Businesses planning to acquire capital assets should consider how those acquisitions may be affected by the proposed rules on immediate expensing of eligible property for Canadian-controlled private corporations (CCPCs). These new rules, announced in the 2021 federal budget, may provide new tax planning opportunities for CCPCs, who may want to take a closer look at the timing of acquiring eligible capital assets, and consider to which assets they should apply the new rules in cases where they have a choice, among other considerations.
Note that draft legislation is still pending for this measure. However, the 2021 federal budget proposed that these immediate expensing rules for CCPCs are intended to apply to eligible property acquired on or after April 19, 2021, and that is available for use before 2024.
The 2021 federal budget announced changes to allow temporary immediate expensing of certain properties acquired by a CCPC that would otherwise qualify for capital cost allowance (CCA), providing up to a maximum of $1.5 million of additional CCA per taxation year.
Eligible property includes any capital property subject to the CCA rules, except for property included in Classes 1 to 6, 14.1, 17, 47, 49 and 51. These excluded assets are generally long-lived assets such as buildings, goodwill, telephone systems, transmission and distribution systems and pipelines.
The immediate expensing is only available in the year the property becomes available for use. The half-year rule is suspended where this measure applies. The $1.5 million limit is prorated for short taxation years and is shared amongst associated members of a group of CCPCs. Any unused portion of the limit cannot be carried forward.
CCPCs acquiring more than $1.5 million of eligible property in a taxation year may decide which CCA class to apply the immediate expensing rules to, with any excess capital cost over $1.5 million subject to the normal CCA rules. Enhanced CCA deductions that are already available for eligible assets under the existing accelerated investment incentive rules, such as the full expensing for manufacturing and processing machinery and equipment and for clean energy equipment, does not reduce the maximum deduction available under this new immediate expensing proposal.
Specifically, a CCPC may expense up to $1.5 million in addition to all other CCA claims under existing rules, as long as the total CCA deduction does not exceed the capital cost of the property.
Immediate expensing is restricted by any existing rules that would otherwise restrict a CCA deduction, such as rules related to limited partners, specified leasing properties, specified energy properties and rental properties. In addition, property that has been used, or acquired for use, for any purpose before it was acquired by the taxpayer is eligible for immediate expensing only if both of the following conditions are met:
- The taxpayer or a non-arm's length person did not previously own the property, and
- The property was not transferred to the taxpayer on a tax-deferred "rollover" basis.
Immediate expensing applies to eligible property acquired on or after April 19, 2021 that is available for use before 2024.
For more details, see TaxNewsFlash-Canada 2021-21, "2021 Federal Budget Highlights".
Potential planning opportunities
These new rules on immediate expensing of eligible property present several potential planning opportunities for CCPCs.
Timing of acquisitions/available for use
CCPCs should consider the timing of acquiring eligible property to ensure, where possible, that they are within the $1.5 million maximum annual limit in a particular taxation year. In particular, CCPCs may want to consider whether they can accelerate or delay capital expenditures, if they would otherwise incur excess expenditures in one year and a shortfall in another, since they cannot carryforward any unused portion of the limit. Since the immediate expensing applies in the year the property is available for use, CCPCs with large equipment projects that exceed the $1.5 million limit may also want to consider whether they can bifurcate those projects so that certain assets are available for use in different taxation years.
Which entity will claim the expenses in an associated group?
Where several CCPCs in an associated group incur eligible expenditures that in aggregate exceed the $1.5 million limit, the group should also consider where the relief is most needed (i.e., taxable vs. non-taxable entities) since the annual $1.5 million limit is shared amongst the associated group.
Which assets should the additional CCA be claimed on?
CCPCs with eligible acquisitions in excess of $1.5 million should determine which classes the accelerated expensing should apply to. Corporations should consider factors such as the rate that would otherwise apply on the class, as they would likely use the accelerated expensing on the lower rate classes first (e.g., class 8 equipment).
CCPCs should also note that these new rules do not affect the existing measures to accelerate the write off of certain assets (e.g., M&P assets). However, there are other measures, such as restrictions on rental properties or specified leasing rules, that may affect the ability to fully utilize the immediate expensing opportunity.
In addition, companies should consider the potential recapture implications when the assets are disposed in the future.
For more information, contact your KPMG adviser.
Information is current to July 26, 2021. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500