Legislation was recently passed into law for a new temporary measure that allows Canadian-controlled private corporations (CCPCs), unincorporated businesses carried on directly by Canadian resident individuals (other than trusts), and certain eligible partnerships to immediately expense up to $1.5 million of eligible property in each year starting in 2021 for CCPCs and in 2022 for other eligible taxpayers.
The new temporary measure allows CCPCs to immediately expense certain capital property acquired on or after April 19, 2021 and that becomes available for use before 2024. With changes introduced in 2022, this law also allows the immediate expensing of eligible property acquired by Canadian resident individuals (other than trusts) or Canadian partnerships where all the partners are CCPCs or Canadian resident individuals (other than trusts) on or after Jan. 1, 2022.
The property must become available for use before 2025 (or before 2024 for partnerships where not all the partners are individuals). Ineligible are multi-tiered partnerships, which are partnerships with other partnerships as members. Immediate expensing would be available only in the year in which the eligible property becomes available for use. The half-year rule would not apply to eligible property that is immediately expensed.
$1.5 million limit
The immediate expensing measure has a limit of $1.5 million per taxation year that must be shared among members of an associated group of eligible persons or partnerships. The rules generally work in a similar manner as the allocation of the business limit for purposes of the small business deduction.
Where the $1.5 million limit is not used in a taxation year, there is no opportunity to carry forward the excess capacity. The limit would be prorated for short taxation years.
What properties are eligible?
For purposes of this new measure, eligible property generally includes all depreciable capital property, other than property included in capital cost allowance (CCA) classes 1 to 6, 14.1, 17, 47, 49 and 51. These exceptions generally pertain to long lived assets, such as buildings and certain structures, and unlimited life intangibles including goodwill.
Immediate expensing would generally only be available on eligible property that:
Was neither previously owned by the taxpayer or a non-arm's length person
Has not been transferred to the taxpayer on a tax-deferred rollover basis
Interactions with other existing deductions
Eligible persons or partnerships that have more than $1.5 million in eligible property that becomes available for use in a year would be allowed to choose which CCA class the immediate expensing would apply to and any excess capital cost would be subject to the normal CCA rules.
It is important to know that the availability of existing enhanced deductions, such as the full expensing of manufacturing and processing machinery and equipment and clean energy equipment, would not reduce the $1.5 million limit under this new immediate expensing measure.
On the other hand, the existing provisions that can restrict a CCA claim in certain situations would continue to apply such as rules pertaining to specified leasing properties, specified energy properties, rental properties, and limited partners.
Understanding the benefit
The new rules do not change the total amount of CCA that may be claimed in respect of an asset. The changes instead accelerate the rate at which CCA can be claimed on eligible property for tax purposes by allowing the immediate expensing of eligible property in the year that property becomes available for use. This would have the effect of reducing taxable income in that first year. No CCA would be available in respect of that asset in subsequent years since the full amount has been claimed. As such, the main benefit of the new measure is tax deferral.
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