Canada: Tax planning for immediate expensing of capital property

New rules present several potential planning opportunities for Canadian-controlled private corporations.

Draft legislation still pending

Businesses planning to acquire capital assets may want to consider how those acquisitions could 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, and they may want to take a closer look at the timing of acquiring eligible capital assets and consider to which assets they could apply the new rules in situations when they have a choice, among other considerations.

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 19 April 2021, and that is available for use before 2024.

Background

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, providing up to a maximum of $1.5 million* of additional CCA per taxation year. Read TaxNewsFlash

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 may want to consider the timing of acquiring eligible property so that, when possible, 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 tax years.

Which entity will claim the expenses in an associated group?

When several CCPCs in an associated group incur eligible expenditures that in aggregate exceed the $1.5 million limit, the group may 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 could the additional capital cost allowance be claimed on?

CCPCs with eligible acquisitions in excess of $1.5 million may need to determine which classes the accelerated expensing apply to. Corporations are to 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).

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 need to consider the potential recapture implications when the assets are disposed in the future.
 

Read a July 2021 report prepared by the KPMG member firm in Canada

*$=Canadian dollar

 

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