Federal Tax UpdateV3

The Federal Government’s 2018 Fall Economic Update cites the radical tax changes in the US which have eroded the relative tax advantage for corporations doing business in Canada.  In response, the federal government has announced $16.5 billion in tax measures over the next six years and $1 billion in spending in order to boost Canadian competitiveness. The government announced the following incentives:

  • Accelerated depreciation on certain capital property acquisitions
  • Deductions for the oil and gas industry
  • Expensing for Manufacturing and Processing Equipment
  • Expensing for clean energy equipment
  • Mineral Exploration Tax Credit extended
  • Media and News Organizations
  • Digital news subscribers

The Update projects the federal deficit to be $19.6 billion for 2019-20.  The Finance Minister has deferred the goal of a balanced budget in order to implement these changes.  It is now expected that the current deficits will continue at least through 2022-23, decreasing to $12 billion by that time.

CAPITAL PROPERTY INCENTIVES

ACCELERATED DEPRECIATION INVESTMENT INCENTIVES

The Update introduces a new Accelerated Investment Incentive to generally allow Canadian businesses that acquire capital property to be eligible for an enhanced first-year tax depreciation on qualifying assets acquired after November 20, 2018. This incentive will apply to tangible capital assets (e.g., vehicles, equipment and buildings) as well as intangible capital assets (e.g., patents and intellectual property) that are subject to the Capital Cost Allowance (CCA) rules. To qualify, neither the taxpayer nor a non-arm’s-length person must have previously owned the property; and the property cannot have been transferred to the taxpayer on a tax-deferred “rollover” basis.

Under this change, businesses will be able to deduct up to three times the amount of tax depreciation that would otherwise apply in the year that an asset is available for use. This is achieved by allowing businesses to apply the prescribed CCA rate to one-and-a-half times the net qualifying addition to the class for the year, and do not apply the “half-year” rule. However, this larger deduction for the first year is ultimately offset by reductions to the deductions allowed in future years.

The Accelerated Investment Incentive, which will apply on a pro-rated basis for short taxation years, will be gradually phased out starting in 2024, where the maximum enhanced tax depreciation will be up to two times the normal amount, and will not apply to capital property available for use after 2027. In addition, the Accelerated Investment Incentive will not be available for manufacturing and processing machinery and equipment or clean energy equipment that benefits from the new expensing rules announced in the Update.

DEDUCTIONS FOR THE OIL AND GAS INDUSTRY

The Update notes that, under the Accelerated Investment Incentive, eligible Canadian development expenses and Canadian oil and gas property expenses will also generally be eligible for a first-year deduction equal to one-and-a-half times the deduction that would otherwise be available.

EXPENSING FOR MANUFACTURING PROCESSING EQUIPMENT

The Update allows Canadian businesses a 100% write-off of the cost of machinery and equipment to manufacture and process goods used in Canada in the year it is available for use in the business. Businesses will be able to immediately expense qualifying assets acquired after November 20, 2018. Specifically, these new rules effectively increase the tax write-off for machinery and equipment currently included in CCA Class 53 (or 43, if acquired after 2025) to 100% in the year it is available for use in a business.  Government calculations suggest that this will lower the average overall tax rate on new business investment from 17% to about 14%.

This change will be gradually phased out for investments that become available for use in 2024, where the first-year deduction will drop to 75% (with a subsequent drop to 55% for investments available for use in 2026), and will no longer be in effect for investments available for use after 2027. These rules will also apply on a pro-rated basis for short taxation years.

To qualify, neither the taxpayer nor a non-arm’s-length person must have previously owned the property; and the property cannot have been transferred to the taxpayer on a tax-deferred “rollover” basis.

Expensing for clean energy equipment.

The Update allows specified clean energy equipment to be eligible for immediate expensing, for eligible assets acquired after November 20, 2018. Specifically, these new rules effectively increase the tax write-off for specified clean energy equipment currently included in CCA Classes 43.1 and 43.2 to 100% in the year it is available for use in a business.

The new clean energy equipment expensing rules will be gradually phased out for investments that become available for use in 2024, where the allowance will drop to 75% (with a subsequent drop to 55% for investments that become available for use in 2026), and will no longer be in effect for investments available for use after 2027. These rules will also apply on a pro-rated basis for short taxation years.

To qualify, neither the taxpayer nor a non-arm’s-length person must have previously owned the property; and the property cannot have been transferred to the taxpayer on a tax-deferred “rollover” basis.

MINERAL EXPLORATION TAX CREDIT EXTENDED

The Update extends the 15% Mineral Exploration Tax Credit to March 31, 2024 (from March 31, 2019). The Mineral Exploration Tax Credit is available to individuals who invest in mining flow-through shares and applies to specified mineral exploration expenses incurred in Canada and renounced by a corporation to flow-through share investors.

OTHER MEASURES

MEDIA AND NEWS ORGANIZATIONS

The Update announced $600 million in incentives for the media section.  This includes a new refundable tax credit for qualifying news organizations, effective January 1, 2019. The Update notes that the eligibility criteria for this tax credit have not yet been determined. Finance says it will provide additional details in the 2019 federal budget.

In addition, the Update announces that Canada intends to allow eligible non-profit journalism organizations to qualify as qualified donees under the charity rules. As a result, these organizations will be allowed to issue official donation receipts and be eligible to receive funding from registered charities. Finance does not provide further details on this change.

DIGITAL NEWS SUBSCRIBERS

The update announces that Canada plans to introduce a new temporary, non-refundable 15% tax credit for qualifying subscribers of eligible digital news media.

FUNDING MEASURES

  • Launch an Export Diversification Strategy to increase Canada’s overseas exports by 50% by 2025
  • Provide a further $800 million over five years to the Strategic Innovation Fund to support eligible Canadian businesses involved in innovative projects

ONTARIO GOVERNMENT – CORPORATE PASSIVE

The Ontario government announced on November 15th that it will not implement the federal government’s tax change which grinds the small business limit in corporate groups earning more than $50,000/yr in passive income.  The move allows corporate groups earning this income to keep the 8% reduction in Ontario tax on the first $500,000 in corporate income.  The government calculates that the overall savings to corporate taxpayers in Ontario will be $160 million annually.

Tax preparers will need to review their software to ensure it properly reflects this move for corporations doing business in Ontario only.

The information in this commentary is current as of November 21, 2018. This publication has been carefully prepared and written in general terms for your guidance only. The preceding commentary cannot be relied upon to cover specific situations and you should act or not act based on the information contained herein. Please contact

Your Contact Partner or Shawn Bausch, BBA – Tax Manager at shawn@sloangroup.ca to discuss these matters in the context of your particular circumstances.

OUR LEADERSHIP TEAM 

Allen Sloan 416-649-7700
Irving Feldman 416-649-7708
Jerry Paskowitz 416-649-7702
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Lorne Davidson 416-649-7722

 

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