Technical Spotlight: CCA

(Posted January 2025)

A few years ago, the Government of Canada introduced temporary tax measures to support small businesses in Canada. Two of these measures – the Accelerated Investment Incentive (AcII) and Immediate Expensing Incentive (IEI) – impact the calculation of the Capital Cost Allowance (CCA) deduction and are being phased out over the next several years. This blog summarizes the key technical you need to know when addressing these tax issues on the CPA Common Final Examination (CFE) and considerations for your writing approach.

Accelerated Investment Incentive – Phase Out

General Rule

AcII provides an increased first-year CCA deduction for eligible property made available for use after November 20, 2018, and before 2028. The general rule, which applies to all CCA classes except for the ones discussed separately below, consists of two elements:

• Applying the CCA rate for the class to 150% of the net additions for that class; and
• Suspending the CCA half-year rule.

During the phase-out period (for eligible property made available for use after 2023 and before 2028), the general rule becomes the following:

• For CCA classes subject to the half-year rule: applying the CCA rate for the class to 200% of the net additions for that class; or
• For CCA classes not subject to the half-year rule: the enhanced first-year allowance is equal to 125% of the normal first-year CCA deduction.

Note that the half-year rule is no longer suspended during the phase-out period, so applying the CCA rate to 200% of the net additions for a class where the half-year rule applies effectively suspends the half-year rule. After 2027, there will be no increase to the net additions or a suspension of the half-year rule.

Separate incentives were introduced for manufacturing and processing equipment (Class 53) and clean energy investments (Classes 43.1 and 43.2). For eligible property made available for use after November 20, 2018, and before 2024, a full deduction of the net additions was allowed for Classes 53, 43.1 and 43.2.

Manufacturing and Processing Equipment

The first-year allowance for Class 53 is as follows:

Manufacturing and processing equipment made available for use after 2015 and before 2026 qualifies for Class 53, which has an accelerated CCA rate of 50%. Prior to the phase-out period, the AcII increased the first-year deduction to 100% of the net additions. For property made available for use between 2024 and 2025, the enhanced first-year deduction is reduced to 75% of the net additions.

* Manufacturing and processing equipment made available for use after 2025 will no longer qualify for Class 53. Instead, the property will be added to Class 43. During the remainder of the phase-out period (2026 and 2027), the enhanced first-year deduction for net additions to Class 43 is 55%. After 2027, the normal first-year allowance of 15% (CCA rate of 30% and the half-year rule) will apply.

Clean Energy Equipment

For Classes 43.1 and 43.2, the first-year allowance is as follows:

Clean energy equipment acquired after February 22, 2005 and before 2025 qualifies for Class 43.2, which has an accelerated CCA rate of 50%. Clean energy equipment acquired after 2024 will be added to Class 43.1, which has a CCA rate of 30%. Prior to the phase-out period, the AcII increased the first-year deduction to 100% of the net additions. For property made available for use between 2024 and 2025, the enhanced first-year deduction is reduced to 75% of the net additions. The enhanced first-year deduction is further reduced to 55% for property made available for use between 2026 and 2027. After 2027, the normal first-year allowance of 15% (CCA rate of 30% and the half-year rule) will apply.

2024 Fall Economic Statement

The Government of Canada presented its 2024 Fall Economic Statement on December 16, 2024, which included a proposal to extend the AcII. The proposed extension would fully reinstate the AcII, including immediate expensing for manufacturing and processing machinery and equipment, clean energy generation and energy conservation equipment, and zero-emission vehicles. These incentives would apply to qualifying property acquired on or after January 1, 2025, and that becomes available for use before 2030. The full reinstatement of these measures would be followed by a four-year phase-out between 2030 and 2033. As of December 31, 2024, no draft legislation has been presented in the House of Commons and these changes have not been enacted; therefore, this proposal is not examinable on the May and September 2025 CFEs.

Immediate Expensing Incentive (IEI)

For eligible property subject to CCA rules (other than property included in CCA classes 1 to 6, 14.1, 17, 47, 49 and 51), the IEI was available to a maximum of $1.5 million of net additions per taxation year. This incentive was available to Canadian-Controlled Private Corporations (CCPCs) for eligible property made available for use after April 19, 2021, and before January 1, 2024. The incentive was later made available to Canadian resident individuals (excluding trusts) and certain eligible partnerships for eligible property made available for use on or after January 1, 2022, and before 2025. Any unused deduction limit (e.g., if the deduction is less than $1.5M for a particular year) cannot be carried forward.

Eligible property acquired by CCPCs made available for use after 2023, or 2024 for individuals and eligible partnerships, will not qualify for the IEI but may still qualify for an enhanced first-year deduction under AcII.

Impact of AcII on the Present Value of Tax Shield Calculation

The standard present value of tax shield for CCA formula below considers the impact of the CCA deduction, including the impact of the half-year rule.

[Cdt / (d + k)] x [(1 + 1.5k) / 1 + k)]

C = net additions

d = CCA rate

T = income tax rate

k = discount rate or time value of money

Since the AcII changes the calculation of CCA (for example, by modifying the first-year deduction, by suspending the half-year rule, etc.), the tax shield calculation would also have to be modified to ensure that the tax impact of the CCA deduction is calculated correctly.

Impact of Enhanced First-Year Deduction

When the AcII or IEI allows for an enhanced first-year deduction, the tax shield formula should be modified to account for the first-year deduction separately as follows:

[(C – Cd_f)dt / (d + k)] + (Cd_ft)

d_f = enhanced first-year CCA rate

“(C – Cd_f)” in the formula above calculates the Undepreciated Capital Cost (UCC) balance after the first-year CCA deduction which will be used to determine the impact of the CCA deduction after the first year while “(Cd_ft)” determines the tax impact of the enhanced first-year CCA deduction.

There is no tax shield formula when the IEI is available because “d_f” would be 100% and the full tax impact only applies to the first year.

Impact of Modifying/Suspending the Half-Year Rule

The second part of the tax shield formula (“[(1 + 1.5k) / 1 + k)]”) adjusts the timing of the impact of the CCA deduction when the half-year rule applies. Therefore, when the half-year rule is suspended under AcII, only the first part of the tax shield formula [Cdt / (d + k)] should be used.

As discussed above, during the AcII phase-out period, the enhanced first-year CCA deduction for CCA classes not normally subject to the half-year rule is equal to 125% of the normal first-year deduction. Therefore, the second part of the tax shield formula is changed to [(1 + 1.25k) / 1 + k)] instead of [(1 + 1.5k) / 1 + k)].

Case Writing Tips

To ensure you can achieve sufficient depth and breadth on CCA calculations, consider the following:

• If the CCA classes for the additions are not provided to you, use the case facts and apply technical knowledge to determine which CCA class the acquired property should be added to.
• Pay attention to the dates in the case. The CCA rate that applies is based on the date that the eligible property becomes available for use, not the taxation year-end date. If the taxpayer has a non-December 31 year-end, the date that the eligible became available for use will impact the CCA rate used.
• Address as many of the CCA classes as you can in the time you have allocated to the required, starting with the most significant classes first.
• Don’t forget to consider the other CCA rules (for example, enhanced rates for Class 1, limits for Class 10.1, etc.) and opening UCC balances.