Annex 3 - Accelerating Business Investment

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A portion of the capital cost of a depreciable property is deductible as capital cost allowance (CCA) each year, with the CCA rate for each class of property prescribed in the Income Tax Regulations.  With some exceptions, CCA deductions are claimed by class of property and are calculated on a declining-balance basis.

The CCA allowed in the first year that a taxpayer’s capital property is available for use is generally limited to half the amount that would otherwise be available in respect of that property (the “half-year rule”). This rule applies to the net addition to the class for the year (i.e., the amount by which acquisitions exceed dispositions). It is a simplifying provision that assumes capital property is, on average, acquired halfway through the year.

Accelerated Investment Incentive

First-year allowance

The Government proposes to introduce an Accelerated Investment Incentive to allow businesses in Canada to deduct the cost of their investments more quickly, thus increasing the attractiveness of making capital investments.

The Accelerated Investment Incentive will provide an enhanced first-year allowance for capital property that is subject to the CCA rules (referred to as “eligible property”), excluding certain property discussed in the Restrictions section below. The Accelerated Investment Incentive will also not apply to property in Classes 53 (manufacturing and processing machinery and equipment), 43.1 and 43.2 (clean energy equipment), which will rather be eligible for the full expensing measure introduced in this Statement.

The Accelerated Investment Incentive will effectively suspend the half-year rule (and equivalent rules for Canadian vessels and Class 13 property) in respect of eligible property. The allowance will then generally be calculated by applying the prescribed CCA rate for a class to one-and-a-half times the net addition to the class for the year. As a result, property currently subject to the half-year rule will, in essence, qualify for an enhanced CCA equal to three times the normal first-year allowance and property not currently subject to the half-year rule will qualify for an enhanced CCA equal to one-and-a-half times the normal first year allowance.

For example, prior to the introduction of the Accelerated Investment Incentive, a property in Class 8, which has a prescribed rate of 20 per cent, would be eligible for CCA of 10 per cent of the cost of the property in the year it becomes available for use, due to the half-year rule. Under the Accelerated Investment Incentive, the taxpayer will be eligible for CCA of 30 per cent of the cost of the property—that is one-and-a-half times the CCA calculated using the prescribed rate of 20 per cent or three times the 10-per-cent CCA that could otherwise be claimed in the first year.

Effect of the first-year allowance in the following years

The Accelerated Investment Incentive will not change the total amount that can be deducted over the life of a property—the larger deduction taken in the first year in respect of a property will eventually be offset by smaller deductions in respect of the property in future years.

Where CCA in respect of a property is calculated on a declining-balance basis, the Accelerated Investment Incentive will automatically reduce the deduction available in respect of the property in all subsequent years, as the undepreciated capital cost in the class, on which the CCA is calculated, will be reduced.

For CCA classes with straight-line depreciation, the ability of a taxpayer to claim the Accelerated Investment Incentive in respect of a property in a year will not affect the deduction available in respect of that property in any of the subsequent years, until such time as the undepreciated capital cost is fully exhausted. For example, where the prescribed rate of a class with straight-line depreciation is 20 per cent and there is only one property in the class, a taxpayer will be entitled to deduct 30 per cent (i.e., one-and-a-half times 20 per cent) of the capital cost of the property in the first year, 20 per cent in each of the second through fourth years and 10 per cent (i.e., the remainder) in the fifth year. 

Certain resource-related assets are depreciated based on unit of use, such that the amount of CCA that may be deducted in each year is generally based on the portion of the resource that is depleted in the year. For properties depreciated on a unit-of-use basis, the ability of a taxpayer to claim the Accelerated Investment Incentive in respect of a property in the first year will not affect the deduction available in respect of that property in any of the subsequent years until such time as the undepreciated capital cost is fully exhausted. For example, if a taxpayer uses 10 per cent of a resource in the first year, the taxpayer will be able to deduct 15 per cent of its capital cost in the first year and, thereafter, will be eligible to deduct the cost in proportion to the amount of the resource depleted in each year to a maximum of 100 per cent of the cost of the resource (such that the deduction in the final year(s) would be reduced). 

Application and Phase-Out

The Accelerated Investment Incentive will be available for eligible property that is acquired after November 20, 2018 and that becomes available for use before 2028, subject to a phase-out for property that becomes available for use after 2023.

For eligible property that would normally be subject to the half-year rule (or an equivalent rule) and that becomes available for use during the 2024-2027 phase-out period, the Accelerated Investment Incentive will effectively suspend the half-year rule (and equivalent rules). As a result, such property will qualify for an enhanced allowance equal to two times the normal first-year allowance.

For eligible property that would not normally be subject to the half-year rule (or an equivalent rule) and that becomes available for use during the 2024-2027 phase-out period, the enhanced allowance will be equal to one-and-a-quarter times the normal first-year allowance.

A taxpayer will be able to claim the enhanced allowance in respect of an eligible property only in the first taxation year that the property becomes available for use.

Short Taxation Years

Under the short taxation-year rule, the amount of CCA that can be claimed in a taxation year must generally be prorated when the taxation year is less than 12 months. When these rules apply, the Accelerated Investment Incentive will apply in respect of an eligible property on the same prorated basis and will not be available in the following taxation year in respect of the property.

Additional Allowances and other Deductions

The Accelerated Investment Incentive will generally apply to additional allowances permitted under the Income Tax Regulations. The Accelerated Investment Incentive relating to the additional allowances for property at a liquefied natural gas facility, as with the additional allowances themselves, will be able to be claimed only against income of the taxpayer that is attributable to the liquefaction of natural gas at that facility. The Accelerated Investment Incentive will not apply to the additional allowance for mining property in Class 41.2, which is currently being phased out.

The Accelerated Investment Incentive will also generally apply to eligible Canadian development expenses and Canadian oil and gas property expenses. These expenses are not subject to a half-year rule and, thus, will qualify for a first-year deduction equal to one-and-a-half times the deduction that would otherwise be available.

Restrictions

The Income Tax Act and the Income Tax Regulations include a series of rules designed to protect the integrity of the CCA regime and the tax system more broadly. These include rules related to limited partners, specified leasing properties, specified energy properties and rental properties. In certain circumstances, these rules can restrict a CCA deduction, or a loss in respect of such a deduction, that would otherwise be available. These integrity rules will continue to apply. 

Certain additional restrictions will be placed on property that is eligible for the Accelerated Investment Incentive. Property that has been used, or acquired for use, for any purpose before it is acquired by the taxpayer will be eligible for the Accelerated Investment Incentive only if both of the following conditions are met:

• neither the taxpayer nor a non-arm’s-length person previously owned the property; and
• the property has not been transferred to the taxpayer on a tax-deferred “rollover” basis.

Full Expensing for Manufacturing and Processing Machinery and Equipment

Machinery and equipment qualify for a temporary accelerated CCA rate of 50 per cent calculated on a declining-balance basis under Class 53, if they are acquired by a taxpayer after 2015 and before 2026 for use in Canada primarily in the manufacturing or processing of goods for sale or lease. These assets would otherwise be included in Class 43 and qualify for a CCA rate of 30 per cent.

The Government proposes to provide an enhanced first-year allowance for such property if it is acquired after November 20, 2018 and becomes available for use before 2028. The enhanced allowance will initially provide a 100-per-cent deduction, with a phase-out for property that becomes available for use after 2023 (described in the table below). The half-year rule will effectively be suspended for property eligible for this measure.

The rules relating to short taxation years and restrictions relating to the use of CCA described for the Accelerated Investment Incentive will also apply in respect of this enhanced allowance.

Full Expensing for Clean Energy Equipment

Specified clean energy equipment acquired by a taxpayer after February 21, 1994 qualifies for an accelerated CCA rate of 30 per cent calculated on a declining-balance basis under Class 43.1. If acquired after February 22, 2005 and before 2025, most equipment that would otherwise be eligible for Class 43.1 can be depreciated at an accelerated CCA rate of 50 per cent under Class 43.2. Many of these assets would otherwise be depreciated at lower rates of 4, 8 or 20 per cent. 

The Government proposes to provide an enhanced first-year allowance for property currently included in Class 43.1 or 43.2 if it is acquired after November 20, 2018 and becomes available for use before 2028. The enhanced allowance will initially provide a 100-per-cent deduction, with a phase-out for property that becomes available for use after 2023 (as described in the table below). The half-year rule will effectively be suspended for property eligible for this measure.

The rules relating to short taxation years and restrictions relating to the use of CCA described for the Accelerated Investment Incentive will also apply in respect of this enhanced allowance.

Strategic Environmental Assessment Statement

The temporary measures introduced in this Statement will encourage capital investments across all sectors of the economy and in a variety of assets. It is unclear whether they will result in net positive or negative environmental effects.

The consumption, transportation and fabrication of capital assets can lead to various negative environmental effects. These effects would be unequal across sectors and types of investments.  For example, investment in certain capital intensive industries is associated with higher greenhouse gas and air pollutants emissions, water and soil pollution, and faster depletion of natural resources. This could negatively impact, to some degree, the achievement of some of the Federal Sustainable Development Strategy goals, in particular those of Effective Action on Climate Change, Clean Growth, Pristine Lakes and Rivers, Sustainably Managed Lands and Forests and Safe, and Healthy Communities. However, these activities are subject to applicable federal and provincial environmental regulations.

On the other hand, providing accelerated tax deductions for all assets, in particular full expensing for clean energy equipment, could lead to positive offsetting environmental impacts, in the form of reduced greenhouse gases and air pollutants emissions, if businesses invest in the latest technology, which is generally more efficient and greener. Therefore, these measures could contribute to the achievement of the Federal Sustainable Development Strategy goals of Effective Action on Climate Change, Clean Growth, Clean Energy and Safe and Healthy Communities.

Based on available data, it is not possible to assess whether the net environmental impact will be positive or negative in the short run. In the long run, the net environmental impact is not expected to be significant, given that the measures are temporary.

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