Expanding Tax Support for Business Investment in Zero-Emission Vehicles
On March 2, 2020, the government proposed to expand a 100 per cent tax write-off for business investments in eligible zero-emission vehicles to include a wider array of eligible automotive equipment and vehicles. The following provides further details on the proposed changes.
On-Road Zero-Emission Automotive Vehicles
As part of Budget 2019, the government introduced a temporarily enhanced first-year capital cost allowance (CCA) rate of 100 per cent for eligible zero-emission vehicles. Two new CCA classes were created. The first is Class 54, which includes zero-emission vehicles that would otherwise be included in Class 10 (most motor vehicles not included in any other class) or 10.1 (passenger vehicles that cost more than $30,000 before sales taxes). The second is Class 55, which includes zero-emission vehicles that would otherwise be included in Class 16 (which includes taxi cabs, vehicles acquired for the purpose of short-term renting or leasing, and heavy trucks and tractors designed for hauling freight). In the case of Class 54, there is a limit of $55,000 (plus sales taxes) on the amount of CCA deductible in respect of each zero-emission passenger vehicle.
At present, in order to be eligible for the first-year CCA rate of 100 per cent provided by Classes 54 and 55, a vehicle must not have been used, or acquired for use, for any purpose before it was acquired by the business. In addition, a vehicle does not qualify as a business' zero-emission vehicle if:
- CCA was previously claimed for that same vehicle by any person or partnership before its acquisition by the taxpayer;
- government assistance was paid to any person or partnership for that same vehicle; or,
- the taxpayer has elected that it not be a zero-emission vehicle.
The government proposes to remove the restriction that a vehicle not have been used, or acquired for use, for any purpose before it was acquired by the business for it to be considered a zero-emission vehicle and, as a consequence eligible for Class 54 or 55. In addition, the requirement that CCA not have been previously claimed for the vehicle to qualify as a zero-emission vehicle would be modified so that a vehicle for which CCA has previously been claimed could qualify as a zero-emission vehicle if it:
- were not acquired on a tax-deferred "rollover" basis; and
- had not been owned, prior to its acquisition by the business or by a person or partnership not dealing at arm's length with the taxpayer.
This extension of Class 54 and 55 would apply to eligible used zero-emission vehicles acquired on or after March 2, 2020, and that become available for use before 2028.
Other Zero-Emission Automotive Equipment and Vehicles
Eligibility for Classes 54 and 55 is limited to equipment defined as a "motor vehicle" under the Income Tax Act. As a result of this definition, eligibility for Classes 54 and 55 is restricted to automotive vehicles designed or adapted to be used on highways and streets, with certain exclusions. Consequently, several types of automotive equipment and vehicles are excluded from Classes 54 and 55, including trolley buses, equipment designed or adapted for use on rails, aircraft and watercraft. The excluded equipment can be classified in a number of different CCA classes with different CCA rates.
As announced on March 2, 2020, the government proposes to provide a temporarily enhanced first-year CCA rate of 100 per cent for eligible zero-emission automotive equipment and vehicles that do not benefit from the accelerated rate provided by Classes 54 and 55. These equipment and vehicles would be included in a new Class 56.
To be eligible for this first-year enhanced allowance, equipment or vehicles must be automotive (i.e., self-propelled) and fully electric or powered by hydrogen. Equipment or vehicles that are powered partially by any means other than electricity or hydrogen for propulsion (such as gasoline, diesel, human or animal power) would not be eligible.
The rules described under "On-Road Zero-Emission Automotive Vehicles" that relate to vehicles used, or acquired for use, for any purpose before they are acquired by the taxpayer would also apply in respect of Class 56 property.
Class 56 would apply to eligible zero-emission automotive equipment and vehicles that are acquired on or after March 2, 2020 and that become available for use before 2028, subject to a phase-out for equipment and vehicles that become available for use after 2023 (as shown in Table 1). A business would be able to claim the enhanced allowance in respect of eligible zero-emission automotive equipment or vehicles only for the taxation year in which the equipment or vehicles first becomes available for use by the business. In cases where a business converts automotive equipment or vehicles to run only on electricity or hydrogen, the business would be able to claim the enhanced first-year allowance in respect of the cost of additions or alterations needed to achieve such a conversion. The enhanced allowance would be available for the taxation year in which the converted equipment or vehicle first becomes available for use by the business.
|March 2, 2020 – 2023
|2024 – 2025
|2026 – 2027
CCA would be deductible on any remaining balances in Class 56 on a declining-balance basis at a rate of 30 per cent. An election would be available to forgo Class 56 treatment and instead include property in the Class in which it would otherwise be eligible.
Strategic Environmental Assessment Statement
This measure is expected to have positive environmental effects, as it is expected to encourage the adoption of technologies that would reduce emissions of greenhouse gases and air pollutants. This would contribute to the Federal Sustainable Development Strategy targets of:
- reducing Canada's total greenhouse gas emissions by more than 30 per cent, relative to 2005 emissions levels, by 2030; and
- a continued decrease in emissions from 1990 of fine particulate matter, nitrogen oxides, sulphur oxides and volatile organic compounds from all sources.
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