Immediate Expensing of Depreciable Property - $1.5M

Immediate Expensing of Depreciable Property - $1.5M

A recent law has been passed that enables Canadian-controlled private corporations, unincorporated businesses run by Canadian residents, and certain eligible partnerships to deduct up to $1.5 million of eligible property in each year starting in 2021 for CCPCs and in 2022 for other eligible taxpayers. This measure is not restricted to certain industries and aims to provide businesses with more capital to invest in assets that promote growth. Some of the elements of this measure were first suggested in the 2021 budget as part of the federal government's plan to increase business investment.

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How it works ?

‍The new measure allows CCPCs to immediately expense capital property acquired on or after April 19, 2021 and which becomes available for use prior to 2024. With changes introduced in 2022, this law allows the immediate expensing of eligible property acquired by Canadian resident individuals or Canadian partnerships where all the partners are CCPCs or Canadian resident individuals on or after Jan. 1, 2022.

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The property must become available for use prior to 2025 (or before 2024 for partnerships where not all the partners are individuals). The half-year rule does not apply to eligible property that is immediately expensed.

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The $1.5 million limit

‍The immediate expensing measure has a maximum of $1.5 million per tax year that must be divided among members of an associated group of eligible individuals or partnerships. The rules operate in a similar way as the allocation of the business limit for the purpose of the small business deduction. If the $1.5 million limit is not used in a tax year, there is no possibility to carry forward the unused amount. The limit would be proportionally reduced for short tax years.

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Eligibility

‍Under this new measure, eligible property generally includes all depreciable capital property, except for property that falls under capital cost allowance classes 1 to 6, 14.1, 17, 47, 49 and 51. These exceptions generally relate to long-lived assets such as buildings and certain structures, and intangible assets with unlimited life, including goodwill.

For immediate expensing to be applied, eligible property must generally meet the following criteria:

• 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

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Things to Consider when Claiming

‍Eligible persons or partnerships that have more than $1.5 million in eligible property that becomes available for use in a year would have the option to choose which CCA class the immediate expensing applies to, and any excess capital cost would be subject to the standard CCA rules.

It's important to note 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 affect the $1.5 million limit under this new immediate expensing measure. However, existing  provisions that can limit a CCA claim in certain situations, such as rules related to specified leasing properties,  specified energy properties, rental properties, and limited partners, would still apply.

Even if a CCPC is experiencing a loss, it may still be beneficial to claim the immediate expensing deduction if it can be used to offset profits in the next few tax years. It's recommended to consult with a tax advisor to evaluate each situation to determine if a claim should be made or if an amended return should be filed to make a claim.