With lots of potential growth comes many challenges for companies; the first being financing for new projects. Finding financing externally can be a struggle, so the majority of companies will be relying on internally generated cash flow. At the same time, controlling and reducing costs, while improving productivity will be a top priority.
This is why one of the leading priorities over the next year and a half is in machinery and equipment investment. Recently, the Canadian government extended the accelerated capital cost allowance (CCA) for new investment in machinery and equipment in the manufacturing and processing sector. The CCA is a 50% straight line depreciation rate on processing machinery and equipment, meaning it will defer taxation and improve financial return from investment. By allowing faster write-offs of eligible investments, this tax relief will allow businesses to retool with new machinery and equipment to stay competitive in the current global market.
An example of how the tax deduction works is as follows:
– “A manufacturer that purchases an eligible machine for $10,000 is able to deduct $2,500 in the first taxation year (because of the half-year rule, which requires that the asset be treated as if purchased in the middle of the taxation year), $5,000 in the second taxation year, and the remaining $2,500 in the third taxation year. In the absence of the temporary accelerated CCA, the machine would be depreciated at a 30% declining-balance rate, resulting in a lower annual deduction from income over a much longer period of time (i.e., the depreciation period would be nine taxation years to deduct 95% of the value of the machine).” ( Source: actionplan.gc.ca)
After the painstaking winter that the manufacturing industry experienced this past year, the two year extension of the CCA will provide the final push that many businesses will need to grow and stay competitive in the recovering economy.
If there was ever a time to invest in new machinery, it’s now!