Canadian farmers and agribusinesses should benefit from the Accelerated Investment Incentive announced in last year’s Fall Economic Statement.
The incentive will allow businesses to write-off capital expenditures faster in the year of acquisition. When we write off or depreciate equipment for income-tax purposes, it’s called a capital cost allowance (CCA).
There are generally different incentives based on the following categories of capital assets:
- Manufacturing and processing (M&P) investments
- Other capital investments (non-M&P)
- Clean energy investments
The incentives provide for an enhanced CCA on equipment purchases, regardless of whether the equipment is new or used. However, the incentive isn’t available if you purchase the equipment from a non-arm length person or when the property is acquired in a tax-deferred transfer.
Below, we discuss the details of the incentive for M&P and non-M&P equipment purchases.
For M&P equipment purchased after Nov. 20, 2018 and available for use before 2024, the tax deduction available in the year of purchase will be 100% of the cost.
For purchases in the years 2024 through 2027, the write-off in the year of purchase is 75% of the cost for the years 2024 and 2025, and then 55% of the cost for years 2026 and 2027.
The following example released by the government shows how immediate expensing will benefit manufacturers and processors:
Alex owns a small winery, Sommelier Inc. She has been hoping to expand her business by increasing her capacity for fermentation and storage. The equipment Alex needs will cost $200,000. Prior to the introduction of immediate expensing for machinery and equipment used in manufacturing and processing, Alex would have been able to deduct $50,000 from her $250,000 business income in the year, leaving her with $200,000 in taxable income. Under the new investment incentive, she will be able to write off the full cost of the new equipment, leaving her with taxable income of just $50,000. In addition, all of Sommelier Inc.'s income will benefit from the small business tax rate reduction from 10.5% to 9%, as of Jan. 1, 2019. Overall, these measures will provide Alex with federal tax savings of $16,500 in the year her investment is made.
For the most part, equipment purchases made by farmers will be non-M&P because farming isn’t considered manufacturing or processing under the federal income tax rules. The incentive for these purchases is that they will be eligible for three times the normal tax deduction through an additional CCA in the year of acquisition when the property is available for use.
For property acquired and available for use after Nov. 20, 2018 and before the year 2024, the enhanced CCA write-off will be three times the normal tax deduction.
Property acquired and available for use after the year 2023 and before 2028 will be eligible for an enhanced CCA of two times the normal tax deduction.
For example, you purchased and took possession of an air seed drill for $100,000. Before the new incentive, your normal tax write-off in the year of purchase would be $10,000. Under the Accelerated Investment Incentive, you will be able to write off $30,000 in the year of purchase. You will get this enhanced write off if you purchase the seed drill before the year 2024. If it’s purchased after 2024 and before 2028, the write-off in the year of purchase will be $20,000.
The following example released by the government shows how other farmers will benefit:
Grain Farm, an oilseed and wheat producer, will benefit from the Accelerated Investment Incentive as it renews its fleet of aging tractors and combine harvesters for $2 million. In addition to increased efficiency and lower operating costs from the technological advances incorporated into the new equipment, Grain Farm will be able to deduct $900,000 for tax purposes in the first year the equipment is used, compared with $300,000 without the Accelerated Investment Incentive, or about $160,000 in federal-provincial tax savings. These tax benefits can be invested to enable Grain Farm to expand its acreage under production and increase exports of products to Asia and South America.
How BDO can help
A number of agriculture businesses choose BDO due to our industry experience. Contact us to find out how we can help your business succeed.