On 21 November 2018, Canada's Finance Minister, Bill Morneau, outlined in the Fall Economic Statement a package of business tax breaks, including new write-off incentives and an investment incentive. These measures are summarised here.
Reasons for the Changes
The new tax incentives are in response to the recent tax reforms in the United States, which saw corporate tax slashed from up to 35% to a flat rate of 21%. The US also considerably improved its expensing rules.
There was concern that, without the introduction of these new tax incentives, Canada would become less competitive compared with the United States, resulting in Canadian businesses shifting some of their operations south of the border.
The Government had observed that the US tax reforms:
could significantly reduce the overall tax advantage that Canada has built over the years, doing potential harm to investment, jobs, and economic growth.
Under the proposals, the Government will allow the full cost of machinery and equipment used in the manufacturing and processing of goods to be written off immediately for tax purposes. Immediate expensing will apply to qualifying assets acquired after 20 November 2018. It will be gradually phased out starting in 2024, and will no longer be in effect for investments put in use after 2027.
The Government hopes the measure:
will fuel new investments and support adoption of advanced technology and processes
In addition, specified clean energy equipment will also be eligible for immediate write-off, for property acquired after 20 November 2018. It will be gradually phased out starting in 2024, and will no longer be in effect for investments put in use after 2027.
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Accelerated Investment Incentive
The Government will also introduce an Accelerated Investment Incentive to support investment by businesses of all sizes and across all sectors. Capital investments will generally be eligible for a first-year deduction for the depreciation equal to up to three times the amount that would otherwise apply in the year an asset is put in use. The Accelerated Investment Incentive will apply to all tangible capital assets, including long-lived investments like buildings, and will also apply to intangible capital assets, such as patents and other intellectual property.
The Accelerated Investment Incentive will be available for eligible property that is acquired after 20 November 2018 and that becomes available for use before 2028, subject to a phase-out for property that becomes available for use after 2023.
The Government says that, with the immediate expensing and the Accelerated Investment Incentive in effect, the average overall tax rate in Canada on new business investment will fall from 17% to 13.8%. This will be the lowest rate in the G7, putting the country back to an attractive and competitive position compared with the US.