Immediate tax deduction for capital expenses
By Michelle Seymour, CPA, CA, CFP® 28 June 2021 7 min read
The recent federal budget announced that, in some cases, Canadian-controlled private corporations (CCPCs) will temporarily be entitled to deduct the full value of new capital expenditures.
Immediate expensing is available from April 19, 2021 through December 31, 2023 for eligible depreciable assets that are acquired and put into use in the business during that time period. This treatment is only available for certain types of capital assets. Long-term properties, including buildings, parking lots and goodwill are ineligible. A maximum of $1.5 million of eligible capital expenses across a group of associated companies can be deducted each year. If an amount of less than $1.5 million is utilized in a given year, the unused amount cannot be carried forward.
In contrast to immediate expensing, typical tax treatment is that Canadian businesses must claim deductions for capital expenses slowly over time, through capital cost allowance (CCA) deductions. Immediate expensing does not change the total amount that can be deducted over time but rather permits a larger immediate deduction with the intention of encouraging capital investments.
The pandemic caused economic uncertainty and cash flow challenges for many businesses, which led some to choose to defer capital asset expenditures. In some cases, business owners may have delayed purchases due to limited availability of certain equipment. A year later, businesses may be revisiting those previously deferred purchases. Further, some business owners may be considering new capital investments to support changing business needs, a revised operating model or new projects.
If your business is planning to acquire significant capital assets, the recently announced tax treatment may be beneficial in terms of reducing corporate income taxes in the short-term.
Immediate expensing example
Let’s take the example of a corporation operating in Alberta that was planning to invest in machinery and equipment later this year with an estimated cost of $150,000. These assets are assumed to be Class 8 assets, which will be an eligible class for immediate expensing. Immediate expensing would permit the business to deduct the full $150,000 in the current tax year. Previously, a deduction of only $45,000* would have been permitted, with the remaining $105,000 to be deducted in future tax years.
*Calculation = $150,000 * 1.5 * 20% = $45,000, assuming Accelerated Investment Incentive
In this example, immediate expensing may result in additional tax savings in 2021 of $11,550 ($105,000 * 11%). This calculation is based on the assumption that the corporation can fully utilize the tax deduction in the current year and that the income would otherwise be eligible for the small business deduction rate (9% federal + 2% provincial). While this does not actually save taxes in the long-term, across the total useful life of the capital property, it does accelerate the tax deductions into the current year. This gives businesses the benefit of those tax deductions much sooner than was previously available.
Tax instalment payments for the current year
Generally, corporations have to pay corporate income taxes by instalment payments throughout the year. When a corporation is able to reduce or avoid the requirement to pay instalments, it may be able to use those funds in its business, temporarily improving the corporation’s liquidity and access to cash. Where a business will acquire significant capital assets, consideration should be given to the impact on required corporate income tax instalment payments.
Instalment payment calculation
A corporation can typically choose between three options for calculating instalments:
- Estimated taxes for the current year;
- Actual taxes for the prior year; or
- A combination of actual taxes for the prior year and the year before that.
Instalment payment exceptions
Federal instalment payments are not required where taxes payable, before the deduction of refundable tax credits, are less than $3,000 for either the current or prior year.
Many CCPCs are exempt from Alberta corporate tax instalments. Rather than paying provincial corporate income taxes by instalment, a CCPC can instead pay the tax balance three months following the corporation’s year-end, provided it meets one of the following criteria:
- The corporation claims the small business deduction (SBD) and has taxable income of $500,000 or less in the current year;
- The corporation claimed the SBD and had taxable income of $500,000 or less in the prior year;
- The corporation’s Alberta taxes payable for the current or prior year were $2,000 or less.
Many CCPCs are also eligible for quarterly, rather than monthly, federal instalment payments.
Reducing instalment payments
Where a corporation’s tax liability is fairly consistent year-over-year, all three options may have a similar result and business owners may choose option two or three for certainty. For many corporations, the past year and the year to come have been anything but normal, with taxable income and corporate income taxes fluctuating significantly from historical years. Purchasing significant capital assets may further reduce projected corporate taxes payable for the current year. If your business anticipates a decline in taxes payable in the current year, it may make sense to consider going with option one, instead, calculating your instalment payments based on estimated taxes for the current year to reduce tax instalments.
Instalment payments example
Let’s keep going with the scenario mentioned above. The same corporation has a calendar year-end. Prior to 2020, it had generated consistent profits, with federal corporate income taxes payable of $40,000 for the year ended December 31, 2019. The corporation’s 2020 operations were impacted as a result of COVID-19 and taxes payable declined to $30,000 for the December 31, 2020 year-end. The business is optimistic about the coming year and was anticipating federal taxes payable of approximately $35,000 in 2021, before considering any capital asset purchases. With the $150,000 expenditure discussed above, federal taxes payable are now anticipated to be $21,500.
Assuming the example corporation is not eligible for quarterly instalments, its federal tax instalment options would be calculated as follows:
- Option one: 12 monthly instalments of $1,792 ($21,500/12)
- Option two: 12 monthly instalments of $2,500 ($30,000/12)
- Option three: two monthly instalments of $3,333 ($40,000/12) and 10 monthly instalments of $2,333 [($30,000-$6,666)/10]
By selecting option one, the company can retain cash of $8,500 when compared to options two and three.
Potential interest charges
If you choose to use option one to calculate your instalments and underestimate your taxes for the current year, interest and penalty charges may result. Accurately forecasting your corporate taxes for the coming year may be challenging given the continued uncertainty and instalment payments may need to be revisited if forecasts are adjusted.
The Canada Revenue Agency (CRA) and Alberta Tax and Revenue Administration (TRA) charge compound daily interest on overdue instalment balances. Relevant interest rates are currently 5 per cent (CRA) and 4.5 per cent (TRA) for Q3, 2021. Where instalment interest exceeds $1,000, instalment penalties may also be charged.
Both the CRA and TRA use an offset method to calculate instalment interest. This means that if you underestimate your instalments earlier in the year, you can reduce or eliminate resulting interest charges by making an early payment for a subsequent instalment.
Some businesses may experience losses in the current year, rather than just a decline in taxable income. This may be the result of a decision to acquire significant capital assets eligible for immediate expensing or due to continued challenges resulting from the pandemic. Non-capital losses arise when a corporation’s tax-deductible expenses exceed revenue in any given year. Note, however, that you cannot use CCA to create or increase a rental loss.
If your corporation is anticipating a current year non-capital loss, you may have some options available to you. Any losses can be carried back up to three years to help recover taxes paid in a prior year. Any remaining losses can be carried forward and utilized in a future tax year for up to 20 years. Additional considerations may exist with respect to loss consolidation strategies for corporate groups with more than one entity.
The tax impact of purchasing capital assets will differ for each business and we recommend that business owners seek advice from their own tax advisors to discuss the tax considerations relevant to their specific circumstances.
Some business owners will acquire capital assets with available cash while others will consider the option of financing significant purchases. To find out how ATB can help with a Business Term Loan, connect with an ATB business specialist.
Further budget resources
For more information on the recent federal budget, please refer to our Federal budget summary: pandemic supports extended, tax and benefit highlights.
This document has been prepared by ATB Wealth. ATB Investment Management Inc., ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund) and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Wealth. The information provided in this article is a simplified general summary and is not intended to replace or serve as a substitute for professional advice. Professional tax advice should always be obtained when dealing with taxation issues as each individual’s situation is different. This information has been obtained from sources believed to be reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. This information is subject to change and ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund), ATB Investment Management Inc. and ATB Insurance Advisors Inc. reserves the right to change the information without prior notice, and does not undertake to provide updated information should a change occur. ATB Financial, ATB Investment Management Inc., ATB Securities Inc. and ATB Insurance Advisors Inc. do not accept any liability whatsoever for any losses arising from the use of this document or its contents.