By Cory Prince, CPA, CA | Durward, Jones, Barkwell
This past November, the federal government presented its 2018 Fall Economic statement. Tax measures were introduced with the aim of improving the competitiveness of Canada’s tax system. Finance Minister Bill Morneau’s updates did not change corporate or personal tax rates. He did, however, announce enhanced tax deductions for capital assets purchased and used in Canada. The federal government has referred to these enhanced tax deductions as the Accelerated Investment Incentive (“AII”).
As a result of the AII changes, capital assets purchased after November 20, 2018, will be eligible for greater capital cost allowance (“CCA”) claims. CCA is the means by which taxpayers claim a deduction for capital assets purchased. When taxpayers purchase capital assets such as buildings, machinery and equipment, the current tax rules allow taxpayers to claim CCA over a period of time that corresponds to the useful life of the asset. CCA rates vary, depending on the type of asset purchased. In the year of acquisition, CCA is restricted by 50% for the majority of capital asset purchases – referred to as the “half-year rule”.
Specified clean energy equipment purchased after November 20, 2018, is now fully deductible in the year of purchase. The half-year rule has also been suspended. This incentive will be gradually phased out starting in 2024 and will be unavailable for clean energy capital assets purchased after 2027.
What capital assets are considered “clean energy”? Some examples include battery storage for wind energy conversion systems, solar photovoltaic (PV) electrical generation equipment and wave or tidal energy equipment. Electric cars are eligible for various rebates at purchase, but they do not fit into the clean energy equipment tax provisions at this time.
Let’s look at two examples in a bit more detail: co-generation and solar equipment.
In this category is found electrical generating equipment (e.g. steam turbine generators and expander generators), including any heat-generating equipment used primarily for the purpose of producing heat energy to operate the electrical generating equipment. Co-generation can also apply to fixed location fuel cell equipment, equipment that generates both electrical and heat energy, heat recovery equipment and any required ancillary equipment. This category excludes: buildings or other structures in which the equipment is housed; permanent brick or concrete stacks; heat rejection equipment; fuel-handling equipment and fuel storage facilities.
Solar equipment includes above ground solar energy collectors, solar water heaters, heat pumps, ancillary equipment and pipe and, ground-source heat pump systems. Energy conversion, storage and control equipment also qualify. Items not considered solar equipment include: equipment that provides back-up for the other eligible equipment; buildings; equipment that distributes heated or cooled air or water within a building; equipment that is part of a system that transfers heat to and from surface water; and equipment that is part of a ground-source heat pump that does not meet certain government standards.
What impact might these changes have for a business that invests in clean energy? It is hard to nail down the “payback” for a taxpayer purchasing clean energy equipment. Typically, the calculations are very specific to each project and the situation of each taxpayer. However, as an example for illustration purposes, assume a taxpayer spends $20,000 on eligible clean energy equipment. They could reduce their taxable income by up to this $20,000 amount. In order to quantify that benefit, they would first determine their tax rate, which varies for personal and corporate taxpayers. The tax rate can either be 12.5%/25%/26.5%. Multiplying the $20,000 amount, by their tax rate, provides them with their allowable tax deduction.
It is important to note that the tax legislation regarding specified clean energy equipment is extremely complex and should be reviewed with a Canadian income tax specialist to ensure the requirements are met.
Many businesses are looking for clean energy to supply their requirements. Some have invested in co-generation and solar equipment for their farming or manufacturing businesses. Others are currently weighing these options. Under the “AII” changes, a business that invests in co-generation or solar sources for energy production should receive enhanced tax benefits.
*360 Energy is very grateful for the assistance of Cory Prince, CPA, CA in preparing this article. Mr. Prince is with the Chartered Professional Accountant firm of Durward, Jones, Barkwell. The firm has offices in Hamilton and Grimsby, Ontario.