Thoughts on the federal 2018 fall economic statement

Bill Morneau was up to his usual stuff today, but there are some practical consequences on what he pulled out of the hat for accelerated capital cost allowances. This will accordingly affect some calculations I had presented five years back on how to compute the effective tax shield on what can be claimed.

The new first-year allowance

This calculation is dead simple, as the tax shield is the full amount of corporate tax relief on the investment in question, and so the net present value of the investment is:

$ I \left (1-t \right ) $

The bonus depreciation scheme, aka the "accelerated investment incentive"

The revised tax shield available for capital costs other than those eligible for the new first year allowances in the next five years, will now result in a NPV on the investment of:

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

where I is the investment cost, t is the applicable corporate tax rate, d is the normal CCA rate for the property concerned, and b is the bonus factor for multiplying into the first-year CCA claim (in Morneau's proposal, it's 1.5).


I will work out some graphs shortly on what the impact of these measures will be. Stay tuned.