There are two big tax changes that have been recently introduced. Small business owners should be aware of these changes, because both of them offer substantial tax breaks. First, there is the ability to immediately expense up to $1.5 million per year in newly acquired capital assets. Second, there is a new tax credit for investments made by a small business that will improve the air quality of their premises. Both of these measures are temporary, so utilize them while you can. Immediate Expensing The 2021 Federal Budget announced that a Canadian-controlled private corporation (“CCPC”) will be able to immediately expense acquisitions of depreciable property of up to $1.5 million per year. The rules were to apply as of April 19, 2021, only a few details on these new rules were provided. The government recently provided more specifics on how these rules will work. It was also announced that sole proprietorships and partnerships, which were notably absent from the description in the budget documents, will also be eligible for the immediate expensing. This means that you can potentially reduce your income for tax purposes by the full cost of property that you acquire, subject to all the conditions and restrictions discussed below. The immediate expensing incentive is only available to an “eligible person or partnership”, which includes: A corporation that was a CCPC throughout the year; An individual (other than a trust) who was resident in Canada throughout the year; or A Canadian partnership all of the members of which were, throughout the period, persons described in (a) or (b) or a combination thereof (excludes multi-level partnerships). Very generally, a CCPC is a corporation that is not publicly traded or controlled by non-residents. Eligible Property To be eligible for the immediate expensing incentive, the property acquired must be “immediate expensing property”, which is property that is eligible for capital cost allowance. However, the incentive is unavailable to buildings, certain intangible assets, and pipelines, because these are generally considered long-lived assets. Also, the property must have been acquired within a specific time range. In the case of a CCPC, the property must be acquired after April 18, 2021. In the case of a Canadian partnership or Canadian resident individual, the property must be acquired after December 31, 2021. Moreover, the property must be available for use by a particular time. If the eligible person or partnership is an individual or a Canadian partnership all the members of which are individuals throughout the taxation year, the property must become available for use before 2025. In any other case (i.e., a CCPC or a partnership with at least one member who is not an individual), the property must become available for use before 2024. An asset is generally available for use when you first use it for the purpose of earning income. If the asset is a vehicle, it becomes available for use when you obtain all the necessary licensing and credentials required to operate it. Last, the property must meet one of two conditions. First, the property has not been used and no person or partnership has deducted CCA or a terminal loss in respect of the property. Or second, the property was not subject to a tax-deferred transfer and it was not previously owned or acquired by the eligible person or partnership or a non-arm’s length person or partnership. The assets that will benefit from the immediate expensing must be “designated immediate expensing property” in the taxation year, which is property that is immediate expensing property that became available for use in the taxation year. The designation is made on the tax return. The ability to designate immediate expensing property allows you to decide which property will benefit from the incentive. Property that takes longer to depreciate normally (for tax purposes) should generally be designated first. Calculating the Deduction The deduction for the immediate expensing incentive occurs before computing the deduction for regular CCA. The immediate expensing deduction for a taxation year is equal to the lesser of the following:
- The immediate expensing limit for the year—generally $1.5 million, with exceptions discussed below;
- The undepreciated capital cost at the end of the taxation year before the regular CCA deduction of designated immediate expensing property; and
- If the person or partnership is not a CCPC, the amount of income earned from a source that is a business or property (before CCA is deducted) in which the relevant designated property is used.
- Made or incurred under the terms of an agreement entered into before September 1, 2021;
- Related to recurring or routine repair and maintenance;
- For financing costs in respect of a qualifying expenditure;
- That is paid to a party with which the eligible entity does not deal at arm’s length;
- That is salary or wages paid to an employee of the eligible entity; or
- That can reasonably be expected to be paid or returned to the eligible entity, or to a person or partnership either not dealing at arm’s length with the eligible entity or at the direction of the eligible entity.