Immediate expensing of depreciable properties - Part 1

The basics

The immediate expensing incentive, introduced in the 2021 federal budget allows for eligible businesses to claim up to $1.5 million in depreciation expense on eligible properties. This is done through the Capital Cost Allowance (CCA) claim on the tax return. The deduction can be claimed for one eligible property or spread amongst several, as long as the total claim does not go above $1.5 million.

The objective of this measure, as per the federal government, is “to provide a temporary accelerated deduction to encourage investments by small and medium-sized Canadian businesses and thereby accelerate the economic recovery while supporting productivity growth in the longer term”.

The incentive is temporary, applicable to eligible property available for use before January 1, 2024, or January 1, 2025, in the case of individuals and Canadian partnerships all the members of which are individuals [ITR 1104(3.1)(b) “immediate expensing property”].

Important definitions

In order to properly understand the mechanics of the incentive, we must take a deep dive into specific definitions.

Immediate Expensing Property (IEP)

This refers to the depreciable properties that are eligible for the immediate expensing incentive. Properties that are eligible are any depreciable properties from a prescribed CCA class other than classes 1 to 6, 14.1, 17, 47, 49 and 51 [ITR 1104(3.1) “immediate expensing property”]. The properties must be acquired after April 18^, 2021, for a Canadian Controlled Private Corporation (CCPC) and after December 31, 2021, for individuals and partnerships [ITR 1104(3.1)(a) “immediate expensing property”]. These properties must be available for use before January 1, 2024 (see above).

The eligible property can be either [ITR 1104(3.1)(c) “immediate expensing property”]:

a)      New (not used) and no person or partnership has ever claimed CCA (or a terminal loss);

b)     Used if the property was not subject to a “rollover” and it was not previously owned or acquired by the “eligible person or partnership” (see below) or a non-arm’s length person or partnership.

Condition b) above excludes any property that was acquired from a section 85 rollover, or if section 87 or paragraph 16.1(1)(b) of the ITA applied in the acquisition.

Eligible person or partnership (EPOP)

This refers to the eligible individuals or companies that can benefit from the incentive. They are [ITR 1104(3.1) “eligible person or partnership”]:

(a)    a corporation that was a Canadian-controlled private corporation throughout the year;

(b)   an individual (other than a trust) who was resident in Canada throughout the year; or

(c)    a Canadian partnership all of the members of which were, throughout the period, Canadian-controlled private corporations, individuals (other than trusts) resident in Canada or a combination thereof.

Multi-tiered partnerships, i.e. partnerships with other partnerships as members, are excluded from the definition.

Designated Immediate Expensing Property (DIEP)

The taxpayer must designate the specific property for the immediate expensing incentive on the tax return. Three conditions are needed to be able to designate and claim the incentive [ITR 1104(3.1) “designated immediate expensing property”]:

a)      a property must qualify as “immediate expensing property” of an “eligible person or partnership” (see definitions above);

b)     a property can only qualify as DIEP in the year in which it becomes available for use;

c)      the property must be designated in prescribed form by the eligible person or partnership filed by the person‘s filing-due date for the taxation year to which the designation relates.

Associated corporations

As mentioned above, the immediate expensing limit, or IEL, is $1.5M that is allocated amongst all eligible property [ITR 1104(3.2)]. If the eligible person or partnership has what the federal government considers as “associated corporations” [ITR 1104(3.6)], then the limit must be allocated amongst these associated corporations.

The concept of associated corporations is similar to the one for the allocation of the small business deduction (SBD) limit for corporations [ITA 256]. The federal government has expanded on this concept for the purpose of the immediate expenditure limit to include EPOPs that are individuals and partnerships.  This is done by deeming individuals and partnerships related to CCPCs and to each other as “deemed corporations” [ITR 1104(3.6)].

A partnership is deemed to be a corporation with a capital stock of a single class of shares and with a total of 100 issued and outstanding shares [ITR 1104(3.6)(a)]. Each member of the partnership is deemed to be a shareholder of the deemed corporation and to own a number of shares based on the partner’s proportionate interest in the partnership [ITR 1104(3.6)(a)].

An individual, in respect of that business or immediate expensing property, is deemed to be a corporation that is itself deemed to be controlled by the individual [ITR 1104(3.6)(b)].

By deeming partnerships and individuals as corporations, we now can apply the existing association rules for the SBD limit, found in ITA 256, to the immediate expensing limit (IEL).

Associated EPOPs must file in prescribed form the amount of the immediate expensing limit allocated to each.

Other important rules

As far as individuals and partnerships are concerned, EPOPs cannot create a business loss using the immediate expense incentive [ITR 1104(3.1)].

If the taxation year of the EPOP is less than 51 weeks, the immediate expensing limit (IEL) must be prorated based on the number of days in the taxation year [ITR 1104(3.5)(b)].

If, after full allocation of the immediate expensing limit (IEL), there’s some undepreciated capital cost (UCC) left over for eligible properties, these properties can be depreciated under existing CCA rules [ITR 1104(3.1)].

The half-year rule for an acquisition of a depreciable property is suspended for properties which this measure is applied [ITR 1100(2)].

In the next instalment, we will embark on a detailed calculation of the immediate expense incentive to better understand this measure. mmercial activity or personal in nature.