CCPCS can immediately expense certain depreciable property

May 13, 2021 BDO CANADA

As part of the federal government’s aim to boost business investment, the 2021 budget proposed a new temporary measure to allow Canadian-controlled private corporations (CCPCs) to immediately expense up to $1.5 million of eligible property in each year from 2021 to 2023. The enhanced deduction targeted at CCPCs is not limited to specific sectors and is meant to free up capital for businesses to invest in assets that drive growth.

The proposed rules

The new temporary measure would allow CCPCs to immediately expense certain capital property acquired on or after April 19, 2021 and that becomes available for use before Jan. 1, 2024. Immediate expensing would be available only in the year in which the eligible property becomes available for use. Where an eligible property is immediately expensed, the half-year rule would not apply.

$1.5 million limit

The immediate expensing measure has a limit of $1.5 million per taxation year that must be shared among associated members of a group of CCPCs. Where a CCPC incurs less than $1.5 million of eligible capital costs, there is no opportunity to carryforward the excess capacity. The limit would be prorated for short taxation years.

What properties are eligible?

For purposes of this new measure, eligible property generally includes all depreciable capital property, other than property included in capital cost allowance (CCA) classes 1 to 6, 14.1, 17, 47, 49 and 51. These exceptions generally pertain to long lived assets, such as buildings and certain structures, and unlimited life intangibles including goodwill.

Immediate expensing would generally only be available on eligible property that:

  • Was neither previously owned by the taxpayer or a non-arm’s length person
  • Has not been transferred to the taxpayer on a tax-deferred rollover basis

Interactions with other existing deductions

CCPCs that have more than $1.5 million in eligible property that becomes available for use in a year would be allowed to choose which CCA class the immediate expensing would apply to and any excess capital cost would be subject to the normal CCA rules.

It’s important to know that the availability of existing enhanced deductions, such as the full expensing of manufacturing and processing machinery and equipment and clean energy equipment, would not reduce the $1.5 million limit under this new immediate expensing measure.

On the other hand, the existing provisions that can restrict a CCA claim in certain situations would continue to apply, such as rules pertaining to specified leasing properties, specified energy properties, rental properties and limited partners.

Example

In an example provided by the government, a CCPC invests $2,000,000 in equal amount for two properties, one falling under CCA Class 7, and the other under Class 10. Under the proposals, the CCPC would be allowed a total first year CCA deduction of up to $1,725,000 compared to $675,000 under the existing rules. This would represent an additional deduction of $1,050,000 in the first year, as summarized below.

Example Provided by the Government
CCA Class (rate) Cost of Acquisitions Immediate Expensing First Year CCA on Remainder of Class* Total First Year CCA First Year CCA under Existing Rules*
Class 7 (15%) 1,000,000 1,000,000 - 1,000,000 225,000
Class 10 (30%) 1,000,000 500,000 225,000 725,000 450,000
Total 2,000,000 1,500,000 225,000 1,725,000 675,000
* Assuming eligible for the existing enhanced CCA under the Accelerated Investment Incentive

Understanding the benefit

The proposed rules do not change the total amount of CCA that may be claimed in respect of an asset. Rather, the new measure accelerates the rate at which CCA can be claimed on eligible property for tax purposes by allowing the immediate expensing of eligible property in the year that property becomes available for use. This would have the effect of reducing taxable income in that first year but since the full amount has been expensed, no CCA would be available in respect of that asset in subsequent years. As such, the main benefit of the new measure for CCPCs is tax-deferral.

Planning points to remember

When it comes to tax planning for your CCPC, the new measure highlights several points you should keep top of mind:

  1. Time your eligible property purchases

    There is no ability to carryforward an amount of the $1.5 million limit that is not used in a particular year. Where possible, it would be advisable to manage the timing of when eligible property acquisitions are made by your CCPC. The objective would be to maximize your CCPC’s ability to benefit from the immediate expensing proposal.

  2. Choose to immediately expense eligible property in classes with the lowest CCA rate

    If your CCPC acquires eligible property in excess of the $1.5 million limit in a taxation year, you can select which CCA classes the immediate expensing measure is applied to. The excess capital cost would then be subject to the normal CCA rules. As such, you should choose to immediately expense the capital cost of eligible property acquisitions in CCA classes with the lowest rates first in order to maximize your overall CCA deduction for the year. Also, remember that existing enhanced CCA deductions, such as the full expensing of manufacturing and processing machinery and equipment, continue to be available and would not impact your $1.5 million limit.

  3. Optimize the allocation of the $1.5 million limit to CCPCs within an associated group

    Since the $1.5 million limit needs to be shared by members of an associated group of CCPCs in each of the relevant years, certain factors including the amount of taxable income and tax rates applicable to each CCPC, as well as the CCA classes and rates of eligible property acquisitions, should be considered when determining an allocation.

  4. Stay informed of developments

    The federal government has not yet released legislation to implement the new measure. To fully understand and benefit from the new proposals, your BDO advisor can keep you apprised of new developments and make sense of the implications for you and your CCPC.

Reach out today to learn more.

Dave Walsh, Managing Partner, Tax Service Line

Rachel Gervais, Partner, GTA Tax Service Line Leader

Greg London, Partner, Eastern Canada Tax Service Leader, Canadian Tax

Bruce Sprague, Partner, Western Canada Tax Service Leader


The information in this publication is current as of May 12, 2021.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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