On November 21, 2018, the Federal Government released the 2018 Fall Economic Statement (the “Statement”). The Statement includes several proposed tax measures to accelerate tax depreciation, which take effect immediately.
The Government proposes to introduce legislation to accelerate the first-year deduction for capital property that is subject to the capital cost allowance (“CCA”) rules (“eligible property”). Eligible property for AII purposes excludes M&P and Clean Energy equipment, which are discussed further below.
Under the AII, the first year CCA claim will be calculated as 1.5 times the CCA calculated using the prescribed rate, ignoring the half-year rule. For example, Class 8 property will qualify for first-year CCA claim at a rate of 30% (i.e., 20% x 1.5) rather than 10% (i.e., 20% with half-year rule). Property currently subject to the half-year rule will qualify for accelerated CCA equal to three times the normal first-year CCA. Property currently not subject to the half-year rule will qualify for accelerated CCA equal to 1.5 times the normal first-year CCA.
An accelerated first-year CCA claim will eventually be offset by a reduced CCA claim in future years, as the total amount of CCA over the life of the property will not change. CCA calculated on a declining-balance basis will result in a reduced CCA claim over all subsequent years, as the first-year ending undepreciated capital cost balance will be reduced. CCA calculated on a straight-line basis will see a reduction in the final year CCA claim. For example, CCA normally claimed on a straight-line basis over five years will enable a taxpayer to CCA claims of 30% for the first year, 20% for the next three years, and 10% for the fifth year.
Eligible property for the purpose of these AII rules is subject to certain restrictions and does not include property that was:
AII in respect of eligible property acquired during a short taxation year will generally be subject to the normal proration requirements.
The AII will be available for eligible property purchased after November 20, 2018 and is available for use before 2028. For eligible property normally subject to the half-year rule and becomes available for use during 2024 to 2027 (the phase-out period), the AII will only suspend the half-year rule. Thus, property acquired during this period will qualify for accelerated CCA equal to double (rather than three times during the initial years) the normal first-year CCA. For eligible property not normally subject to the half-year rule and becomes available for use during the phase-out period, the property will qualify for accelerated CCA equal to 1.25 times the normal first-year CCA.
Similar AII measures will apply to certain resource expenditures.
The Government proposes enhanced first-year allowance for M&P (Class 53) and clean energy equipment (Class 43.1 and 43.2) purchased after November 20, 2018 and is available for use before 2028 as follows:
The half-year rule is effectively suspended for property eligible for these measures. The same rules related to short taxation years and restrictions in respect of eligible property related to AII will also apply.