Two ways to make the most of the Capital Cost Allowance program

The end is near for two temporary changes to the federal Capital Cost Allowance. As you file your personal tax returns for 2023 and 2024, it’s worth considering one last time how these enhancements can be used on your farms.

The temporary changes enacted in 2018 are the Accelerated Investment Incentive and the Immediate Expensing of Capital Expenditures. They were enacted to incentivize business owners, including farmers, to invest capital in their businesses and, therefore, stimulate the economy. The programs change how the CCA can be claimed on personal income tax returns in the first year of use for certain classes of capital assets.

Use of both programs is optional, but as you file your individual tax returns that include capital expenditures in 2023 and 2024, here are some details and considerations to keep in mind:

Accelerated Investment Incentive (AII)

• This deduction removes the half-year rule and allows for a deduction equal to one-and-a-half times the normal rate. This triples the normal deduction you would get when applying the half-year rule.

• It qualifies for most property available for use at year-end with the exclusion of some manufacturing and processing classes (54, 55 and 56) and clean energy investment classes (43.1, 43.2 and 53), which end up qualifying for full expensing in the year the investment is made.

• You can still qualify for this incentive if you purchase the property after 2023 but before 2028. However, it’s reduced from three times the normal rate to only two times, removing the half-year rule.

Immediate expensing of Capital Expenditures

• In 2021, the government provided further increased deductions for capital expenditures, allowing for the full deduction in the year it was available. The total deduction allowed per related taxpayer group of small- to medium-sized Canadian businesses is $1.5 million of eligible expenditures.

• Most classes of assets will qualify, with the exclusion of buildings (Classes 1 to 6), non-deductible purchases (Class 14.1), roads and parking lots (Class 17) and petroleum pipeline assets (Class 47, 49 and 51). There are also exclusions for assets previously held by a related party or subject to a Section 85 rollover.

• Canadian Controlled Private Corporations (CCPCs) can expense qualified assets acquired from April 18, 2021, to Dec. 31, 2023, meaning CCPCs can no longer claim the full deduction after filing their 2023 tax return.

• For taxpayers who are individuals or partnerships made up solely of non-incorporated individuals, the qualifying period is from Jan. 1, 2022, to Dec. 31, 2024. This means that non-incorporated businesses have another year to make capital expenditures and fully expense them on their 2024 tax return.

Think ahead

As with all tax incentives, it is important to consider how these deductions may impact the operation’s taxable income and tax planning.

Both AII and Immediate expensing of Capital Expenditures measures doesn’t change the total amount that can be deducted as CCA from the purchase of an asset. Instead, they accelerate the deductions earlier in the ownership cycle of the property and, in turn, reduce the UCC balance for future years.

Claiming these deductions will result in lower CCA claims in later years, so pay attention to future tax planning with the reduced UCC balances.

Also, consider recaptured Capital Costs Allowance if your business is winding down operations and the sale of assets. Claiming the deductions early may result in more taxable income at higher tax bracket rates later. As with all tax incentives, it is important to consider how they may impact the operation’s taxable income and tax planning.

Article by: Lance Stockbrugger, CPA