When a Canadian taxpayer acquires a capital asset for use in a business, the taxpayer is generally required to add the acquisition cost of the asset to a particular capital cost allowance ("CCA") class for Canadian tax purposes. Thereafter, the taxpayer may claim CCA in computing its tax liabilities on the basis of the deductions permitted to be claimed in respect of the taxpayer's assets in each CCA class.
Budget 2013 proposes to enhance the CCA treatment of certain property acquisitions as a means of encouraging Canadian businesses to (i) continue to acquire certain machinery and equipment to be used primarily in Canada for the manufacturing or processing of goods for sale or lease ("Canadian Manufacturing Equipment"), and (ii) acquire certain environmentally-friendly equipment and technologies.
Canadian manufacturing and processing machinery and equipment
Under the current CCA regime, where Canadian Manufacturing Equipment is acquired by a taxpayer after March 18, 2007 and before 2014, the taxpayer is permitted to claim accelerated CCA in respect of such property at a rate of 50%, computed on a straight-line basis. (Absent such special treatment, the taxpayer would normally only be permitted to claim CCA at a rate of 30%, computed on a declining balance basis.)
Budget 2013 proposes to extend the enhanced CCA treatment of Canadian Manufacturing Equipment by two years such that taxpayers that acquire Canadian Manufacturing Equipment in 2014 and 2015 will be permitted to claim CCA in respect of such property at a 50% rate on a straight-line basis. However, it is worthy of note that the "half year rule", which only permits half of the CCA that may otherwise be deducted by a taxpayer in respect of assets that first become available for use by the taxpayer in the relevant taxation year, will apply to the enhanced CCA claims made by taxpayers in respect of Canadian Manufacturing Equipment.
environmentally-friendly equipment and technologies
A preferential set of rules govern the CCA that may be claimed in respect of clean energy generation and conservation equipment. In particular, CCA is generally permitted to be claimed at accelerated rates under CCA Class 43.2 in respect of eligible equipment that generates or conserves energy by (i) harnessing a renewable energy source (e.g., wind, solar), (ii) using fuel from waste (e.g., landfill gas, lumber waste), or (iii) making efficient use of fossil fuels. CCA may generally be claimed in respect of property in CCA Class 43.2 at a rate of 50% per year on a declining-balance basis.
Budget 2013 introduces new measures to provide further incentives for Canadian taxpayers to invest in environmentally-efficient equipment and technologies
biogas production equipment
Certain equipment used to produce "biogas", typically through systems in which bacteria are permitted to act on organic waste to produce biogas, are included in CCA Class 43.2. (After limited refinement, biogas may be burned to generate heat or electricity.) The biogas production equipment that falls within the ambit of CCA Class 43.2 is currently limited to equipment that processes organic waste that is sludge from an eligible sewage treatment facility, food and animal waste, manure, plant residue or wood waste (collectively, "Eligible Organic Waste").
Budget 2013 proposes to expand the range of Eligible Organic Waste and, by extension, the range of biogas production equipment that may fall within CCA Class 43.2, by specifically including pulp and paper waste and wastewater, beverage industry waste and wastewater, and separated organics from municipal waste.
biomethane cleaning and upgrading equipment
Biomethane is regarded as a practical substitute for natural gas in a variety of electricity and heat generation processes. Biomethane is captured by cleaning and refining gases emanating from waste. While the CCA regime provides preferential treatment for certain types of equipment used to capture biomethane, eligibility to claim such preferential rates of CCA currently depends on (i) the type of gas treated by the equipment, and (ii) the type of equipment used to treat the gas. In this regard, (i) the gases from waste that attract such preferential CCA treatment are biogas, digester gas and landfill gas (collectively, "Eligible Gases"), and (ii) the type of equipment that attracts such preferential CCA treatment is equipment that is ancillary to landfill gas and digester gas collection equipment, and biogas scrubbing equipment.
Budget 2013 proposes to eliminate the foregoing restrictions, such that all types of cleaning and upgrading equipment that can be used to treat Eligible Gases will be included in CCA Class 43.2.
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The proposals tabled in Budget 2013 relating to environmentally-friendly equipment and technologies are intended to apply in respect of property acquired on or after March 21, 2013 that has not been used or acquired for use before March 21, 2013.