Competitiveness Challenge: Are New Corporate Tax Changes Enough?

Canada’s competitive advantage in the global economy has been of concern since corporate tax reforms were introduced in the United States earlier this year, and especially after Finance Canada’s ill-fated attempt to reform the corporate tax system a year ago. Finance Minister Morneau delivered his response to the current challenges by proposing the acceleration of some Capital Cost Allowance measures in the November 21 Fall Economic Update.

The updates encourage businesses to invest in equipment with several proposed changes to the allowable claims for capital cost allowance (depreciation) on assets acquired after November 20, 2018, and before 2028. There was little by way of support, however, for new economy solutions like Knowledge-Based Capital. No income tax incentives were included, for now at least.   

That’s a missed opportunity as many countries are now investing significant resources into the development of intellectual property rights; comparable to what they’re putting into physical capital such as machinery, equipment and buildings. The OECD notes “New thinking is needed to update a range of policy frameworks – from tax and competition policies to corporate reporting and intellectual property rights.” in a 2013 report entitled “Supporting Investment in Knowledge Capital, Growth and Innovation”:

Here are the changes introduced by Mr. Morneau:

For most capital assets - except class 53: manufacturing and processing machinery and equipment and classes 43.1 and 43.2: clean energy equipment:

• First-year claims will be tripled for purchases between November 20, 2018, and December 32, 2023.
• Rather than restricting the claim to 50% of the normal Capital Cost Allowance (CCA) claim (half-year rule), the claim will be 150% of the normal CCA claim.
• For purchases in years 2024 to 2027, the half-year rule will be suspended and where the half-year rule does not apply, the claim will be 125% of the normal claim.
• For purchase after 2027 the current rules will apply.
• For class 53 - manufacturing and processing machinery and equipment):
• The CCA rate will be 100 % for purchases between November 20, 2018, and the end of 2023.
• For purchases in 2024 and 2025, the rate will be 75%
• For purchases in 2026 and 2027, the rate will be 55%.
• For purchases after 2027, the rate will return to 30% subject to the half-year rule.

For class 43.1 and 43.2 - clean energy equipment, the same rules for class 53 will apply for purchases between November 20, 2018, and December 31, 2027. After that, the current rules will apply.

In each case, the additional first-year claim will not affect the total amount of CCA that may be claimed in respect of any asset. As is currently the case, when assets are disposed of for more than their undepreciated capital cost, the excess claims will have to be recaptured.

Knowledge Bureau will keep its readers informed on interpretations of these new rules as they happen.  In the meantime, advisors with clients working in these industries will want to review tax savings opportunities as a result of these new proposals.

Additional educational resources: CE Summits – the January Advanced Tax Update. Register by December 15 to guarantee your attendance at these events which sell out quickly every year. It’s an opportunity to train your entire team for Tax Season 2019!

If you work with Canadian business owners, enhance your skills to guide them in making tax-efficient investments by taking the MFA – Business Tax Services Specialist designation. You’ll also want to attend the Spring CE Summit workshops, for post-budget action strategies you’ll need to apply after the release of the 2019 Federal Budget.

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