The Rural Voice, 2019-03, Page 73 This 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 it 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 go buy some shiny paint
or pour concrete.
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. For
purchases from 2027 to 2024, 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 per cent to
nine 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
of their equipment purchases will be
non-M&P since under the federal
income tax rules, farming is not
considered manufacturing or
processing. The incentive for these
purchases are eligible for 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. Compared to
before, 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 impact 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. ◊
March 2019 69
Tax Change:
depreciable
purchases
written off faster
Kurt
Oelschlagel is
a partner at
BDO in
Hanover
Financial Management
The new Accelerated Investment Incentive
program allows farmers to write off capital
expenditures faster.