With the tax changes announced in the federal government’s fall economic statement, farmers can get more capital cost allowance sooner on the purchase of equipment.
Some equipment dealers are using this accelerated investment incentive property (AIIP) as a sales tool. Here’s what has changed and what it means in actual dollars. Taxes are certainly not my area of expertise. Thanks to Saskatoon accountant Allyn Tastad of Hounjet Tastad Harpham for walking me through the changes and the implications.
The changes apply to property acquired after Nov. 20, 2018, that becomes available for use before 2028. Farm equipment qualifies. One exception is property that was previously owned by the taxpayer or by a non-arm’s length person or partnership.
The incentive accelerates the amount of capital cost allowance that can be deducted from taxable income. First of all, the half-year rule has been suspended. Until now, you could only claim half of the regular allowance in the year that something was purchased. Now you can claim 100 per cent of the applicable capital cost allowance in the year of purchase.
In addition, the first year of capital cost allowance has been bumped up by 50 percent. In practical terms, a producer will have equipment in various capital cost allowance categories. Net additions to any class will be increased by a factor of 50 percent for calculating the first-year capital cost allowance.
For subsequent years, the allowance deduction returns to normal.
So how does all this work in practice? Let’s say you buy a new or used tractor for $100,000. Tractors and other self-propelled equipment are in Class 10 and eligible for a 30 percent capital cost allowance.
If you purchased the tractor before Nov. 20, the capital cost allowance in the first year is 15 percent or $15,000. This is half of the 30 percent allowance in the first year of purchase.
If the tractor is bought after Nov. 20, the half-year rule is suspended, plus the amount is bumped up by a factor of 1.5 times. Rather than a capital cost allowance of 15 percent, you can deduct 45 percent, which is 45,000.
How does this affect your tax bill? If you’re running an incorporated farm with a federal tax rate of 12 percent, the $45,000 capital cost allowance reduces your tax bill by $5,400. The same tractor purchased before Nov. 20 would generate a reduction in taxes of only $1,800.
This is a federal incentive to buy equipment and stimulate the economy. However, remember that when you’re allowed to claim more allowance in year one, it reduces how much is left for subsequent years. The total amount of deduction hasn’t been increased. You just get to claim deductions sooner.
Farmers who are old enough may remember the tax credit that existed on new equipment purchases back in the 1980s. You actually received an extra tax credit over and above the capital cost allowance. That’s been gone for decades and this new incentive should not be described as a tax credit. It’s merely an acceleration of the expense you can claim.
There is value to receiving more of your tax deduction earlier, but when you work through the numbers, this shouldn’t move the needle very much when deciding whether to upgrade equipment. Other considerations remain much more important.