DFK Tax Newsletter
Summary of Designated Immediate Expensing Property (“DIEP”) Rules
On April 19, 2021, the government announced new rules allowing for immediate expensing (100% write off in the year of purchase) of up to $1.5 million of capital asset purchases per year. These rules finally became law in June 2022, allowing CRA to start assessing immediate expensing claims.
For Canadian controlled private corporations (CCPCs), purchases acquired and available for use from April 19, 2021 to December 31, 2023 qualify. These rules were expanded to unincorporated businesses operated by individuals and partnerships (but not trusts) for property acquired and available for use from January 1, 2022 until December 31, 2024.
Associated businesses (including corporations, unincorporated businesses, and partnerships) will have to share the $1.5 million annual limit among the businesses in the group.
An Eligible Person or Partnership (EPOP) is:
- A CCPC
- A Canadian resident individual
- A partnership of which all members are Canadian resident individuals and or CCPCs
What property qualifies for immediate expensing?
Designated Immediate Expensing Property (“DIEP”) generally includes all depreciable capital property, other than property included in Capital Cost Allowance (CCA) classes 1 to 6, 14.1, 17, 47, 49 and 51. These exceptions generally pertain to long lived assets, such as buildings and certain structures, and unlimited life intangibles including goodwill.
Existing enhanced CCA deductions, such as the full expensing of manufacturing and processing machinery and equipment and Accelerated Investment Incentive Property (1.5 times the normal CCA rate in the first year), continue to be available and do not impact the $1.5 million limit.
In addition, DIEP must meet EITHER of the following conditions:
- The property has not been used for any purpose before it was acquired by the eligible person AND is not a property for which CCA was claimed by any person or partnership before the property was acquired OR
- The property was not transferred on a rollover basis OR acquired from a non-arm’s length party
Limitations on deduction:
The maximum deduction is equal to the lesser of:
- The immediate expensing limit for the taxation year ($1.5 million subject to the allocation requirements among the associated group and pro-rated for short taxation year)
- The UCC of the DIEP before claiming any CCA deductions for the year
- if NOT a CCPC, the income if any (before claiming any CCA deductions for the year), earned from the business or property in which the DIEP is used for the taxation year.
- Consequently, an individual or partnership cannot create a loss using immediate expensing, however a CCPC can.
Existing rules restricting CCA (leasing property rules, rental property rules, specified energy property rules, etc.) continue to apply.
Associated persons and partnerships:
The immediate expensing annual limit of $1,500,000 must be allocated amongst the associated persons and partnerships. For this purpose, individuals and partnerships are deemed to be corporations when evaluating whether they are associated with other businesses.
Trade-ins and Disposals
If an asset is bought and sold in the same taxation year the property will not qualify as a DIEP. However, if a capital asset purchased in a previous year is traded in towards the price of a new property, the full gross purchase price is eligible for immediate expensing. A DIEP only earns that title in the year that it is purchased, so a disposal of that property in a subsequent taxation year is not a disposal of DIEP. Be careful on your CCA schedule when recording disposals!
Normally, the CCA recapture and terminal loss rules do not apply to passenger vehicles included in CCA Class 10.1 (passenger vehicles that cost over $34,000). However, if the vehicle has been designated as immediate expensing property, special rules apply such that recapture will most likely be triggered on a disposal. Now, the taxpayer must track if immediate expensing was used for each Class 10.1 vehicle in a previous year. Such recapture could cause an unexpected income inclusion, because each Class 10.1 asset is included in a separate CCA pool and the cost of a new vehicle does not replenish the old pool.
Matters to consider when using immediate expensing
Immediate expensing and CCA are optional deductions from CRA’s perspective.
- If the business is operated personally or in a partnership, immediate expensing cannot be used to create or increase a loss, but it can be used to reduce taxable income of the business in which the property is used to zero. In many cases an individual taxpayer would want to make use of the lowest tax brackets and their personal tax credits, so it may be prudent not to claim all of the immediate expense deduction that is available.
- A large deduction now means less deductions in the future. It may not make sense to save tax now, only to pay tax at higher rates in the next few years. If the capital assets have been fully expensed, the proceeds on disposal will likely result in recaptured CCA and higher taxable income. An immediate expensing deduction may save tax at a low tax rate now, only to have more taxable income in future years taxed at a higher rate. This is especially important for business owners considering winding down operations or selling the assets in the near future.
- There is no ability to carryforward an amount of the $1.5 million limit that is not used in a particular year. Therefore, the timing of acquisitions is crucial to maximizing the use of this deduction.
- A taxpayer can choose which CCA classes the immediate expensing is applied to. Therefore, choosing to immediately expense the eligible property acquisitions in CCA classes with the lowest rates first will maximize the overall CCA deduction for the year.
- As the $1.5 million limit needs to be shared by members of an associated group, the amount of taxable income and tax rates applicable to each member of the group, as well as the CCA classes of eligible property acquisitions should be considered when determining an allocation.
- For farmers who use the cash method to report income, managing income levels while benefiting from the immediate expensing provisions is achievable by utilizing the Optional Inventory Adjustment (“OIA”). This adjustment allows a farming business to make an upward adjustment of its income based on its inventory on hand at year end. It results in an automatic deduction for the same amount in the following tax year. If the immediate expensing of capital purchases brings taxable income below the target level for the business, an OIA can increase the income back up to the desired level (assuming there is sufficient inventory on hand at year end).
- The designation as immediate expensing property must be made within 12 months of the eligible entity’s filing due date for the year to which the designation relates.
For more information, please contact your DFK Canada advisor.