow for a 100 per cent write-off (e.g., prepaying expenses and tile drainage). Before you rush into making a capital asset purchase for tax savings, make sure you take advantage of these other opportunities.

Preparing for year-end

If you’re close to your year-end and have already exhausted other ways to reduce your tax bill, you could proceed with the purchase of an expensive capital asset you were planning for the future. This could offset any additional income with a sizeable CCA write-off in that first year, especially if you’re purchasing a big-ticket item like a combine. Even if you’re 100 per cent financing this big-ticket item and making payments over a period of five or 10 years, you would still receive the full 45 per cent write-off in the year you purchase a Class 10 asset.

Deferring tax vs. absolute tax savings

Most incorporated farmers have a flat rate of tax from zero income to $500,000. Many of these measures are essentially tax deferrals, not absolute tax savings. If your income this year is $200,000 and you spend $100,000 to bring that down $100,000 and your income next year is $200,000 again, you’re going to pay the same percentage of tax. By taking advantage of the accelerated CCA opportunity and other opportunities to write off expenses faster (e.g., prepaying expenses), you’re only deferring tax until a later year, at which point you’ll pay that same rate of tax. A corporation would only experience an absolute tax savings if a higher tax rate applies, which usually doesn’t occur until its income exceeds $500,000.

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Thomas Blonde Thomas Blonde
Elora, Ontario
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