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As reported last month, the federal government’s Fall Economic Statement, delivered by Finance Minister Bill Morneau in November included some notable tax reforms designed to stimulate investment in energy efficiency and carbon reduction building improvements. HRAI and a number of allied associations with an interest in energy efficiency have for years advocated for favourable tax treatment as a preferred approach to direct cash incentives so this was good news for the industry.  To aid understanding of the changes, HRAI requested a clarification from Finance Canada on the application of these new measures, and their response is reported below.

In general, there are two types of business costs: current expenses that can be deducted immediately, and capital expenses that must be deducted over time according to the applicable capital cost allowance (CCA). All capital costs that must be deducted through the CCA system, as well as Canadian development expenses and Canadian oil and gas property expenses, are eligible for the Accelerated Investment Incentive (subject to limited restrictions on used assets that were once property of a non-arm’s length party). To determine the applicable rate, Schedule II of the Income Tax Regulations provides a detailed guide for what CCA class an asset will fall into. For a more high-level summary of the main CCA classes, see this table.

Eligibility conditions for the full expensing measures are identical to those that applied to the accelerated CCAs provided by classes 43.1 and 43.2 (clean energy equipment) and class 53 (manufacturing and processing machinery and equipment). For additional guidance on which assets qualify for these classes, see the table below outlining qualifying clean energy equipment and this CRA Income Tax Folio, which provides some interpretive guidance relating to the interpretation of the terms “manufacturing and processing” and eligibility criteria for the M&P accelerated CCA.


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Specified clean energy equipment (see table below) will be eligible for immediate and full write-off. Investment in other types of equipment, including efficiency-related technology, will be eligible for accelerated write-offs.  The whole package represents an injection of $14.4 billion to stimulate investment across Canada.

 

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The expectation is that allowing businesses to immediately or more quickly write off their capital expenses will significantly improve the business case for investment in efficiency and reduced carbon upgrades. The full write-off would include investments like solar photovoltaic or thermal projects on commercial buildings, ground-source heat pumps, biogas projects, district energy systems, and EV charging stations.  More broadly, investment including energy efficiency retrofits would qualify for the accelerated tax treatment, improving their financial returns.

For more information, contact Martin Luymes at 1-800-267-2231 ext. 235, or email mluymes@hrai.ca.