What You Need to Know about the Accelerated Investment Incentive and its Benefits
Are you interested in recovering costs of your newly acquired capital assets sooner?
The Accelerated Investment Incentive announced on November 20, 2018 by the CRA is a tax change that allows businesses to recover the cost of their investment faster.
Under the new rules, you can get a first-year deduction that is up to three times larger than what you normally get in the first year of purchase.
What is the significance of the Accelerated Investment Incentive?
The ability of the sole proprietors, corporation and to demonstrate high resilience levels to the financial crisis, and to adapt quickly to the emerging circumstances in the post-COVID era is vital for business growth. Thus, the provisions of the new Accelerated Investment Incentive can help meet the changing needs of businesses and society, as they are allowed to save money on taxes and recoup their investment faster. It also encourages entrepreneurs to invest more, and at the same time, use their tax savings for other essential business expenses.
Eligible properties under the Capital Cost Allowance (CCA) rules can qualify for an enhanced first-year allowance if you acquired them after November 20, 2018. Also, the property must be available for use before 2028.
What is the Difference between the Old Rules and the Accelerated Investment Incentive?
The new rules allow you to write off more of the cost of your asset so that you can recover a bigger portion of the cost of investment in the first year.
For example, if you buy a work trailer under the old rules, you can deduct 15% on the year you purchased it and the other 30% of the reducing balance in the second and following years.
Under the new rules, you receive a 45% deduction in the year of purchase and still get the full deduction of your trailer over its lifetime.
Old Rules
Example: When you purchase a work trailer for $8,000, you can deduct 15% in the first year ($1,200). The following year, you are allowed to deduct 30% of the reducing balance ($2,040).
Computation:
Year 1: $8,000 x 1/2 x 30% = $1,200
Year 2: ($8,000-$1,200) x 30% =$2,040
Total deductions in year 1 & 2 = $3,240
New Rules: Accelerated Investment Incentive
Example: You purchase a trailer for $8,000. In the first year, you can deduct up to $3,600 (45%) and then 30% of the reducing balance ($1,320) in the second year. In short, you get higher deductions in the first year of purchase and lower deductions in the following years.
Take note that tax deductions on the year of purchase depend on the classification of your depreciable asset.
Computation:
Year 1: $8,000 x 3/2 x 30% = $3,600
Year 2: ($8,000-$3,600) x 30% =$1,320
Total deductions in year 1 & 2 = $4,920
*Computation above is only for illustration purposes. Please contact us for details.
Suspension of the Half-Year Rule
The rule that only allows 50% of the cost of an eligible asset in the year of purchase is suspended. Now, all eligible properties will get a first-year deduction that is up to three times larger than their normal allowable deductions.
For example, for your eligible motor vehicle, the CCA rate in the first year is 15%. But under the Accelerated Investment Incentive (AII), your first-year rate becomes 45% (15% x 3).
Does the Accelerated Investment Incentive increase the total amount I can deduct over the life of my asset?
No. The new rules only allow you to claim a larger CCA deduction in the first year of purchase. In the process, you will have smaller CCA deductions in the years that follow.
The calculation of CCA also depends on whether the property is calculated on a declining-balance basis, or with straight-line depreciation.
For the declining-balance basis calculation, the incentive reduces the undepreciated capital cost available in subsequent years. But, for straight-line depreciation, your ability to claim the incentive for a particular year does not affect the deduction available in the following years until you have claimed the full cost.
Please contact us today if you have additional questions.