Immediate expensing measure in federal budget expected to make farm capital purchases more attractive

While much of the attention around the federal budget release on Monday was focused on the billions of dollars in new spending and programs, the budget also includes a significant measure that will make it more attractive for incorporated farms to purchase certain types of capital, including tractors, trucks, and other farm machinery.

The budget, if approved by Parliament, would allow immediate expensing of up to $1.5 million of “eligible investments” each year by Canadian-controlled private corporations. The measure would apply from April 19, 2021 until the end of 2023.

“Essentially, a farming business each year will have a $1.5 million threshold where they can go purchase capital assets up to that amount. Normally, when you purchase assets you have to take deductions and depreciation over time. That $1.5 million can now be fully expensed in the first year,” explains Ryan Kehrig, Saskatoon-based tax partner with MNP, discussing the tax implications of the Liberal budget in the interview below.

“It’s definitely going to be an incentive for farmers to upgrade their capital equipment if they feel they can,” he says.

The immediate expensing measure only applies to certain Capital Cost Allowance (CCA) classes. Classes 1 to 6, 14.1, 17, 47, 49 and 51 are all excluded, meaning class 1 buildings, farmland, quota, and grain bins are not eligible, notes Kehrig.

From a tax perspective, farmers shouldn’t be alarmed, but should pay attention to signals coming from Ottawa around capping the amount of interest that can be deducted as an expense each year, says Kehrig.

The budget proposes that interest expenses claimed by certain businesses be limited to 40 per cent of their earnings in 2023 and 30 per cent thereafter.

“Long story short, highly-leveraged, low-income businesses, such as those in the ag sector tend to be, may see a cap or a ceiling on the amount of interest they can deduct. This interest will carry forward to future years, but unless the dynamics of the industry change, you may be paying interest expense but not realizing the tax benefit from it,” explains Kehrig.

Draft legislation regarding these limits on interest deductions is expected this summer, which would be followed by the usual consultation and parliamentary approval process. The budget refers to the measure in the context of multinational companies using “excessive” deductions of interest to reduce the taxes they pay in Canada, so Kehrig says the hope is the government will clarify the proposal so it doesn’t affect farm businesses.

The budget also promises rebates of up to $100 million on carbon taxes paid for grain drying in the provinces where the federal carbon tax backstop is in effect — Alberta, Saskatchewan, Manitoba, and Ontario. “It’s a little vague as to how these rebates are going to be applied. Is it going to be equal across the board? Or is there going to be some kind of receipt mechanism? Or just based on acres? My preference would probably be to have those activities exempted in the first place,” notes Kehrig.

For more on the tax implications of the 2021 federal budget, listen to Ryan Kehrig’s entire chat with Shaun Haney:

Related: Climate and COVID-relief programs headline agriculture spending in federal budget


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