Tax Insights: 2018 Federal Fall Economic Statement ─ Tax highlights

Issue 2018-45

In brief

On November 21, 2018, the Federal Minister of Finance, Bill Morneau, presented the 2018 Federal Fall Economic Statement. The economic statement:

• introduces the Accelerated Investment Incentive
• allows an immediate write-off for newly-acquired manufacturing and processing (M&P) and specified clean energy equipment

This Tax Insights discusses these and other tax initiatives outlined in the economic statement.

In detail

Business tax measures

Accelerated Investment Incentive (AII)

The economic statement introduces the AII, which will provide an increased first-year capital cost allowance (CCA) deduction for “eligible property” acquired after November 20, 2018 and available for use before 2028. The AII will apply to all capital property subject to the CCA rules, except:

• M&P and specified clean energy equipment (see below for the enhanced rules that apply to these properties)
• property previously owned by the taxpayer or a non-arm’s length person
• property transferred to the taxpayer on a tax-deferred “rollover” basis

For eligible property that becomes available for use before 2024, the incentive will provide a maximum first-year CCA deduction on the net additions to a CCA class that is 1.5 times the standard CCA deduction for that class, subject to a maximum of 100% (effectively suspending the half-year rule and providing a CCA deduction that is up to three times the usual first-year maximum).

For example, a Class 8 property eligible for CCA at a maximum annual rate of 20% - normally reduced to 10% in the first year - acquired after November 20, 2018, will now be eligible for CCA of up to 30% in the first year it becomes available for use. The maximum annual CCA in respect of the property for subsequent years will continue to be 20% calculated on the declining-balance basis.

The increased first-year deduction will be phased out for property that becomes available for use after 2023 and before 2028.

The AII can only be claimed in the first year a property becomes available for use, so if a CCA deduction is deferred in that year, there will be no enhanced deduction available in a later year. Total CCA available over the life of a property will not change as a result of the AII – the enhanced first-year deduction will effectively result in smaller deductions in future years.

Short taxation years

The AII will be pro-rated for short taxation years, following existing rules for such years, with no ability to claim any further enhanced deduction in a following year.

Additional allowances and other deductions.

The AII will generally apply to additional allowances permitted under the Income Tax Regulations, such as the additional allowances for property at a liquefied natural gas facility. This incentive will also generally apply to eligible Canadian development expenses and Canadian oil and gas property expenses

Restrictions

The Income Tax Act and the Income Tax Regulations include a series of rules designed to protect the integrity of the CCA regime and the tax system more broadly, which can operate to limit the amount of CCA deductible in a particular year for certain taxpayers in some situations. These integrity rules and restrictions continue to apply for all property that qualifies for the AII.

Immediate write-off for newly-acquired M&P and clean energy equipment

Eligible M&P equipment acquired and available for use after 2015 and before 2026 currently qualifies for a temporary accelerated CCA rate of 50% on a declining-balance basis.

Specified clean energy equipment acquired and available for use before 2025 currently qualifies for accelerated CCA rates under Class 43.1 (30%) and Class 43.2 (50%) on a declining-balance basis.

The economic statement enhances the first-year CCA deduction for eligible M&P and specified clean energy equipment acquired after November 20, 2018 and available for use before 2028. The enhanced CCA deduction that is available in the first year such property becomes available for use will be:

• 100% for property that becomes available for use before 2024
• gradually phased out for property that becomes available for use after 2023 and before 2028

The half-year rule is effectively suspended for property eligible for this enhanced first-year CCA deduction.

The rules relating to short taxation years and the restrictions discussed regarding the AII (see above) also apply to this enhanced first-year CCA deduction.

Personal tax measures

Mineral Exploration Tax Credit for Flow-Through Shares

The economic statement extends eligibility for the mineral exploration tax credit for an additional five years, to flow‑through share agreements entered into before April 1, 2024.