Tax Planning Regarding Immediate Expensing of Capital Property

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Tax Planning Regarding Immediate Expensing of Capital Property

The 2021 Federal Budget announced proposed changes allowing Canadian Controlled Private Corporations (CCPCs) temporary immediate deductions on eligible property. Under this change, a CCPC can deduct 100% of capital outlays on the eligible property acquired on or after April 19, 2021 and that is available for use before the 2024 calendar year, that would otherwise qualify for capital cost allowance (CCA) over a number of years. Note that draft legislation is still pending for this measure.

There are limitations in terms of what class of capital property, how much and when the capital property can be claimed. Eligible property includes any capital property subject to the CCA rules except for the following CCA Classes:

  • Classes 1-6 – Various building types
  • Class 14.1 – Intangibles/goodwill
  • Class 17 – Roads, parking lots, sidewalks, storage areas or similar surface construction
  • Class 47 – transmission or distribution equipment of electrical energy
  • Class 49 – property that is a pipeline, including control/monitoring devices, valves and other equipment ancillary to the pipeline for transmission of petroleum
  • Class 51 – property that is a pipeline, including control and monitoring devices, valves and other equipment ancillary to the pipeline, used for the distribution of natural gas

The threshold imposed on the immediate deduction is $1.5M for a corporation and its associated CCPCs (if applicable) per tax year. The $1.5M limit is also prorated for short taxation years.

When allowable expenditures exceed the $1.5M limit in the given tax year, CCPCs are allowed to elect which CCA asset class to apply the immediate deduction to. Any leftover capital costs in excess of the limit are subject to regular CCA rules. On the other hand, if there is any unused portion of the annual limitation remaining at the end of the tax year, it cannot be carried forward into future tax years. When an asset is subject to immediate deduction, the half-year rule does not apply.

The ruling is also restricted by any pre-existing CCA deduction rules, rules related to limited partners, specified leasing properties, specified energy properties and rental properties. These rules can potentially restrict the allowable CCA deduction.

Property would be eligible for immediate expensing even if it has been used before, or acquired for use for any purpose before the acquisition by the taxpayer if the both the following conditions are met:

  1. Neither the taxpayer nor a non-arm’s length person previously owned the property; and
  2. The property has not been transferred to the taxpayer on a tax-deferred “rollover” basis

Original Source: Pages 614-616