52 What is the Accelerated Investment Incentive and what are the basics of how it works?
Addan Ayaz
The accelerated investment incentive (AII) began in Canada in 2018. It was introduced as a means to encourage corporations to invest in more capital assets as there is now added benefits to doing so, however, it is only a temporary measure and will be phased out by 2028.
The accelerated investment incentive is just a temporary change to the Capital cost allowance (CCA). CCA works as a tax deduction representing a capital asset’s depreciation.
The main benefit of the AII is that it allows for a larger CCA deduction within the first year of acquiring an eligible depreciable asset. For most assets purchased after November 20, 2018 the AII provides two main advantages:
- No half-year rule applied in the year of acquisition
- Net additions for the year (additions less disposals) are multiplied by 1.5 X the CCA rate for the class of assets.
Both of these new rules create a big increase in the amount of CCA that can be claimed in the year of acquisition. Prior to this incentive, in the year that equipment was acquired the taxpayer could only claim CCA on half of its value in the year of acquisition. This is known as the half year rule and is not applicable under the accelerated investment incentive.
It is important to remember that the AII does not affect the overall amount a taxpayer can deduct. The AII only increases the CCA deduction in the first year, ultimately allowing for decreased deduction throughout the following years. The decreased CCA deduction in the following years would be due to the UCC amount carried forward being less after using AII for the first year.
Example by Panveer Kaur:
3C’s Inc has the UCC balance of $100 at the beginning of 2018 of Class 10 and purchased an additional property of $200 in January. In 2019, it purchased additional eligible asset of $200. In 2020, it acquired an eligible asset of $300 and disposed the property for $150, which has a capital cost of $200.
|
Calculation Steps |
2018 |
2019 |
2020 |
|
UCC at the beginning of year (A) |
$100 |
$240 |
$278 |
|
Additions |
$200 |
$200 |
$300 |
|
Disposition during the year: Lessor of Proceeds of Disposition Capital cost |
– |
– |
($150) |
|
Net Additions during the year (B) |
$200 |
$200 |
$150 |
|
50% of net eligible additions as per AII rules (C) |
N/A |
$100 |
$75 |
|
Half-year rule (D) |
($100) |
N/A |
N/A |
|
Adjusted UCC for CCA calculation(A+B+C-D) |
$200 |
$540 |
$503 |
|
CCA= 30% * adjusted UCC |
($60) |
($162) |
($151) |
|
Less: 50% of net eligible additions as per AII rules |
N/A |
($100) |
($75) |
|
Add: 50% of Half year rule deductions |
$100 |
N/A |
N/A |
|
UCC at the end of year |
$240 |
$278 |
$277 |
(Example by Mathew Andrews):
Andrews Ltd. acquired the following assets in 2018 and 2019. The 2018 asset was acquired prior to November.
2018:
- – A new building intended to act as a warehouse for $400,000.
2019:
- – New office desks for $4,000.
- – A general-purpose computer for $2,000, which the office manager bought from his brother.
- – A zero-emission Tesla Cybertruck for delivery purposes for $60,000.
How would each asset be treated in terms of CCA in the years they were acquired? Consider the half-year rule and/or accelerated investment incentive for each item.
Building: Class 1
Because the building was acquired before November of 2018, it is not eligible for the accelerated investment incentive. The building would fall under class 1 (see ITR Schedule II, Class 1 (q)) and would likely have a CCA rate of 4% (there are lots of specific rules on the CCA rates for buildings but they are beyond the scope of this example). Since it does not qualify for the accelerated investment incentive, it will also be subject to the half-year rule. The first year CCA would be calculated as follows:
(400,000 / 2) * 4% = $8,000
Office Desks: Class 8
Because the office desks were acquired after November of 2018, they are eligible for the accelerated investment incentive and therefore will not be subject to the half year rule. The desks, being furniture, fall under Class 8 (see ITR Schedule II Class 8 (i)) and will have a CCA rate of 20% per the calculation below:
(4,000 * 1.5) * 20% = $1,200
Computer: Class 50
It is notable that the computer was purchased from a blood relative of the office manager. Because of this, the transaction was not dealt at arm’s length. Since the accelerated investment incentive doesn’t apply to non arms-length transactions, the computer is subject to the half-year rule. As a class 50 asset (see ITR Schedule II, Class 50), CCA will be calculated as per below.
(2,000 / 2) * 55% = $550
Cybertruck: Class 54
Because the Cybertruck is a zero emission vehicle and is not intended to be rented out, it is classified under class 54 and has a limited prescribed CCA amount of $55,000. Class 54 assets are also eligible for the accelerated investment incentive which for the class is an immediate write-off of 100% of the asset. This is calculated as below:
55,000 * 100% = $55,000
Note: Once you’ve identified the CCA class of an asset it is important to research whether there are any specific AII rules for that class. For example, class 43.1 and 43.2 (which largely deal with green energy) allows for a 100% CCA deduction in the year of acquisition as long as the asset is available for use prior to 2024.
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References and Resources:
January 2020
