Manufacturers Get CCA Tax Breaks

Tax changes for asset purchases will be introduced for 2013 and beyond – allowing taxpayers a more significant Capital Cost Allowance deduction in some cases – in an attempt by the federal government to stimulate the manufacturing sector.

Class 29 – Machinery and Processing Equipment. Currently, taxpayers who acquire machinery and equipment after March 18, 2007 and before January 1, 2014 primarily for the manufacturing or processing of goods for sale or lease qualify for an accelerated capital cost allowance of 50% calculated on a straight line basis under Class 29. The March 21, 2013 budget extends this temporary measure through the 2015 tax year. Effective January 1, 2016, manufacturing and processing equipment will revert back to Class 43 and CCA will be calculated at 30% declining balance rate.

Class 43.2 – Clean Energy Generation Equipment.  Class 43.1 and 43.2 deal with Clean Energy Generation and Conservation Equipment. While the two classes are essentially identical, class 43.2 requires a higher efficiency standard requirement. Class 43.1 allows for CCA at 30% on a declining balance method while class 43.2 allows for a 50% CCA rate. The March 21, 2013 budget adds “Biogas Production Equipment” that uses more types of organic waste eligible for class 43.2, resulting in a higher Capital Cost Allowance.

Class 41 – Mining Machinery, Equipment & Structures.  Class 41 allows for a 25% CCA rate on a declining-balance basis. In the past, equipment and machinery qualifying for class 41 were also able to claim an additional allowance which allowed the taxpayer to deduct up to 100% of the remaining costs of eligible assets acquired for use in a new mine or an eligible expansion. The budget proposes to phase out the additional allowance over a number of years as follows:

Transition Schedule

Year                 2013-2016       2017    2018    2019    2020    After 2020

Percentage     100%               90%     80%     60%     30%     --

Canadian Exploration and Development Expenses.  Investors who participate in flow-through shares with Canadian Exploration Companies will be pleased to know that the ability for these companies to flow-through their expenses has been extended through to March 31, 2014. On the other hand, you may not be as pleased about the re-alignment of certain costs associated with flow-through shares in the mining sector.

Currently CEE and CDE expenses are classified and flowed-through to the taxpayer for use on the personal tax return. In short, the change comes down to the classification of certain types of expenses incurred and whether they are Exploration expenses or Development expenses. Exploration expenses are deductible at 100% and Development expenses are deductible at 30% per year on a declining balance method.

The budget proposes the pre-production mine development expenses, previously classed as CEE expenses, will be deemed to be Development expenses and therefore subject to the 30% declining balance basis. Due to the long time frame associated with exploration and development the changes will be phased in as follows:

Transition Schedule

Year                 2013    2014    2015    2016    2017    After 2017

CEE portion    100%   100%   80%     60%     30%     --

CDE portion   --          --          20%     40%     70%     100%

Future Reclamation Obligations.  Taxpayers with future obligations (for example, for the cost of reclaiming land previously used for waste disposal purposes or for addressing pipeline abandonment) may currently claim a deduction for amounts contributed to a Qualifying Environmental Trust established to fund such future reclamation. This budget amends the rules to ensure that the reserve for such future services cannot be used under paragraph 20(1)(m), which is a different provision used to defer income for services yet to be rendered to clients who have paid for services in a prior year.