Capital Cost Allowance And The Current Incentives

Canadian businesses use depreciable capital assets, such as machinery or equipment, in their operations. As businesses age, new capital property must be acquired to improve processes or to replace old assets at the end of their useful life. As a community, Grande Prairie will continue to experience strong growth and innovation by continuing to reinvest in these capital assets.  Capital investment is often a decision that not only improves business performance but can also provide significant tax deductions through the Capital Cost Allowance (CCA) on eligible property. Below we explore why investing in capital property now can provide a significantly higher first-year deduction. 

Capital Cost Allowance or Depreciation?

CCA is the income tax deduction assigned by the CRA to a depreciable asset over its useful life. Taxpayers must follow the methodology outlined in the Income Tax Act to determine the depreciation expense for tax purposes. The total cost of the depreciable property is deducted over the asset’s useful life by tracking the Undepreciated Capital Cost (UCC), or the balance of the capital cost not yet depreciated until the property is fully depreciated for tax purposes or sold. Depreciation in accounting is an expense calculated based on Canadian accounting rules but is added back to taxable income before the CCA is deducted for income tax purposes.

Calculating CCA

CCA rates are calculated based on the rates assigned to a property class and properties belonging to the same class receive a specific CCA rate. These classifications can be challenging to determine as they depend on multiple factors such as asset type, cost to acquire, when the asset was acquired, and its use. Consult the CRA website or speak with your accountant to determine your asset class and its CCA rate.   Some property is subject to a half-year rule in the year of acquisition. This means that the CCA is calculated at half the capital cost in the first year. 

Accelerated Investment Incentive

The Canadian government created the Accelerated Investment Incentive (AII) in 2018 to help stimulate the economy by encouraging investment in new capital property by Canadians. The AII allows businesses that purchase capital property to claim a larger tax deduction in the year of acquisition by changing two significant parts of the first-year CCA calculation:

1. CCA half-year rule is suspended
2. A CCA rate is multiple by 1.5 

This means that in the assets’ first year of use, those subject to the half-year rule, qualify for a CCA at three times the regular CCA deduction. Assets not ordinarily subject to the half-year rule can claim a CCA at one-and-a-half times the regular CCA. The total amount of CCA deductible over the asset’s life not does change, just the amount claimed in the first year. The Accelerated Investment Incentive only applies to property acquired after November 20, 2018, and available for use before 2028, with a phase-out period beginning in 2024. Furthermore, the asset would not be eligible for the AII if the asset:  

1. Was previously owned by a person who deals with the business at an arm’s length capacity
2. Has been transferred via a tax-deferred rollover
3. Is from Class 43.1, 43.2, or 53 

In 2024, the AII phase-out period begins. Asset classes subject to the half-year rule will continue to benefit from its suspension. For those asset classes not subject to the half-year rule, the CCA rate is multiplied by a factor of 1.25. Therefore the full benefits of the AII incentive are only available until the end of 2023 but other CCA incentives exist for specific asset classes. 

Manufacturing & Processing and Clean Energy Equipment

In the Fall 2018 Economic Statement, the Canadian Government introduced incentives for Manufacturing & Processing (M&P) and clean-energy equipment. Class 53 M&P equipment and Class 43.1 or 43.2 clean energy equipment are eligible for a 100 percent CCA rate in the first year of use.  A phase-out period is applied after 2023 as follows:

• 2024 & 2025
  • The first-year deduction is 75 percent 
• 2026 & 2027
  • The first-year deduction is 55 percent 
• From 2028 
  • No enhanced CCA rate applies 

Zero-Emissions Vehicles and Equipment

To encourage the use of eligible zero-emission vehicles and equipment aimed at reducing Canada’s greenhouse gas emissions, three new CCA asset classes were created following the 2019 Federal Budget and Bill C-20 in 2021. The new asset classes include an enhanced 100% first-year CCA deduction until the end of 2023 with a capital cost limit of $55,000 for Class 54 assets, described as highway vehicles included in Class 10 or 10.1.   A phase-out period begins in 2024 as follows:

• 2024 & 2025
  • The first-year deduction is reduced to 75 percent 
• 2026 & 2027
  • The first-year deduction is reduced to 55 percent 
• From 2028 
  • Standard deduction applies

So what do we at McNabb Lucuk LLP recommend to our Grande Prairie and area clients? Simply put, if you’ve had a strong 2023, acting on capital investment opportunities now could provide you with a greater first-year capital deduction if the expense can be put to use before the end of the calendar year. If you can’t wait until the new year, you still have an opportunity to take advantage of CCA capital cost incentives during the respective phase-out periods. If you have any questions on capital asset classes and allowance rates, contact your accountant or call us, we’d be happy to help.