The ‘Accelerated Investment Incentive’ is a Valuable Tax Rule, Acting as a Tax Deduction for Eligible Business Owners

Canada’s Accelerated Investment Incentive Allows for Immediate CCA Deductions

The Accelerated Investment Incentive in Canada is a set of tax rules designed to encourage businesses to invest in eligible capital assets by allowing them to write off more of the cost in the year of purchase. This incentive aims to stimulate investment by reducing the tax liability in the year of purchase, thus providing businesses with more cash flow to reinvest or expand operations.

The Accelerated Investment Incentive was introduced as part of the 2018 Fall Economic Statement by the Canadian government. It temporarily modifies how Capital Cost Allowance (CCA) is claimed, which is a tax deduction for the depreciation of capital assets. The Income Tax Act prescribes the specific methodology for calculating CCA.

The Accelerated Investment Incentive allows for applying the prescribed CCA rate for a class to up to one-and-a-half times the net addition to the class for the year and suspending the CCA half-year rule (and equivalent rules for Canadian vessels and Class 13 property).

The CCA half-year rule is a provision in the Income Tax Act that limits the amount of Capital Cost Allowance (CCA) a taxpayer can claim in the year one acquires a depreciable capital asset. In the year you acquire an eligible asset and it becomes “available for use,” you can only claim half of the normal CCA amount that would otherwise apply to that asset’s class. The remaining half of the CCA deduction is effectively deferred to future years as part of the asset’s undepreciated capital cost (UCC), which is the pool of unclaimed value carried forward.

The Accelerated Investment Incentive also allows businesses to immediately write off the full cost of machinery and equipment used for the manufacturing or processing of goods and specified clean energy equipment. The incentive applies to property for which CCA is calculated on either a declining-balance basis or under straight-line depreciation.

Eligibility

You must acquire the eligible property after November 20, 2018, and it must be available for use before 2028 in order to qualify for the Accelerated Investment Incentive. This incentive applies to most depreciable properties but does not include those in Classes 54, 55, and 56 (zero-emission vehicles), or Classes 43.1, 43.2, and 53, which have their own full expensing rules.

Impact on CCA Deductions

While the Accelerated Investment Incentive accelerates the deduction in the first year, it does not increase the total amount of CCA that can be claimed over the asset’s life. This means subsequent years’ deductions will be lower because the undepreciated capital cost is reduced more quickly. The full benefits of the Accelerated Investment Incentive apply to assets available for use before 2024. From 2024 to 2027, there’s a phased reduction in the benefits, and after 2027, the enhanced deductions are no longer available.

Restrictions

The Accelerated Investment Incentive interacts with other tax provisions. For instance, if an asset qualifies for both the Accelerated Investment Incentive and another incentive, the taxpayer can generally choose which benefit to apply but cannot claim both for the same asset. The Accelerated Investment Incentive also does not allow a CCA deduction if such deductions are restricted under the Income Tax Act in those circumstances.

Eligible property acquired in non-arm’s-length and roll-over transactions are not eligible for the Accelerated Investment Incentive either.

Pro Tax Tip: Plan Your Asset Acquisitions Strategically:

Given that the Accelerated Investment Incentive allows for a higher CCA deduction in the year an asset becomes available for use, particularly with the suspension of the half-year rule, consider timing your large capital expenditures to maximize this benefit.

If you’re planning significant capital investments, aim to have assets available for use before 2024 when the full 1.5 times CCA rate applies. This can significantly reduce your taxable income in the year of purchase, thus lowering your tax liability for that year.

If you cannot get assets in use by the end of 2023, still plan your acquisitions to occur before the end of 2027 when the Accelerated Investment Incentive phases out completely. Even partial benefits in 2024-2027 can be advantageous. If you dispose of an asset, the rules for recapture or terminal loss still apply based on the adjusted UCC after considering the Accelerated Investment Incentive benefits. This can lead to a higher recapture if the accelerated deduction was more than what would have been claimed under normal circumstances.

Sometimes, leasing an asset might be more beneficial than buying under normal circumstances due to tax benefits like claiming lease payments as expenses. However, with the Accelerated Investment Incentive, a purchase might provide a better tax advantage due to the immediate higher CCA deductions. Evaluate if the tax benefits from the Accelerated Investment Incentive outweigh the flexibility of leasing.

For these reasons, there are many considerations when deciding whether or not to apply the Accelerated Investment Incentive to your business assets. One must carefully weigh the pros and cons. If you would like assistance with the Accelerated Investment Incentive, consult an expert Canadian tax lawyer.

FAQ

Does the Accelerated Investment Incentive increase the total amount of CCA I can claim over the life of an asset?

No, the Accelerated Investment Incentive accelerates the CCA deduction in the first year(s), but the total amount of CCA claimed over the life of the asset remains the same.

What is the enhanced first-year allowance under the Accelerated Investment Incentive?

For assets available for use before 2024, businesses can claim up to 1.5 times the normal CCA rate in the first year. This rate decreases in subsequent years until the Accelerated Investment Incentive phases out completely after 2027.

Can partnerships or corporations benefit from the Accelerated Investment Incentive?

Yes, both partnerships and corporations can benefit from the Accelerated Investment Incentive, provided the assets are eligible and meet the availability for use criteria within the specified time frame.

Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.