This blog post is contributed by one of our Partners in the Medicine Hat office. Thank you Séamas O’Fuarthain for sharing this information.
I have received a few questions recently on the new “Accelerated Investment Incentive” that was announced on November 20/2018 by the Federal government. I decided to create a post to highlight this tax change.
The headline for this announcement was “manufacturing and clean energy,” but hidden in the details is something that will have a positive effect on most businesses (not just those in manufacturing and clean energy).
1. What were the old rules?
When you purchased a piece of equipment, you are allowed to deduct the capital cost over the life of the asset. For example, when you purchased a truck for $10,000, you were allowed to deduct 15% in the first year ($1500 deduction) and then 30% of the reducing balance in the second year ($2,550).
2. What are the new rules?
For purchases Nov 21/2018 onwards (until 2024), you can triple the deduction in the first year. For example, when you purchase a truck for $10,000, you will be allowed to deduct 45% in the first year ($4500 deduction) and then 30% of the reducing balance in the second year ($1,650).
You are still going to get the full deduction for the truck over its lifetime; the new rules give you a higher deduction in the first year (and then lower deductions in the years that follow).
3. How much taxes will this save me?
The tax savings depend on your tax rate.
PERSONAL: For personal taxes, people generally pay about 25% tax for net income up to $47k and 31% for income between $47k and $94k. If you own your business personally, the tax savings for that truck purchase is worth $1125 in the first year (at the 25% tax rate).
CORPORATE: For corporate taxes, people generally pay about 11% corporate taxes (2019 tax rates). If you own your business corporately, the tax savings for that truck purchase is worth $500 in the first year (at the 11% tax rate).
4. That’s all the tax savings?
Yup…. the tax savings are really not that significant, particularly for corporations.
The reason is relatively simple. Small corporations don’t pay a lot of tax (about 11% tax rate), so therefore extra tax deductions are not that significant.
In the truck example above, the tax savings were $500 on a $10,000 truck (so about 5% of the cost of the truck is funded from the first year tax savings).
5. Are there more significant tax savings on other types of equipment?
The deductions vary depending on the type of equipment. The truck example above is one of the highest deductions available. Some other examples are as follows:
- Trucks, Combines, Trailers 45% in the first year
- Equipment 30% in the first year
- Buildings 6% to 15% in the first year.
6. Does this make leasing equipment less attractive?
Leasing equipment is a little less attractive under these new rules as you get the deduction quicker when you purchase the equipment.
That said, the tax deduction is not that significant for either purchase or lease.
For many years, I have advised my clients that the tax implications of “lease versus purchase” are rarely significant enough to affect the decision. The decision on “lease versus purchase” usually comes down to the business case – which option will cost you less money and provide you with the greatest flexibility.
7. So… What do I do from here?
The tax change doesn’t make a big difference to the cost of buying equipment, so I expect that most businesses will not adjust their equipment purchase decisions.
If you do purchase equipment, it’s nice to know that you will get a (very) modest tax break for the purchase.
Please don’t hesitate to contact Séamas O’Fuarthain, CA , or one of our other Partners or Associates if you should have additional questions.
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