This past fall the federal government introduced the Accelerated Investment Incentive, giving Canadian businesses the ability to write off capital expenditures faster. Encased in its 2018 Fall Economic Statement, this incentive allows farmers and other businesses more depreciation in the year an asset is purchased … a lot more. The idea is to spur business investment and innovation.
When we write-off or depreciate equipment for income tax purposes it’s called capital cost allowance (CCA). Basically, the incentives provide for enhanced CCA on equipment and building purchases, regardless of whether the equipment is new or used. However, the incentive is not available if you purchase the equipment from a related person or when the purchase is acquired in tax-deferred transfer.
Different incentives apply for three categories of capital assets, Manufacturing and Processing investments (M&P), Clean Energy investments and other capital investments or non-M&P.
The incentives for M&P and non-M&P equipment purchases differ and have quite detailed requirements so ask your accountant about them before you pour concrete or go buy some shiny paint.
For M&P equipment bought after November 20, 2018 and available for use before 2024, the tax deduction available in the year of purchase will be 100 per cent of the cost. The write-off in the year of purchase is 75 per cent of the cost for the years 2024 and 2025, and 55 per cent of the cost for years of 2026 and 2027.
For example, Alex owns a small winery, called Sommelier Inc. She has been hoping to expand her business by increasing her capacity for fermentation and storage. The equipment Alex needs will cost $200,000. Before the introduction of immediate expensing for machinery and equipment used in manufacturing and processing, Alex would have been able to deduct only $50,000 from her $250,000 business income in the year, leaving her with $200,000 in taxable income. Under the new investment incentive, she will be able to write off the full cost of the new equipment, leaving her with taxable income of just $50,000.
In addition, all of Sommelier Inc.’s income will benefit from the small business tax rate reduction from 10.5 to 9 per cent, as of January 1, 2019. So overall, these measures will provide Alex with federal tax savings of $16,500 in the year her investment is made.
Non-M&P equipment (farm machinery)
For most farmers, most equipment purchases will be non-M&P since under the federal income tax rules, farms are not considered manufacturing or processing. The incentive for these purchases is three times the normal tax deduction through additional CCA in the year of acquisition, when available.
In other words, if you buy equipment available to use after November 20, 2018 and before the year 2024 you can write off three times the normal tax deduction. Property acquired and available for use after 2023 and before 2028 will be eligible for enhanced CCA of only two times the normal previous tax deduction.
For example, if you purchased and took possession of an airseeder for $100,000 under the accelerated investment incentive, you would be able to write-off $30,000 in the year of purchase. Before the new incentive, your normal tax write-off in the year of purchase would be $10,000. You’d get this enhanced write-off if you bought it before the year 2024, but if you purchased the same airseeder in the next three years, the write off in the year of purchase would be less, only $20,000.
The Fall Economic Statement included the following example. If a grain farm renews its entire fleet of aging tractors and combine harvesters, and spends $2 million, the farm will be able to deduct $900,000 for tax purposes in the first year the equipment is used. Previously, the farm would have only had $300,000 in CCA without the Accelerated Investment Incentive. For the farm, the net result would be about $160,000 in federal-provincial tax savings.
The farmer will benefit from the Accelerated Investment Incentive plus the increased efficiency and potentially the lower operating costs from the technological advances incorporated into the new equipment. However, this might also mean taking on too much machinery debt at the wrong time.
It’s always smart to plan your capital asset acquisitions and how it will impact your farm’s finances. This new incentive makes it an excellent time to review how your asset replacement strategy impacts on your farm’s taxes.
Before you buy or build, talk with your accountant and lenders about your farm’s working capital and debt/equity ratio.
Kurt Oelschlagel FCPA, FCA, TEP is a partner at BDO Hanover, Ontario