The Canadian Accelerated Investment Incentive is a new set of rules for writing off business investments in depreciable property to reduce the taxes a business pays. These new rules are designed to encourage investment in Canadian businesses by making it more desirable to purchase anything from new farm equipment to new manufacturing and processing machinery.
This program is only available for a limited period of time. It only applies for purchases made after November 20, 2018, and becomes available for use before 2028. In 2024, the program will begin to be phased out until 2027.
What is the Accelerated Investment Incentive?
The main incentive of this program is that it allows businesses to write off more of the cost of their depreciable property in the first year of purchase. The program does this by expanding on existing capital cost rules. Certain classes of purchases have a prescribed capital cost allowance rate which businesses are allowed to use to expense the purchase on their taxes. This program increases the net addition to the class by up to one and a half times for the year.
In effect, this makes the tax deductions more immediate for businesses. Thus they recover the cost if investment sooner, encouraging them to invest more.
What is the Half Year Rule?
Under the Accelerated Investment Incentive, the half-year rule has been suspended (temporarily). However, it may still benefit you to understand this rule for when it comes back into effect.
The Canada Revenue only allows 50% of the cost of eligible property in the first year it was purchased. The specific capital cost allowance rate is determined by the CCA class the property belongs to.
Under this program, the federal government has made it so that eligible property previously subjected to the half-year rule will now get a first-year deduction that is up to three times larger than they may have otherwise.
Full Expensing for Certain Sectors of the Economy
Also, under the Accelerated Investment Incentive businesses can immediately write off the full cost of specific purchases; manufacturers and processors, and clean energy investments, have full expensing ability under this incentive. Any business making equipment and clean energy purchases may also be able to write off the full cost of these investments in the year of purchase.
Specifically, the CCA classes which will benefit from full expensing are 43.1, 43.2 and 53.
Which Capital Cost Allowance Classes are Included in the Program?
Even capital cost allowance classes which have CCA rates calculated on a declining balance are affected by the Accelerated Investment Incentive. However, the incentive does reduce the undepreciated capital cost available in subsequent years, as you have less value to draw on.
Capital cost allowance classes which are calculated with a straight-line depreciation are also affected by the Accelerate Investment Incentive. In fact, the incentive does not reduce the amount you can claim in subsequent years for this property type until you have claimed the full cost (which is when the undepreciated capital cost is exhausted). The same thing goes for certain resource-related assets and other properties depreciated on a unit-of-use basis.
How Does the Accelerate Investment Incentive Effect My Deductions in Subsequent Years?
It is important to understand that you still cannot deduct more than the total cost of the eligible property under this program. Therefore, it is important to plan for lower tax deductions from your property purchases in subsequent years after the purchase year.
For example, if your business purchases $50,000 of eligible equipment in 2020, you will be able to deduct a much larger portion of this cost upfront in the year of purchase. Where previously you may have been able to claim $5,000, now you may be able to claim $15,000.
However, this means that you only have $35,000 of costs left in this equipment purchase after the first year, where previously you would have had $45,000. If you are able to deduct the same amount you would have each year without the Accelerated Investment Program, you will then be able to deduct the cost for fewer years, as the total value of the purchase will run out faster.
If, on the other hand, the amount that you can deduct each year is reduced by the Accelerated Investment Program (because of the capital cost allowance class of your eligible property) then you may be able to deduct the cost for the same amount of years as you would have before the program, the amount will be smaller.
No matter how long you will be deducting the cost of your business purchase, you could recover more of the cost sooner with this incentive, enabling further investment of your money back into your business.