Canada: Business Income Tax Measures

Remittance Thresholds for Employer Source Deductions

Employers have an obligation to withhold amounts from remuneration paid to employees in respect of income tax, Canada Pension Plan ("CPP") contributions and Employment Insurance ("EI") premiums. Employers are then required to remit such amounts to the CRA. With respect to CPP and EI, the remittance includes both the employer and employee contributions. The frequency of an employer's remittance is dependant upon the particular category of remitter the employer falls in. The basis for determining which category an employer is included in is dependant on the employer's total average monthly withholding amount in preceding calendar years.  Two such categories are employers who, two calendar years ago, had a total average monthly withholding amount of:

  • $15,000 but less than $50,000 and are then required to remit deductions up to twice per month, depending on their payroll frequency ("Category 1"); and
  • $50,000 or greater and are then required to remit deductions up to four times per month, depending on their payroll frequency ("Category 2").

The Budget proposes to reduce the frequency of remittances of source deductions for the above categories of employers. Specifically the Budget proposes to:

  • increase the threshold amount for Category 1 employers from $15,000 to $25,000; and
  • increase the threshold amount for Category 2 employers from $50,000 to $100,000.

These changes will apply in respect of amounts withheld after 2014.

Tax Incentives for Clean Energy Generation

The Tax Act permits taxpayers to deduct capital cost allowance ("CCA") on depreciable assets. The rate of CCA is dependent on the class of assets on which CCA is being claimed. Class 43.2 assets (specified clean energy generation and energy conservation equipment) are subject to an accelerated CCA rate of 50% per year on a declining-balance basis. Class 43.2 assets are essentially assets that generate or conserve energy by:

  • using a renewable energy source (e.g. wind, solar, small hydro);
  • using fuel from waste (e.g. landfill gas, manure, wood waste); or
  • making efficient use of fossil fuels (e.g. high efficiency cogeneration systems that simultaneously produce both electricity and useful heat).

Eligible equipment of this nature is listed under Class 43.1 of Schedule II of the Income Tax Regulations, which list is incorporated by reference in Class 43.2. The main difference between the two classes is that to benefit from the higher accelerated rate of depreciation under Class 43.2, cogeneration systems and waste-fuelled electricity generation systems must meet a higher efficiency standard.

The available rate of CCA is referred to as "accelerated" because it is an exception to the general rule whereby the rate of CCA is intended to be based on the useful life of the asset. The Budget proposes to expand the eligible equipment for Class 43.2 (as well as Class 43.1) to include water-current energy equipment and equipment used to gasify eligible waste fuel for use in a broader range of applications. The goal of the change is to encourage investment in technologies that are more environmentally friendly and that may contribute to the diversification of Canada's energy supply.

Water-Current Energy Equipment

"Water-current" energy equipment converts the kinetic energy of flowing water into electricity without the use of a physical barrier such as a dam. Wave and tidal energy equipment are generally already eligible under Class 43.2. The Budget would expand Class 43.2 to apply to water-current energy equipment. Eligible property will include support structures, submerged cables, transmission equipment, and control, conditioning and battery storage equipment. However, it will not include buildings, distribution equipment or auxiliary electricity generating equipment.

The availability of accelerated CCA for water-current energy equipment, as well as wave and tidal energy equipment, will be dependant on the property, when it becomes first available for use, complying with all applicable Canadian environmental laws, by-laws and regulations.

These changes will apply to property acquired on or after Budget Day that has not been used or acquired for use before Budget Day.

Gasification Equipment

"Gasification" is a term used to describe the process that converts organic or fossil-based materials into hydrogen, carbon monoxide and carbon dioxide, resulting in a product known as "producer gas" or "syngas". Gasification equipment is currently eligible under Class 43.2 as "fuel upgrading equipment" when it is used in an eligible cogeneration facility or an eligible waste-fuelled thermal energy facility. The Budget would expand Class 43.2 to apply to property used to gasify eligible waste fuel for other applications (e.g. to sell the producer gas for domestic or commercial use). Eligible property will include piping, storage equipment, feeding equipment, ash-handling equipment and equipment to remove non-combustibles and contaminants from the producer gas. However, it will not include buildings, other structures, or heat rejection equipment.

The availability of accelerated CCA for eligible property will be dependant on the property, when it becomes first available for use, complying with all applicable Canadian environmental laws, by-laws and regulations.

These changes will apply to property acquired on or after Budget Day that has not been used or acquired for use before Budget Day.

Consultation on Eligible Capital Property

The Budget announces a consultation on proposed changes to the eligible capital property ("ECP") regime under the Tax Act. Currently, the Tax Act has CCA provisions for capital expenditures for tangible property (e.g. equipment, furniture and buildings) and a separate regime for capital expenditures in respect of intangible property (e.g. goodwill and customer lists). These assets are referred to under the Tax Act as ECP.

Expenditures on account of ECP are deductible (slowly) in computing income from business. Under the ECP regime, only 75% of an eligible capital expenditure is added to the cumulative eligible capital ("CEC") pool, from which a deduction of 7% may be taken on an annual declining-balance basis.

The ECP regime further provides that 75% of an eligible capital receipt, in contrast, is subtracted from the CEC pool or, if the CEC pool is depleted, results in recapture of previously-deducted CEC. Any excess eligible capital receipts are included in income from the business at a 50% inclusion rate.

The Budget acknowledges that the ECP regime has become increasingly complicated and notes that certain stakeholders have suggested a replacement regime based on a new class of depreciable property to which the CCA rules would apply. Detailed draft legislative proposals will be released for consultation shortly, and the timing for the implementation of the proposals will be determined following the consultation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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