Do recent changes to CCA rules affect your business?

Capital Cost Allowance (CCA) is the tax equivalent of depreciation—it is the portion of the total cost of eligible capital assets that can be deducted for Canadian tax purposes. The first year CCA is claimed, businesses are generally limited to a deduction equal to half the amount calculated using an asset’s specific CCA rate. This is known as the ‘half-year rule’. CCA is then calculated on a declining balance basis in subsequent years.

Two measures were recently introduced that greatly enhance the first-year CCA deduction on assets subject to the half-year rule: Accelerated Investment Incentive and Full Expensing.

Available for use

To qualify for either measure, an asset must be acquired after November 20, 2018 and be available for use before 2028. Note that these incentives will gradually decrease for property that becomes available for use after 2023 and will be completely eliminated after 2027.

The following link provides an explanation as to when an asset is considered as becoming ‘available for use’:

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance/available-use-rules.html


Accelerated Investment Incentive

Under the Accelerated Investment Incentive, eligible property currently subject to the half-year rule qualifies for an enhanced CCA deduction equal to three times the normal first-year amount. The incentive applies to all tangible and intangible capital assets with the exception of manufacturing and processing machinery and equipment and specified clean energy equipment—such assets fall under the Full Expensing measure.

Example:
In 2020, a company spends $20,000 on computer equipment and it is available for use in the same year.

Old Rules:
Deduction Year 1 (2020): $20,000 x 50% (half-year rule) x 55% (CCA rate) = $5,500
Deduction Year 2 (2021): $14,500 ($20,000 – $5,500) x 55% = $7,975
Deduction Year 3 (2022): $6,525 ($14,500 – 7,975) x 55% = $3,589

And so on, until the item has been fully depreciated or sold.

New Rules:
Deduction Year 1 (2020): $20,000 x 50% (half-year rule) x 55% (CCA rate) x 3 = $16,500
Deduction Year 2 (2021): $3,500 ($20,000 – $16,500) x 55% = $1,925
Deduction Year 3 (2022): $1,575 ($3,500 – 1,925) x 55% = $866

And so on, until the item has been fully depreciated or sold.

Note that not all assets are subject to the half-year rule. Eligible property not subject to the half-year rule (e.g., patent, franchise or limited-period licence) qualifies for one and a half times (vs three times) the amount that would otherwise apply in the year that the asset is available for use.

Full Expensing

The Full Expensing measure allows businesses to immediately write off the full cost of eligible manufacturing and processing machinery and equipment and Clean Energy Equipment.

Example:
In 2020, a company spends $200,000 on Clean Energy Equipment and it is available for use in the same year.

Old Rules:
Deduction Year 1 (2020): $200,000 x 50% (half-year rule) x 50% (CCA rate) = $50,000
Deduction Year 2 (2021): $150,000 ($200,000 – $50,000) x 50% = $75,000
Deduction Year 3 (2022): $75,000 ($150,000 – $75,000) x 50% = $37,500

And so on, until the item has been fully depreciated or sold.

New Rules:
The CCA rate is 100% and the half-year rule is suspended. As such, the company will be able to expense the full amount of $200,000.

The tax professionals at S+C Partners would be happy to review your current and planned capital asset purchases and discuss if and how your business can take advantage of these increased tax deductions.