The new CCA rules, explained

All the hype over Bill Morneau's fall economic statement yesterday was really overdone, but, once you look into the details, many questions remain. I won't discuss the macroeconomic and political issues, as they are being fully debated elsewhere. I will, though, expand on my initial thoughts about the changes to the capital cost allowance rules, because they are more complex than were originally described.

Recap

As most CMAs will recall from their training, the NPV of capital investment for the regular declining-balance classes in Schedule II of the Income Tax Regulations is determined through two calculations:

Full-year rule

$ I  \left (1-\frac{td}{i+d}\right ) $

Half-year rule

$ I \left [ 1-\left (\frac{td}{i+d}\right )\left (\frac{1+\frac{1}{2}i}{1+i}\right ) \right ] $

The new accelerated investment incentive rules

Morneau's proposals essentially displace the half-year rule for selected groups of assets, but the much advertised touting of these as providing 100% writeoffs for capital investment are not really that simple. We have to look at how the computations are expressed, and they ain't pretty.

First of all, under the current Notice of Ways and Means Motion,

• property acquired after 20 November 2018 (excluding property previously owned by the taxpayer or by another entity with whom the taxpayer does not deal at arm's length, whether by rollover or otherwise) that becomes available for use before 2028 is now identified as "accelerated investment incentive property", and
• the capital cost allowance prescribed rates are now multiplied by the following adjusted acquisition values:

$ ab + cd + ef + gh + 0.5i  $

all of which are described in the table below:

Group	CCA Class	Factor		Description
$ ab  $	not in respect of property included in ITR 1100(1)(v) (ie, a Canadian vessel) or in any of Classes 12, 13, 14, 15, 43.1, 43.2 and 53	$ a  $		0.5, in respect of property that becomes available for use before 2024, and 0, in respect of property that becomes available for use after 2023
		$ b = j - k  $	$ j  $	the total of all amounts that become available for use within the year
			$ k  $	the amount, if any, by which the amount determined for $ s  $ exceeds the amount determined for $ r  $ in the description of $ i  $
$ cd  $	Class 43.1 (ie, clean energy processing)	$ c  $		2 1/3, in respect of property that becomes available for use before 2024, 1 1/2, in respect of property that becomes available for use in 2024 or 2025, and  5/6, in respect of property that becomes available for use after 2025
		$ d = l - m  $	$ l  $	the total of all amounts that become available for use within the year
			$ m  $	same calculation as for $ k  $
$ ef  $	Class 43.2 (ie, certain clean energy processing equipment acquired before 2025 that would otherwise fall under Class 43.1)	$ e  $		1, in respect of property that becomes available for use before 2024, and 0.5, in respect of property that becomes available for use in 2024
		$ f = n - o  $	$ n  $	the total of all amounts that become available for use within the year
			$ o  $	same calculation as for $ k  $
$ gh  $	Manufacturing and processing equipment in Class 53 (if acquired before 2026) or Class 43 (if acquired after 2025)	$ g  $		1, in respect of property that becomes available for use before 2024,  1/2, in respect of property that becomes available for use in 2024 or 2025, and   5/6, in respect of property that becomes available for use after 2025
		$ h = p - q  $	$ p  $	the total of all amounts that become available for use within the year
			$ q  $	same calculation as for $ k  $
$ i  $	property subject to the half-year rule	$ i = r - s  $	$ r  $	the total of all amounts that become available for use within the year
			$ s  $	amounts received as proceeds of disposition for property

While the last factor is effectively the classic half-year rule computation, the other factors are essentially the top-up amount that will be added. They effectively lead to the following composite results:

1. Unless otherwise provided elsewhere, the CCA first-year claim is calculated at 1.5 times the standard rate for assets becoming available for use before 2024, after which the full-year rule will apply for assets becoming so before 2028, and then reverting back to the half-year rule thereafter.
2. For Class 43.1, the CCA first-year rate becomes 100% for assets available for use before 2024, 75% for those becoming so in 2024 or 2025, and 55% for those becoming so after 2025.
3. For Class 43.2, the CCA first-year rate becomes 100% for assets available for use before 2024, and then 75% for those assets becoming in 2024.
4. For Class 53 and Class 43 assets (depending upon the date they come into use),  the CCA rate becomes 100% for assets available for use before 2024, 75% for those becoming so in 2024 or 2025, and 55% for those becoming so after 2025.
5. The half-year rule continues to apply for those assets that do not qualify as "accelerated investment incentive property".

Therefore, the formula I was posting yesterday for calculating the effective tax shields on the new accelerated rates, being:

$ I \left [ 1-\left (\frac{td}{i+d}\right )\left (\frac{1+bi}{1+i}\right ) \right ] $

can be used as appropriate, after taking into account the appropriate top-up factors outlined above.