2017-03-15 00:00:00 Taxes English Learn about the accelerated capital cost allowance and how Canadian manufacturers can use it to save on investments in machinery and... https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/Client-and-accountant-discuss-capital-costs-while-reviewing-financial-documents-near-tablet-on-table.jpg https://quickbooks.intuit.com/ca/resources/taxes/manufacturers-budget-2015-allows-accelerated-capital-cost-allowance/ Manufacturers: Budget 2015 Allows For Accelerated Capital Cost Allowance

Taxes and Tips for Manufacturers

3 min read

Keeping abreast of the changing tax landscape is a necessity, whether you’re a small business owner, the CEO of a major company, or the accountant who serves them. All companies who manage any type of equipment that is strictly tied to their business for the production or manufacturing of goods can celebrate some of this year’s tax changes.

Manufacturing corporations in particular stand to benefit greatly from Canada’s Department of Finance’s [Economic Statement for the Fall of 2018](https://www.fin.gc.ca/n18/18-107-eng.asp). In response to the United States lowering corporate tax rates, Canada implemented new tax laws that will do the same for Canadian businesses. The new tax measures are specifically for corporations – taxes that would otherwise be payable are being lowered. But it’s not what you might think. The rates themselves are not dropping. Instead, the Department of Finance is allowing an accelerated depreciation of various capital investments, such as the equipment used in manufacturing companies. While it’s not an outright lower tax, it means that the effective rate is thereby lowered, at least in the first few years of the depreciation.

## What Does [Accelerated Depreciation](https://quickbooks.intuit.com/ca/resources/firm-management/calculate-sum-of-years-digits-depreciation) Mean for Manufacturers?

The Department of Finance’s changes mean that businesses can now immediately:

* Write off machinery costs for equipment used specifically in the manufacturing of products.
* Write off the entire amount of certain equipment using [clean energy sources](https://quickbooks.intuit.com/ca/resources/going-green/enhance-brand-reputation-going-green/).
* Depend on the Accelerated Investments Incentive, or AII, which allows all businesses that make a capital investment to claim the Accelerated Capital Cost Allowance – or deduct more of their initial investment sooner than in the past.

## What Is the Accelerated Investments Incentive?

The AII triples history’s [capital cost allowance rates](https://quickbooks.intuit.com/ca/resources/accounting-news/corporate-taxation-federal-accounting/) for first-year tangible assets and investments. Even intangible assets, such as patents or intellectual property, count as capital investments for this allowance. The AII applies to all property, but doesn’t apply to manufacturing equipment or clean energy equipment. The new measures for expensing cover that, as outlined below. But what, then, are the implications of the AII?

There are two:

1. The AII suspends the prior half-year rules that applied to all types of property, meaning you can now apply the asset’s full undepreciated costs to its class. The half-year rule stated that you could only add half of an asset’s capital costs to its undepreciated value in the first year, and the second half the next year.
2. The AII enhances allowances for net additions to a specific class of property within a given year, at a rate of 1.5 times for that specific net addition class. You can then deduct that amount from your overall income for that year.

## Restrictions on AII Claiming

Regardless of how you apply the AII allowance to your taxes, you can’t continue to claim the same amount each year. In other words, you must claim the requisite remainder of the undepreciated value in each subsequent year.

In some cases, you might have a shorter tax year than the average manufacturing company, such as if you commenced business in June. In this instance, your AII is applied at a prorated rate, like the CCA’s rules for the average taxpayer in shorter taxation years.

These other restrictions also come into play. If you’re using the AII towards a first-year allowance, the property must:

* Not have been owned previously by you, someone close to you, or your company
* Not have been acquired by you on a “rollover” basis
* Have been acquired by you after November 20, 2018, and
* Be put to use prior to 2028

Beginning in 2024, these enhancements will begin to be phased out. By 2027, these rules will no longer apply.

## Closing Thoughts

The Department of Finance believes these new rules should help encourage manufacturing companies to invest these savings in new assets for their businesses. No matter how you invest, make sure you take advantage of all applicable tax breaks for your business. QuickBooks Online can help you [maximize your tax deductions](https://quickbooks.intuit.com/ca/maximize-tax-deductions/). Keep more of what you earn today.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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