Accelerated Investment Incentive

Summary

The Government of Canada's 2018 Fall Economic Statement was tabled on November 21, 2018.

It proposes the following measures for eligible property:

  • Accelerated Investment Incentive – Providing an enhanced first-year allowance for certain eligible property that is subject to the Capital Cost Allowance (CCA) rules. In general, the incentive will be made up of two elements:
    • 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
    • suspending the existing CCA half-year rule (and equivalent rules for Canadian vessels and class 13 property)
  • Full Expensing for Manufacturers and Processors – Allowing businesses to immediately write off the full cost of machinery and equipment used for the manufacturing or processing of goods (class 53).
  • Full Expensing for Clean Energy Investments – Allowing businesses to immediately write off the full cost of specified clean energy equipment (classes 43.1 and 43.2).

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 incentive or the full expensing measure. A phase-out will begin for property that becomes available for use after 2023.

For more information, see Application and Phase-Out.

Accelerated Investment Incentive

Under the proposed Accelerated Investment Incentive measure, certain capital property that is subject to the general CCA rules (referred to as "eligible property") will be eligible for an enhanced first-year allowance. The property will be eligible if it is acquired after November 20, 2018, and becomes available for use before 2028.

To find out the restrictions on property, see Restrictions.

The incentive's general rule will not apply to classes 43.1, 43.2, and 53, as they will benefit from the full expensing measures.

For more information, see the full expensing measures.

The incentive's general rule will be made up of two elements:

  • applying the prescribed CCA rate for a class to one-and-a-half times the net addition to the class for the year
  • suspending the existing CCA half-year rule (and equivalent rules for Canadian vessels and class 13 property)

As a result, eligible property currently subject to the half-year rule will, in essence, qualify for an enhanced CCA equal to three times the normal first-year deduction. Eligible property not subject to the half-year rule (e.g., patent, franchise or limited-period licence) will qualify for one-and-a-half times the normal first-year deduction. For more information, see Example 3.

If the Undepreciated Capital Cost (UCC) of a class increases in a year by an investment in both eligible property and non-eligible property, and an amount (e.g., a disposition) reduces the UCC of the class, you must first reduce the cost of non-eligible property additions before reducing the cost of eligible property additions. For more information, see Example 5.

The incentive will apply to property for which CCA is calculated on a:

  • declining-balance basis (including class 14.1, intangible property)
  • straight-line depreciation (for example, leasehold improvement, patents, and limited period licences)

Effect of the first-year enhanced allowance in the following years

The Accelerated Investment Incentive does not change the total amount that you can deduct over the life of a property. By claiming a larger CCA deduction in the first year, you will have smaller CCA deductions in future years.

For classes where the CCA is calculated on a declining-balance basis, the incentive will automatically reduce the UCC available in respect of the property in subsequent years.

For CCA classes with straight-line depreciation, your ability to claim the incentive in respect of a property in a year will not affect the deduction available in respect of that property in any of the subsequent years, until such time as the UCC is fully exhausted.

Example 1

Where the calculated rate of a class with straight-line depreciation is 20% and there is only one property in the class, and it is an eligible property addition, you will be entitled to deduct 30% (i.e., one-and-a-half times 20%) of the capital cost of the property in the first year, 20% in each of the second through fourth years and 10% (i.e., the remainder) in the fifth year.

Certain resource-related assets can depreciate based on unit of use. You can generally claim CCA based on the portion of the resources depletion in each year.

For properties depreciated on a unit-of-use basis, your ability to claim the incentive in respect of a property in the first year will not affect the deduction available in respect of that property in any of the subsequent years until such time as the UCC is fully exhausted.

Example 2

If you use 10% of a resource in the first year, you will be able to deduct 15% of its capital cost in the first year. After the first year, you will be eligible to deduct the cost in proportion to the amount of the resource depleted in each year to a maximum of 100% of the cost of the resource. This will reduce the amount of deduction you can claim in the final years.

Application and phase-out

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. A phase-out period will begin for property that becomes available for use after 2023.

For eligible property that would normally be subject to the half-year rule (or an equivalent rule) and that becomes available for use during the 2024-2027 phase-out period, the incentive will effectively suspend the half-year rule (and equivalent rules). In essence, you'll be able to calculate CCA at the rate relevant to that class without applying the half-year rule.

For eligible property that would not normally be subject to the half-year rule (or an equivalent rule), and that becomes available for use during the 2024-2027 phase-out period, generally the enhanced allowance will be equal to one-and-a-quarter times the normal first-year allowance.

You will be able to claim the enhanced allowance in respect of an eligible property only in the first tax year that the property becomes available for use.

As a result, as shown in Example 3 to Example 6, an enhanced first-year allowance of up to three times the normal first-year CCA deduction will be available for property that would otherwise be subject to the current half-year rule. The enhanced first-year allowance is reduced to two times the normal first-year CCA deduction in the 2024–2027 period as seen in Example 6.

Example 3

You acquire a class 10 (30%) property for $300 in 2019, and it becomes available for use in that year. The property is eligible for the incentive and there is no non-eligible property purchased in the year. There are no dispositions in the year.

Example 3
Calculation steps Current rules Footnote 11   Proposed rules
UCC at the beginning of 2019 (Beginning UCC)
$0 $0
Addition of eligible property $300 $300
Adjustment to addition = 50% x addition N/A
$150
Half-year ruleFootnote 1 $150 N/A
Adjusted UCC for CCA calculation $150 $450
CCA rate 30% 30%
CCA for 2019 = 30% x adjusted UCC $45 $135
UCC at the end of 2019 = Beginning UCC + addition for the year – CCA for 2019 $255 $165 (i.e. $300 – $135)
CCA for 2020 = 30% x UCC at the end of 2019Footnote 2 $77 $50
UCC at the end of 2020 = UCC at the end of 2019 – CCA for 2020 $178 $115

Example 4

In this example you acquire an eligible class 10 (30%) property for $300 in 2019, and it becomes available for use in that year. There is also an acquisition of property of $100 from a non-arm's length person (non-eligible property that is subject to the half-year rule).

Example 4
Calculation steps Current rulesFootnote 12  Proposed rules
UCC at the beginning of 2019 (Beginning UCC)
$0 $0
Addition of eligible property (EP) $0 $300
Addition of non-eligible property (NEP) Footnote 3 
$400 $100
Adjustment to addition = 50% x EP N/A $150
Half-year rule Footnote 4 ($200) ($50)
Adjusted UCC for CCA calculation
$200 $500 (i.e. $300 + $100 + $150 – $50)
CCA rate 30%
30%
CCA for 2019 = 30% x adjusted UCC $60 $150
UCC at the end of 2019 = Beginning UCC + addition (EP + NEP) for the year – CCA for 2019 $340 $250 (i.e. $300 + $100 – $150)
CCA for 2020 = 30% x UCC at end of 2019 Footnote 5   $102 $75
UCC at the end of 2020 = UCC at the end of 2019 – CCA for 2020
$238 $175

Example 5

In this example you acquire an eligible class 10 (30%) property for $100 in 2019 but you also have an acquisition of property of $100 from a non-arm's length person (non-eligible property that is subject to the half year rule). You begin the year with an UCC of $100 and there is a disposition of $150.  

Example 5
Calculation steps Current rulesFootnote 12 
Proposed rules
UCC at the beginning of 2019 (Beginning UCC)
$100 $100
Addition of eligible property (EP) $0 $100
Addition of non-eligible property (NEP)Footnote 6 
$200 $100
Disposition during the year
$150 $150
Adjusted UCC after addition and disposition $150 $150
Adjustment to addition = 50% x (EP – {Disposition – NEP}) Footnote 6    N/A $25
Half-year rule Footnote 7 ($25) $0
Adjusted UCC for CCA calculation $125 $175
CCA rate 30% 30%
CCA for 2019 = 30% x adjusted UCC
$38 $53
UCC at the end of 2019 = Beginning UCC + addition (EP + NEP) for the year – (Disposition + CCA for 2019) $112 $97 (i.e. $300 – $150 – $53)
CCA for 2020 = 30% x UCC at the end of 2019 Footnote 8   $34 $29
UCC at the end of 2020 = UCC at the end of 2019 – CCA for 2020 $78 $68

Example 6

In this example, you acquire a class 10 (30%) property for $300 in 2024, and it becomes available for use in that year. The property is eligible for the incentive and there is no non-eligible property purchased in the year. There are no dispositions in the year.

Property that is an eligible property and is acquired and becomes available for use in 2024
Calculation steps

Current rules

Footnote 11  

Proposed rules
UCC at the beginning of 2024 (Beginning UCC)
$0 $0
Addition of eligible property (EP) $300 $300
Adjustment to cost = 50% x addition Footnote 9 N/A $0
Half-year rule = 50% x addition
$150 N/A
Adjusted UCC for CCA calculation $150 $300
CCA rate 30% 30%
CCA for 2024 = 30% x adjusted UCC $45 $90
UCC at the end of 2024 = Beginning UCC + addition – CCA for 2024
$255 $210 (i.e. $300 – $90)
CCA for 2025 = 30% x UCC at the end of 2024 Footnote 10   $77 $63
UCC at the end of 2025 = UCC at the end of 2024 – CCA for 2025 $178 $147

Additional allowances and other deductions

The Accelerated Investment Incentive will generally apply to additional allowances permitted under the Income Tax Regulations.

Under the incentive, you will be able to claim additional allowances for property at a liquefied natural gas facility only against your income that is attributable to the liquefaction of natural gas at that facility.

You will not be able to claim the Accelerated Investment Incentive for the additional allowance for mining property in class 41.2. For more information see Additional restrictions.

Enhanced first-year allowance in respect of Canadian development expense and Canadian oil and gas property expense

An enhanced deduction will also generally apply to eligible Canadian development expenses (CDE) or Canadian oil and gas property expenses (COGPE) incurred after November 20, 2018, and before 2028. These expenses are not subject to a half-year rule and, thus, will qualify for a first-year deduction equal to one-and-a-half times the deduction that would otherwise be available. The additional deduction begins to phase out for expenses incurred after 2023. CDE and COGPE are also not subject to the available for use rule.

Note

An accelerated CDE or COGPE does not include an expense that is a successored CDE or successored COGPE (i.e., expenses incurred by a predecessor corporation that a successor corporation is entitled to claim) or that is a cost in respect of a Canadian resource property you acquired, or a partnership in which you are a member, from a person or partnership with which you do not deal at arm's length.

Restrictions

Short tax years

Under the short tax-year rule, you must generally prorate the amount of CCA you can claim if the tax year is less than 12 months. Property eligible for the incentive will also be subject to the short tax year rules for CCA.

Rules to restrict CCA deduction

In certain situations there are rules that can restrict a CCA deduction, or a loss in respect of such a deduction, that would otherwise be available.

Some of the rules that will continue to apply include rules relating to:

  • limited partners
  • specified leasing properties
  • specified energy properties
  • rental properties
  • computer software tax shelter rules
  • limited recourse debt rules

This is not an exhaustive list.

Additional restrictions

Certain additional restrictions apply to eligible property. Under the proposed legislation, if you acquire property that has been used, or acquired for use, for any purpose before you acquired it, it will only be eligible for the incentive if both of the following conditions are met:

  • neither you nor a non-arm's length person previously owned the property
  • the property has not been transferred to you on a tax-deferred "rollover" basis

In other words, property acquired in non-arm's length and roll-over transactions are not eligible for this incentive. They are considered non-eligible property (NEP).

Under the current rules, certain property is subject to the half-year rule but other property is excluded. Under the proposed rules, these exclusions also apply, therefore not all NEP is subject to the half-year rule. For more information on the half-year rule, see Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance.

Additionally, the Accelerated Investment Incentive will not apply for the additional allowance for mining property in class 41.2. The allowance for mining property is currently being phased out.

Full expensing for manufacturing and processing machinery and equipment

Machinery and equipment currently qualify for a temporary accelerated CCA rate of 50% calculated on a declining-balance basis under class 53. It qualifies if you acquired the property after 2015 and before 2026 for use in Canada primarily in the manufacturing or processing of goods for sale or lease. These assets would otherwise be included in class 43 and qualify for a CCA rate of 30%.

If you acquire property after November 20, 2018, and it becomes available for use before 2028, it will be eligible for an enhanced first-year allowance. The enhanced allowance will initially provide a 100% deduction, with a phase-out for property that becomes available for use after 2023.

Full Expensing effectively suspends the half-year rule for property eligible for this measure.

Table 1 – Phase-out of enhanced first-year allowance
Year Current first-year allowance (half-year rule) Proposed first-year enhanced allowance
Implementation – 2023 25 100
2024 25 75
2025 25 75
2026 15 55
2027 15 55
2028 onward 15 N/A

The rules relating to short tax years and restrictions described for the incentive will apply in respect of this enhanced allowance.

Full expensing for clean energy equipment

Specified clean energy equipment acquired after February 21, 1994, currently qualifies for an accelerated CCA rate of 30% calculated on a declining-balance basis under class 43.1. You can depreciate equipment acquired after February 22, 2005, and before 2025, that would otherwise be eligible for class 43.1 (subject to certain limited exceptions), at an accelerated CCA rate of 50% under class 43.2. Many of these assets would otherwise depreciate at lower rates of 4, 8 or 20%.

If you acquire property after November 20, 2018, and it becomes available for use before 2028, it will be eligible for an enhanced first-year allowance. The enhanced allowance will initially provide a 100% deduction, with a phase-out for property that becomes available for use after 2023.

Full Expensing effectively suspends the half-year rule for property eligible for this measure.

Table 2 – Phase-out of enhanced first-year allowance
Year Current first-year allowance (half-year rule) for class 43.1 Current first-year allowance (half-year rule) for class 43.2 Proposed first-year enhanced allowance
Implementation – 2023 15 25 100
2024 15 25 75
2025 15 N/A 75
2026 15 N/A 55
2027 15 N/A 55
2028 onward 15 N/A N/A

The rules relating to short tax years and restrictions described for the incentive will apply in respect of this enhanced allowance.

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