If your business plans to invest in tangible and intangible capital property by December 2027, the new draft legislation put forth by the federal government regarding the Accelerated Investment Incentive (AccII) may be of interest to you.
The new legislation proposes to provide businesses with the opportunity to accelerate the Capital Cost Allowance (CCA) claims on new eligible property purchases in the year of acquisition. In order to be eligible to claim the heightened CCA claim, the following conditions must be met:
- The depreciable property must be acquired after November 20, 2018
- The depreciable property must become available for use before 2028
In addition, the property must be purchased from an arm’s-length taxpayer or partnership in order to be eligible to claim CCA under the AccII. This applies to both new and used property.
This incentive can be applied to eligible property for which CCA is calculated on a declining-balance basis or a straight-line basis. Historically, CCA claimed in the year of acquisition is limited to one-half of the normal CCA rate that would otherwise be claimed. This is referred to as the half-year rule. While most capital asset purchases are subject to the half year rule, certain eligible property included in classes 12 & 14 are excluded. The AccII proposes to change the amount of CCA that can be claimed in the year of acquisition.
In order for eligible property to claim CCA, including proposed AccII CCA claims, the property must be “available for use”. This condition is commonly met when the asset is being used to generate income for the business, or when the property has been delivered and it is capable of producing a product or performing a service for which the business could sell.
The AccII consists of two phases. Phase one covers the period of November 21, 2018 to December 31, 2023 and offers the highest accelerated CCA claims for eligible property. During this phase, a business can increase the prescribed CCA rate by one-and-a-half times to apply to net additions to the class in the year. This will result in a CCA claim on eligible property that before November 21, 2018 was subject to the half year rule which is three times the normal first year deduction. Eligible property not normally subject to the half year rule will qualify for one-and-a-half times the normal first year deduction as well.
To illustrate the new rules consider the purchase of equipment in 2019, which is classified as Class 8 for CCA purposes. A purchase of $20,000 would yield the following CCA claims in the first two years of use:
Phase two includes capital expenditures made during January 1, 2024 to December 31, 2027 and offers incentives to a lesser degree. Eligible property subject to the half year rule purchased during those years will essentially be able to deduct the full amount of CCA in the year of acquisition as opposed to half. Eligible property not normally subject to the half year rule will be able to deduct one-and-a-quarter times the normal acquisition year allowance.
To illustrate this phase, consider the purchase of Class 8 equipment purchased for $20,000 in 2025. The CCA claims in Year 1 and 2 are as follows:
The CCA claims in Year 1 in both Phase One and Phase Two under the AccII provide a profitable business with a higher tax deduction in the year, and therefore reduces a business’ taxes payable.
The Accelerated Investment Incentive also allows assets to be expensed in the year of acquisition for manufacturing and processing machinery and equipment (Class 53), as well as clean energy equipment (Class 43.1 or 43.2) acquired between November 21, 2018 and December 31, 2023. The first year enhanced allowance for these types of equipment will reduce to 75% in 2024-2025, and finally to 55% in 2026-2027. This provides an additional opportunity for profitable businesses investing in manufacturing and processing equipment and clean energy equipment to reduce their taxable income in the year of acquisition, and thus minimize taxes payable.
Although the Accelerated Investment Incentive does not change the amount of CCA deductible over the life of the property, it does allow businesses the opportunity to shift the lion’s share of CCA to the beginning of the life of the asset. This provides profitable businesses with a quicker write-off of expenses for tax purposes, leading to lower taxable income, and a deferral of tax in the year of purchase of eligible property.
If you have any questions about the AccII and how it will affect your business, contact us at 905-517-2297 or at email@example.com
Blog post authored by Madison MacKellar