Here are some key tips to consider while planning year-end tax planning strategies, focusing on the timing of depreciable asset purchases and sales.
As the end of the year approaches, it is important to carefully plan your tax strategy in order to maximize the benefits you receive. One key area to focus on is the timing of investments in depreciable assets such as equipment, vehicles, and other property.
Immediately invest in eligible expenses
Canadian-Controlled Private Corporations (CCPCs), unincorporated businesses conducted directly by Canadian resident individuals (other than trusts), and certain eligible partnerships may expense up to $1.5 million of eligible property yearly starting from 2021 for CCPCs and from 2022 for other eligible taxpayers.
Furthermore, “accelerated investment incentive property“, which encompasses machinery, equipment and manufacturing or production tools receives unique tax incentives for expedited investments. For instance, these assets may be entitled to a 150% cost deduction in taxes.
If you want to get the most out of your depreciable assets, consider buying them before your fiscal year ends. That way, you can take advantage of the $1.5 million limit with no carry forward. As long as you have title to eligible assets and they’re available for use in the current fiscal year, you can claim capital cost allowance (CCA) this year to reduce your business’s income.
If the cost of your eligible property exceeds $1.5 million, you can expense that property by choosing the classes with the lowest CCA rate.
Rules for properties that offer accelerated investment incentives
The AIIP rules apply, in addition to the immediate expensing rules. For eligible property acquired after November 20, 2018, and available for use before 2028, the AIIP rules provide enhanced first-year CCA claims at the highest rate of CCA available to property that is used before 2024.
With these new rules, any manufacturing or processing machinery and equipment that is eligible and available for use before 2024 can be completely written off in the first year. Other types of property that are eligible for depreciation benefits can receive an enhanced first-year CCA claim today which is three times greater than the previous amount prior to the introduction of AIIP rules.
The first-year CCA under the AIIP rules would not lower the $1.5 million limit for immediate expensing and would be more beneficial for capital property acquisitions in classes where they wouldn’t eligible for immediate expensing, or if the $1.5 million limit is exceeded.
Qualified zero-emission vehicles and off-road vehicles purchased as well as equipment that becomes available for use before 2028 are allowed enhanced first-year CCA. For vehicles eligible that are available to be used before 2024, the rules grant a complete write-off during the first year.
Remember, the amount of CCA that you can write off for each zero-emission passenger vehicle that you acquired on or after January 1st, 2022 is limited to $59,000 (plus sales taxes). Also, if you used the federal point-of-sale incentive for zero-emission vehicles administered by Transport Canada when purchasing your new car upon which to avail of a full CCA write-off.
Purchasing capital assets sooner rather than later before your fiscal year ends and being able to claim the enhanced first-year CCA allows you to write these investments off on taxes much faster, as long as the assets will also be available for use prior to your next fiscal year.
Postpone selling assets that have gained value until after the end of the year
Postpone the sale of any capital assets with accrued gains until 2023 so that your business can claim one additional year of CCA. This will also postpone the inclusion of recaptured CCA and capital gains in taxable income by one year. Note that this applies to depreciable property, real property that is capital property, and investments.
Whether you are a small business owner or a larger corporation, there are many tax planning strategies at your disposal that can help you minimize tax liability and maximize the benefits of your investments. By working with a tax professional to develop a tailored plan for your specific needs, you can ensure that you make the most of this important time of year.