On November 21, 2018, Canada's Finance Minister Bill Morneau presented the federal government's Fall Economic Statement (Statement), which includes significant tax changes that take effect immediately.
This bulletin highlights two tax measures included in the Statement: changes to Canadian tax depreciation rates for new investments in capital assets, and measures designed to support Canadian journalism.
ACCELERATED TAX DEPRECIATION FOR NEW CAPITAL INVESTMENTS
Background: U.S. Tax Reform
In December 2017, the U.S. enacted significant legislative changes. These changes include a dramatic reduction in the headline U.S. federal corporate income tax rate — from 35 per cent to 21 per cent, and the introduction of temporary 100 per cent "bonus depreciation" for certain capital investments.
Although these changes were in some respects offset by new U.S. rules pertaining to interest deductibility, loss utilization and measures to subject some foreign active business income to immediate U.S. tax, it is widely understood that the overall effect of these changes was to greatly reduce, if not eliminate, the long-standing Canadian corporate tax advantage.
In the 2018 Canadian federal budget, the government committed to studying the impact of U.S. tax reform on Canadian competitiveness. The Statement gives effect to the government's response.
As widely expected, the government decided against a reduction in the headline federal corporate income tax rate. The generally prevailing federal rate will remain at 15 per cent, and the combined federal-provincial rate will generally remain in the range of 26-27 per cent in much of Canada.
Instead, as also anticipated, the Statement proposes time-limited changes to Canadian tax depreciation rules. The government expects these changes, which are discussed in more detail below, to reduce the so-called "marginal effective tax rate" of new business investments in Canada from 17 per cent to 13.8 percent, the lowest in the G7.
Accelerated Investment Incentive
The so-called "Accelerated Investment Incentive" consists of a series of proposed measures. The measures are focused on the rules applicable to capital cost allowance or "CCA", also known as tax depreciation, and the rules applicable to the deduction of certain resource expenditures (specifically Canadian oil and gas property expenses and Canadian development expenses).
By way of background, taxpayers engaged in a business in Canada may deduct the cost of capital assets acquired by deducting a specified percentage of the asset's cost in the year of acquisition and subsequent years, in most cases on a declining balance basis. The applicable rate depends on the type of property, and often, though not always, is connected to the property's generally expected useful life.
Eligible assets include virtually all tangible and intangible capital property, such as machinery and equipment, motor vehicles, computers, buildings and intangible assets such as patents, time-limited licences, trade-marks and goodwill.
The first measure will increase the first-year CCA deduction for almost all new acquisitions of capital assets. This will be done as follows:
- The "half-year" rule that normally limits CCA in the year an asset is first acquired (and available for use) will be suspended. This rule generally provides that in the first year the asset is acquired and available for use (referred to as the "First Year"), only one-half the percentage generally specified for that asset may be deducted. For example, for computers, which have a 55 per cent write-off rate, the deduction is limited to 27.5 per cent in the First Year.
- The applicable CCA rate for the First Year will be 1.5 times the normal rate specified for that asset.
Taken together, these measures will generally increase the deduction available in the First Year to three times the otherwise available deduction. For example, for computers, the CCA deduction allowed in the First Year will be 82.5 per cent (three times 27.5 per cent).
The accelerated deduction will not change the total amount of CCA deductible over the period during which the asset is used in the business. The enhanced deductions in the First Year will leave a smaller unamortized balance available to be deducted in later years.
This measure will apply only to capital property acquired after November 20, 2018, and will be gradually phased out starting in 2024. The measure is in response to the corresponding U.S. tax reform measures, and is similarly temporary.
Subject to the limitations noted below, the change applies to all types of capital asset acquisitions, both tangible and intangible. The government notes in the Statement that in some respects, the change is more favourable than the U.S. measure, which is limited to assets with a normal useful life of 20 years or less, and which excludes some assets such as patents.
There are two types of capital property that will be ineligible for the Accelerated Investment Incentive:
- A person who is considered to "not deal at arm's length" with the taxpayer claiming the deduction must not have previously owned the property. This would disqualify acquisitions from other members of the same corporate group, but may also go further than intended because of the breadth of the "non-arm's length" concept.
- The property must not have been transferred to the taxpayer on a tax-deferred rollover basis. This means that even if the property was acquired from an arm's length seller, but the consideration included shares (or partnership interests) of the acquirer in circumstances where a rollover election is filed (seemingly, even for a partial rollover), the incentive would be unavailable.
For certain resource expenditures, the Accelerated Investment Incentive measures will largely apply in the same manner (i.e., the rate of deduction for the First Year will be 1.5 times the normal rate otherwise specified for the expenditure pool); however, there is no half-year rule that applies to resource expenditures.
Another measure will provide an enhanced First-Year CCA deduction for manufacturing and processing machinery and equipment. This measure will provide a 100 per cent deduction in the First Year — increased from 25 per cent under current law — for such assets acquired after November 20, 2018. The 100 per cent rate will continue in effect through 2023, after which it will be phased out.
Similar rules will apply to acquisitions of certain "clean energy equipment".
SUPPORT FOR CANADIAN JOURNALISM
The Statement includes a series of new measures to support Canadian journalism. As noted by the government, recent changes in technology and the way Canadians consume news have made it difficult for many news outlets to find and maintain financially stable business models. Following a period of study, the government has now come forward with three novel measures to support this sector.
The Notice of Ways and Means Motion that accompanied the Statement does not include draft legislation regarding any of the three measures and there are many details that still need to be determined. The government intends to appoint an independent panel to advise on the parameters of the measures and has committed to provide further details in the 2019 Canadian federal budget.
Non-Profit Journalism Organizations
The first measure provides that "non-profit journalism organizations" will be able to qualify as so-called "qualified donees". Qualified donees, including most notably registered charities, are able to issue an official donation receipt to a taxpayer that makes a gift; the taxpayer may then claim a deduction or tax credit, thereby reducing the after-tax cost of the gift. Qualified donees are also able to receive gifts from charitable organizations and foundations.
This measure appears intended to assist qualifying news organizations in funding their operations by soliciting gifts from readers and other interested persons. The Statement does not provide specific information about what would constitute a "non-profit" journalism organization for this purpose.
Finance officials have acknowledged informally that further specifics will need to be carefully considered when it comes time to draft definitive legislation.
Tax Credit For Qualifying News Organizations
The second measure is for both non-profit and for-profit qualifying news organizations. Specifically, a new refundable tax credit will be available to qualifying news organizations.
It is suggested this measure will apply to labour costs (and perhaps other expenditures), but the rate and other important details are not included in the Statement. Once established, the credit will apply as of January 1, 2019.
Digital News Subscriptions
The third measure is for consumers of news who have digital news subscriptions. Specifically, the government proposes that a new, temporary 15 per cent tax credit be available for the cost of such subscriptions.
This measure appears to be intended to support the development of digital news media. It will be interesting to see if provincial governments will parallel this measure.
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© 2018 Blake, Cassels & Graydon LLP.
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