Immediate Expensing of Capital Property – Planning Considerations

IMMEDIATE EXPENSING OF CAPITAL PROPERTY

Introduction

The Canadian government recently passed legislation that temporarily allows certain businesses to immediately expense up to $1.5 million of eligible property each year.  This legislation has a long and tortured history that has caused heartburn to business owners and accountants across the country since it was promised long ago but didn’t find its way into law until after the first tax returns, which would have been eligible for this treatment were long past due.  Then, between the promise made and the actual enactment date, various substantial changes were made, which had significant effects for anyone potentially using these new provisions.  Regardless of the history, the immediate expensing provisions are now law, and we have certainty around which we can plan.

Here’s a high-level overview of the main points

Who is eligible?

CCPCs (Canadian-controlled private corporations) and unincorporated businesses carried on by Canadian resident individuals and eligible partnerships.  The immediate expensing limit must be shared among all members of an associated group of eligible persons or partnerships.

What is eligible?

To qualify, the capital property must be:

• Property other than property included in CCA classes 1-6, 14.1, 17, 47, 49, and 51.  The classes that are not eligible generally include long-lived assets such as buildings and other structures, goodwill and other intangibles, telephone systems, transmission and distribution systems, and pipelines.  If you would like more information on what type of assets belong in which class, please see https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance/classes.html,
• Acquired from someone else in an arms-length transaction, and
• Available for use before the end of the year in which the immediate expensing amount is claimed.

When is the deduction available?

CCPCs can claim the immediate expensing amount on assets acquired on or after April 19, 2021, and which become available for use before January 1, 2024.

Eligible partnerships and individuals can claim the amount on assets acquired on or after January 1, 2022, and which become available for use before January 1, 2025.

The deduction must be claimed before the tax return in which the deduction is claimed is more than 12 months past due.

Where can I claim the deduction?

The deduction will be claimed as a separate line on Schedule 8 of your tax return and is part of your capital cost allowance claim.  Remember that this is a tax deduction, and your decision on whether or not to claim the amount will not affect your financial statements (other than taxes payable and tax expense).

Also, be aware that this deduction is only available to corporations and businesses resident in Canada for tax purposes.

Why has this deduction been introduced?

The immediate expensing deduction was introduced in the 2021 budget as a means to free up capital for businesses to invest in assets that drive economic growth.  The government intends for this provision to be used, and if it suits your situation and helps your business, you should use it.  However,

How do I know whether I should claim the immediate expensing amount?

The immediate expensing amount can be a powerful tax planning tool since the amounts involved are potentially quite significant.  With great power comes great responsibility, and you should carefully optimize the benefits of this tool.  You need to be aware that the new rules do not add any new deductions in the long run; they speed up the timeline along which the expense is claimed.  Therefore, what you claim today may come back as income down the road.  You should consult with your tax advisor to be sure that you claim the appropriate amount in the current year and that your decision is optimized for the long run rather than only for the present time.

If you do decide to claim the immediate expensing amount, keep the following planning points in mind:

Time your purchases.  Make sure you are not over the $1.5 million maximum annual limit for the current period.  If necessary, consider whether you should delay capital purchases.  Or, if you have more room and need the deduction, consider purchasing early.  However, always keep the entire economic picture in mind.  Taxes are only a part of the picture.

Remember that the immediate expensing amount cannot be carried forward.  If you cannot make use of it in the year an asset is purchased, you lose the opportunity.  This does not mean you lose the ability to expense the purchase over time; it just means you go back to the applicable CCA rules.

If you have several related companies or entities, consider which business will claim the immediate expensing amount.  Use the deduction where it helps the most.

As a general rule, claim the immediate expensing amount on assets with the lowest CCA rate first.

Always keep in mind the potential for recapture of CCA in the future.  You don’t want to use the immediate expense deduction to lower your income when you are already in a low tax bracket, only to have the recapture of CCA cause you to pay taxes at a higher rate in the future.

If you would like to discuss how the immediate expensing amount could help your tax situation, please get in touch with us for a consultation.