Extension of Accelerated Capital Cost Allowance (ACCA) Provides Tax Relief for Manufacturers

The recent federal budget of 2013 highlighted several initiatives aimed at strengthening the competitiveness of the manufacturing sector. New sources of Canadian business funding and renewal of previous initiatives provides extra incentives for manufacturers to advance their business to the next level. One initiative that is especially beneficial for manufacturers is the renewal of the accelerated capital cost allowance (ACCA) for new investment in machinery and equipment. The initiative was renewed for additional 2 years and will run until 2017-2018, providing an estimated total of $1.4 billion in tax relief for Canada’s manufacturing and processing sector.

ACCA allows companies that purchase new machinery or equipment to depreciate the asset at 50% using the straight line method. In the absence of ACCA, the machinery would be depreciated at 30% declining-balance rate, which will result in lower annual deductions from income over a much longer period of time. Let’s take the example that a manufacturer purchases new machinery for $10,000 that has zero salvage value.  See the below table which compares the two depreciation methods:

As illustrated, straight line depreciation allows for a faster write-off of machinery and equipment. The declining balance depreciation results in lower annual deductions from income over a longer period of time.  In the above example, it would take nine taxation years to deduct 95% of the value of the machine. By allowing for a faster depreciation through the straight line method, ACCA provides support to the manufacturing sector to help them be competitive with the global economy.