Immediate Expensing
If you've always wished you could write off your equipment at the time of purchase, listen up!
There was an interesting tax change proposed in the 2021 federal budget. It was called the immediate expensing measure. There was some talk about what that would mean and farm publications got really excited for half a minute. Farmers are notorious for their aversion to paying taxes and their sometimes comical attempts to find ways of delaying the tax liability. There are so many stereotypes about farmers buying equipment in December or just before year-end that dealers count on this.
So the promise of a tax change that would allow businesses to claim capital asset purchases as an expense seemed amazing. Well, that change is now in the draft legislation stage, meaning you can actually start to consider using it. Originally it was just for qualifying corporations but now individuals and some partnerships (where all the partners would have qualified as individuals) can potentially use it too.
The Legislation
You can read the full documents here (with explanation notes here) but I’ll sum it up for you. Designated immediate expensing property that is not a permanent structure or bolted down somewhere can claim CCA at 100% of its cost in the year it is acquired. That’s the very simple version of it. Reality is a bit more complicated.
If your farm is structured as a Canadian-controlled private corporation, purchases can qualify if it is acquired after April 18, 2021, and becomes available for use before January 1, 2024. If you farm as a sole proprietor or in a partnership, the asset must be purchased after December 31, 2021, and prior to January 1, 2025, to be considered. There is a maximum for what can be expensed of $1.5 million per taxation year and that limit must be shared between associated entities.
A purchase can be a “designated immediate expensing property” (DIEP) if it is a depreciable asset. Assets categorized in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51 are not eligible. This means purchases such as buildings, grain storage, quota are excluded. If you can move and relocate the purchase easily, it probably qualifies. There are also additional conditions and restrictions, for example regarding non-arm’s length transfers and used property.
Hiccups to Consider
If you are not incorporated, the measure can not be used to increase or create a loss within the taxation year, meaning your deduction is limited to the amount of income generated within the year. That means that the measure is of no use to you if your farm is operating at a loss.
In addition (and this applies to everyone), if you make a purchase a DIEP and claim the 100% deduction, that asset becomes 100% taxable if you ever go to sell it. Since the asset has already claimed its full capital cost allowance, when you go to sell it, the proceeds become recovered capital cost allowance. For example, if you purchase a $250,000 tractor in 2022 and it meets all of the qualifications, you will be adding an expense of $250,000 to your bottom line for 2022. Now, if in 5 years you turn around and trade that tractor for $175,000, you will be adding $175,000 to your income for that year.
Another important part to consider is that the purchase must be available for use by the aforementioned dates. If you order equipment and it is not delivered prior to that date, it will not qualify. Usually, this is not a concern as the measure applies for 2-3 years but in the world we live in now, that should be considered. It’s probably not a good idea to order the equipment in December 2023 if you are a corporation as it might not be in your yard by New Year’s Eve.
Since it’s still in draft, there is also no option for corporations to use it in their current year-end. The tax software does not include it yet and the CRA has advised that the immediate expensing is not to be used yet.
Caveats
This legislation is still in draft form and final interpretations are not available yet. One thing I have spotted is that used equipment may not qualify, based on this paragraph:
Subparagraph (c)(i), in general terms, describes new property and allows property to be IEP if it has never been used and no person or partnership has ever claimed CCA (or a terminal loss) in respect of the property.
Currently, the assumption is that as long as it’s not a building or another asset in the excluded CCA classes, it qualifies, whether it is used or not. However, the above does give one pause and I would suggest keeping an eye on the final legislation if you want to designate used equipment purchases as immediate expensing property.
That’s all for tonight! I’ll keep you posted, if and when this tax change actually happens. For now, it’s just something to keep in mind. The next federal budget is next week so there will probably be other items of note. As always, consult your own accountant, this blog is solely for education purposes!