The Government of Canada is extending the deadline for the acquisition of computer equipment eligible for tax relief from June 30, 1999 to October 31, 1999. This will be of benefit to small-and-medium-sized business in addressing the year 2000 ("Y2K") issue.
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 Y2K compliant.
This accelerated capital cost allowance deduction builds upon previous government initiatives and signals a continued concern about the year 2000 preparedness of businesses, especially smaller firms.
Current expenditures – The 1998 federal 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 that functionality in the year 2000 are fully deductible in the year incurred.
Capital expenditures – Concern has 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’s new initiative provides additional immediate tax relief to small-and-medium-sized firms by allowing 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 from January 1, 1998 will qualify. The acquisition period originally scheduled to terminate on June 30, 1999 is to be extended until October 31, 1999 to encourage firms to act by assessing their Y2K readiness and taking needed action.
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.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a PricewaterhouseCoopers LLP professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your PricewaterhouseCoopers LLP advisor.
PricewaterhouseCoopers LLP is a Canadian member firm of PricewaterhouseCoopers International Limited, an English company limited by guarantee.
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