The Federal government announced a new Accelerated Investment Incentive in their Fall 2018 Economic Statement. It will allow equipment purchased after November 20, 2018 to be depreciated for tax purposes, at an accelerated rate. Normally in the year that equipment is acquired, only half of its value is available for capital cost allowance (CCA). Under the new proposal this “half year rule” will not apply and the value of the acquisition will be increased by 50%.
Simply put, the CCA deduction will be 3 times larger in the first year you purchase the equipment under the new proposed rules.
Table 1 below shows an example of a $150,000 equipment purchase that has a 30% CCA rate.
|Tax deduction under the Current Rules||Tax deduction under the New Accelerated CCA||Difference between the New vs Current Deduction|
|Year 1 – CCA||$22,500||$67,500||$45,000|
|Year 2 – CCA||$38,250||$24,750||$(3,500)|
|Year 3 – CCA||$26,775||$17,325||$(9,450)|
|Year 4 – CCA||$18,743||$12,128||$(6,615)|
|Year 5 – CCA||$13,120||$8,489||$(4,631)|
The example shows that the tax deduction available in the first year is $45,000 greater under the proposed rules, but smaller in subsequent years. It is important to remember that the deduction is used to decrease taxable income. If your taxable income is already low due to other circumstances, the deduction would not be beneficial but can be carried forward to subsequent years.
The rules above will not apply to Class 53 (manufacturing and processing machinery and equipment) and Classes 43.1 and 43.2 (clean energy equipment) which will be eligible for a full deduction (100%) in the year of purchase. Some farmers who do some on farm processing may have equipment that falls into this class.
Producers should contact their tax advisors and discuss these proposed changes to see how they can be used to their best advantage.