PLEASE NOTE: THIS INFORMATION WAS ORIGINALLY SUBMITTED BY COOPERS & LYBRAND, CANADA
The Canadian Finance Minister has announced tax relief for businesses to address the year 2000 computer compliance problem. Under the tax relief package, accelerated capital cost allowance ("CCA"), essentially tax depreciation, deductions of up to $50,000 will be provided for computer hardware and software acquired to replace systems that are not year 2000 compliant. Acquisitions during the period January 1, 1998 to June 30, 1999 will qualify for the special tax relief.
To focus the tax relief on small and medium-sized businesses, only unincorporated firms and corporations not subject to the large corporations capital tax will qualify. There will be special rules for corporate groups and partnerships that have corporate members.
The year 2000 compliance problem is a design flaw in software applications and in certain microprocessors related to storage of the year designation that could play havoc when the calendar year changes from 1999 to 2000. Many software applications such as accounting systems and certain types of computer hardware including desktop computers, networks, and the microprocessor chips that control transportation systems, machinery, elevators, office equipment, lights, building climate, and security systems could be affected.
This new accelerated capital cost allowance deduction builds upon previous government initiatives and signals its continued concern about the year 2000 preparedness of businesses, especially smaller firms.
Current expenditures - The February 1998 budget clarified the tax treatment of certain year 2000 expenditures and Revenue Canada issued a technical bulletin on this issue. Specifically, expenditures made only to ensure functionality in the year 2000 (i.e., a repair) are fully deductible in the year incurred. In these instances, taxpaying firms would be provided with immediate tax relief.
Computer chips and firmware - The government has also confirmed that expenditures on computer chips and firmware (software that is embedded in a computer chip) will be treated like other year 2000-related costs. That is, expenditures on computer chips and firmware made only to ensure functionality in the year 2000 are fully deductible in the year incurred.
Capital expenditures - Concern had been expressed that small and medium-sized businesses need to address the year 2000 problem on a priority basis, but may face certain financial constraints. The government now proposes to provide additional immediate tax relief to small- and medium-sized firms by providing an immediate write off of 100 per cent of the cost of computer hardware and software acquired to address their year 2000 problem.
The write off will take the form of an accelerated CCA deduction claimable in the year of acquisition, thereby effectively permitting small- and medium-sized enterprises to deduct immediately CCA that would otherwise have only been deductible over future years:
* for eligible computer hardware and systems software the accelerated CCA deduction will be 85 per cent of cost (this, combined with the regular CCA claim, will result in a deduction of 100 per cent of the cost of eligible expenditures in the year of acquisition); and
* for eligible application software the accelerated CCA deduction will be 50 per cent of cost (this, combined with the regular CCA claim, will result in a deduction of 100 per cent of the cost of eligible expenditures in the year of acquisition).
In order to be eligible, the computer hardware and software must be year 2000 compliant and be acquired to replace non-compliant hardware and/or software acquired before 1998. Only expenditures for eligible hardware and software acquired during the period January 1, 1998 to June 30, 1999 will be eligible.
To claim the tax relief taxpayers must make a prescribed election with their tax return. In the current absence of a specific election form, Revenue Canada will accept a letter, filed with the tax return, that identifies the eligible property being acquired, its cost and the date of acquisition and a description of the property being replaced. This letter will fulfil the requirement to make an election in prescribed manner.
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
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