Canada Introduces New Accelerated Capital Cost Allowance Incentives

On November 21, 2018, the Department of Finance Canada (“Finance”) released the 2018 Fall Economic Statement (the “Statement”).[1] In a clear response to the lowering of the corporate tax rate (and other corporate tax measures) in the United States, Finance introduced new measures that will lower the tax otherwise payable by some corporations in Canada. However, Finance did not lower corporate taxes by lowering the actual tax rates. Rather, the proposed changes will allow corporations to accelerate the tax depreciation of certain capital investments, thus lowering their effective corporate tax rate (at least in the earlier years).

Finance proposed changes that will allow businesses to: (i) immediately write off the cost of machinery and equipment used for the manufacturing or processing of goods; (ii) immediately write off the full cost of specified clean energy equipment; and (iii) rely upon an accelerated investment incentive (the “AII”), which will allow all businesses, making capital investments, to claim an accelerated capital cost allowance (i.e., a business will be permitted to deduct larger amounts of depreciation expenses sooner rather than later).

According to Finance, the AII effectively triples the current first-year capital cost allowance (“CCA”) rate for all tangible capital assets (and some intangible capital assets, including patents and other intellectual property). The AII applies to capital property except property in class 53 (manufacturing and processing equipment), and classes 43.1 and 43.2 (clean energy equipment).[2] Instead, the new full expensing measures will apply to these classes (as discussed below). The AII will have two key implications.

First, the AII will “suspend” the half-year rule in respect of AII property. In the first year that a taxpayer uses an asset, the half-year rule generally provides that a taxpayer may only add half of the asset’s capital cost to the undepreciated capital cost of the asset’s class for purposes of determining the maximum amount of the CCA deduction (the other half of the asset’s capital cost is added to the undepreciated capital cost of the class in the following year). Instead, the AII provides that, in the first year of using an asset (i.e., an AII property), a taxpayer may add the full amount of the asset’s capital cost to the undepreciated capital cost of the asset’s class.