17 Oct The End of Immediate Expensing Rules: Impact on Taxation in 2024 and Beyond

The Canadian tax landscape is undergoing a significant shift with the expiration of immediate expensing rules. Businesses need to prepare for the ripple effects this change will have on their tax planning strategies. The end of these temporary provisions will affect how Capital Cost Allowance (CCA) and Undepreciated Capital Cost (UCC) are calculated, resulting in higher taxable income and increased tax liabilities in the years ahead.

Background: What Are the Immediate Expensing Rules?

In 2021, as part of Canada’s pandemic recovery measures, the government introduced temporary immediate expensing provisions for certain capital investments. This allowed businesses to deduct up to $1.5 million annually of capital assets purchased in the year they were acquired. This accelerated deduction aimed to stimulate economic growth by encouraging businesses to invest in machinery, equipment, and other assets.

This provision was available for Canadian-controlled private corporations (CCPCs), partnerships, and sole proprietors, significantly reducing taxable income in the year of the asset’s purchase. However, the immediate expensing rules ceased on December 31, 2023, and businesses will now face changes as they revert to the traditional CCA regime.

The Return to Traditional CCA Rules

Under the traditional CCA system, capital assets are depreciated over time based on predefined rates set by the Canada Revenue Agency (CRA). For instance, Class 8 assets, which include most machinery and equipment, have a CCA rate of 20%. Instead of fully deducting the cost in the year of purchase, businesses can now deduct only 20% of the asset’s value in the first year (subject to the half-year rule) and subsequent percentages in following years. This means a slower recovery of capital investment costs.

Impact on Undepreciated Capital Cost (UCC)

The end of immediate expensing will also affect how UCC balances are managed. UCC represents the remaining undepreciated value of capital assets for tax purposes. With immediate expensing, the UCC balance for certain assets would have been zero in the first year. Now, as CCA is applied gradually over several years, UCC balances will remain higher for longer, prolonging available deductions for capital assets in future tax years.

Businesses will need to closely monitor their UCC schedules, as the slower depreciation leads to higher UCC balances and lower available deductions each year, affecting cash flow and tax planning strategies.

Higher Taxable Income and Increased Taxation

For businesses that have relied on immediate expensing to reduce their tax burdens during the pandemic recovery, the shift back to traditional CCA rules may come as a surprise. Without the ability to fully expense capital investments immediately, business owners must plan for the financial implications of increased taxation, including setting aside sufficient funds to cover their higher tax obligations.

Additionally, when a business sells an asset that was previously immediately expensed, this may trigger an income inclusion for the recapture of previously taken CCA, resulting in increased taxation on the sale of that asset.

Strategic Tax Planning Post-2024

To manage the impact of higher taxable income and deferred capital cost deductions, businesses should adopt proactive tax strategies, including:

• Timing of Purchases: Consider the timing of significant capital investments. Planning capital expenditures for future years can help manage taxable income more effectively over multiple periods.
• Maximizing Existing Deductions: Ensure all eligible expenses and credits are claimed to offset the higher taxable income resulting from the end of immediate expensing. This includes claiming available deductions for interest, depreciation, and business-related expenses.
• Exploring Tax Credits: Investigate other available tax credits that may reduce the overall tax burden, such as the Scientific Research and Experimental Development (SR&ED) credit, which can provide relief for research and innovation-focused expenditures.
• Consulting with Clearline CPA: Given the complexity of changing tax rules, businesses should engage with the advisors at Clearline CPA to develop a comprehensive tax plan. Clearline CPA can help navigate the transition back to traditional CCA rules and ensure compliance while optimizing financial outcomes under the new tax regime.

Conclusion

The end of the immediate expensing rules marks a return to more traditional tax treatment for capital investments. While businesses will no longer benefit from the accelerated deductions that these temporary measures allowed, the traditional CCA system offers predictability over the long term. However, the shift will result in higher taxable income and increased tax obligations starting in 2024.

To navigate this change, businesses must focus on effective tax planning strategies to minimize the impact on their bottom line. By adjusting the timing of capital investments and working closely with tax advisors, businesses can manage their taxable income and prepare for the higher levels of taxation in the years ahead.